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, 2006

OR

 ̈

TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission file Number: 000-30090

_______________

VISIPHOR CORPORATION(Name of small business issuer in its charter)

_______________

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

Suite 1100  4710 Kingsway

Burnaby, British Columbia
V5H 4M2(Address of principal executive offices) ( Zip Code)

(604) 684-2449(Issuer's telephone number)

_______________

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 in response to Item 405 of Regulation S-B 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

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

The Issuer’s revenues for its most recent fiscal year were Cdn$6,383,383.



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 22, 2007, was US$0.066



The number of shares outstanding of each of the Issuers classes of equity as of March 22, 2007, was 44,114,775 common shares.

Transitional Small Business Disclosure Format: Yes o No x



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VISIPHOR CORPORATION



FORM 10-KSB



For the Year Ended December 31, 2006



INDEX





PART I

5

Item 1.  Description of Business.

5

General Overview

6

Products and Services

6

Visiphor Consulting Services

8

Customers and Market Opportunity

8

Markets

8

Competition

9

Biometric Face Recognition and Identification

9

Child Recovery and Identification Software

9

Arrest and Booking Software

9

Intellectual Property Rights

9

Research and Development

10

Sales and Marketing

10

Employees

12

Financial Statements

12

Risk Factors

13

Item 2.

Description of Property

17

Item 3.

Legal Proceedings.

17

Item 4.

Submission of Matters to a Vote of Security Holders.

17



PART II

18

Item 5.

Market for Common Equity and Related Stockholder Matters.

18

Exchange Controls

19

Certain Canadian Federal Income Tax Information for United States Residents

20

Dividends

20

Disposition

20

Recent Sales of Unregistered Securities

21

Small Business Issuer Purchases of Equity Securities

21

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

22

About Visiphor

22

Overview

22

The Companys Business

22

Critical Accounting Polices and Estimates

23

Results of Operations for the three-month period and year ended December 31, 2006 compared to

December 31, 2005:

24

Non-GAAP Operating Cash Flow

24

Revenues

26

Operating Expenses

26

Administration

27

Bad Debt

27

Cost of Materials

27

Interest and Amortization

27

Sales and Marketing

27

Professional Services

27

Technology Development

28

Restructuring Charge

28

Net Loss for the Period

28



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Summary of Quarterly Results

29

Liquidity and Capital Resources

29

Differences to Net Income under Canadian and U.S. GAAP

30

Recent Accounting Pronouncements

30

FIN 48

30

EITF No. 06-3

31

FAS 157

31

Staff Accounting Bulletin 108

31

Contractual Obligations

32

Off-Balance Sheet Arrangements

32

Item 7.

Financial Statements.

33

Item 8.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

60

Item 8A.Disclosure Controls and Internal Controls Over Financial Reporting.

60

Item 8B. Other Information.

61



Part III

62

Item 9.

Directors, Executive Officers, Promoters and Control Persons, Corporate Governance Compliance

With Section 16(a) of the Exchange Act.

62

Executive Officers and Directors

62

Board of Directors

64

Audit Committee and Audit Committee Financial Expert

64

Code of Ethics

64

Compliance with Section 16(a) of the Exchange Act

64

Item 10. Executive Compensation

65

Compensation of Named Executive Officers

65

Employment Agreements

66

Compensation of Directors

68

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

69

Item 12.  Certain Relationships and Related Transactions, and Director Independence.

71

Item 13. Exhibits.

71

Item 14.  Principal Accountant Fees and Services.

72







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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 27A of the Securities Act of 1933, as amended (the Securities Act), and 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 Visiphor Corporations (Visiphor 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 Annual Report include, but are not limited to: the Companys expectation that revenues will increase during the first two quarters of 2007 when compared to those of 2006 and that such revenues will continue to increase in the future as newly developed products and solutions continue to gain increasing customer acceptance; managements belief that increased revenues achieved as a result of the sale of products will more than offset increased technology development costs; the Companys ability to achieve significant growth in the U.S.; that increased investment in technology advances will result in the Companys future success; the Companys ability to fund its operations in the future resulting from new orders; new contracts to be entered into the near future; the Companys future operating expense levels; and the Companys ability to achieve break-even operations on an operating cash flow basis during the first three months of 2007.



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; 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 potential additional disclosure requirements 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; the Companys reduction in staff levels; and the other risks and uncertainties described in Exhibit 99.1 to 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 Annual 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:



|                   |        |        |        |        |       
|------------------ | ------ | ------ | ------ | ------ | ------
|                   | 2006   | 2005   | 2004   | 2003   | 2002  
|Period End         | 0.8674 | 0.8579 | 0.8310 | 0.7738 | 0.6329
|Average for Period | 0.8816 | 0.8260 | 0.7719 | 0.7205 | 0.6370
|High               | 0.9015 | 0.8690 | 0.8493 | 0.7749 | 0.6656
|Low                | 0.8641 | 0.7872 | 0.7158 | 0.6329 | 0.6175



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 March23, 2007 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$0.864.  The Company 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.

Visiphor is a software product and consulting services Company that is in the business of helping enterprises by connecting what matters. The Company specializes in the development and deployment of solutions to the problem of integrating disparate business processes and databases. In so doing, the Company has developed a number of sophisticated products and specialized consulting skills. These have allowed Visiphor to gain industry recognition as a leader in providing advanced solutions to the data disparity problem that permeates the law enforcement, security, health care and financial services industries.



Visiphor provides solutions for:



·

Enterprise Information Integration (EII),

·

Data Migration via Extract, Transform and Load (ETL),

·

Enterprise Application Integration (EAI), and

·

Business Process Workflow Integration.



Visiphors software products consist of servers and applications that produce one-time software licensing revenues and recurring support revenues. The Companys consulting services are highly specialized and focus on facilitating the solution to business integration related problems.



Visiphor develops and markets software products that simplify, accelerate, and economize the process of connecting existing, disparate databases. The Companys technologies enable information owners to share data securely with internal line of business applications and external stakeholders and business partners 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.



In addition to a suite of data sharing and integration products, Visiphor also has an award winning consulting team, Visiphor Consulting Services (VCS), that can provide services to organizations ranging from business process management support, development of an integration strategic plan, through to the design, development and implementation of a complete data sharing and integration solution for any combination of internal applications integration, business partner integration, process automation or workflow.



Using industry standard Web services, XML and Application Integration tools like Microsoft Biztalk® Server and Visiphors own Briyante Integration Environment (BIE); Visiphor delivers an economical approach to the design and implementation of reliable, real-time application interoperability.



Production deployments of the Companys core integration technology  the Briyante Integration Environment  have demonstrated reductions in the time and risk associated with implementing and supporting federated 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 demonstrated by recent, successful deployments in the United States.



In June 2005, the Company changed its name from Imagis Technologies Inc. to Visiphor Corporation. This was done to convey that the business plan going forward would be based on Visual Metaphors (thus the name Visi-phor) for the delivery of data integration solutions for enterprise.



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



In conjunction with the Royal Canadian Mounted Police (RCMP), Imagis Cascade developed a set of law enforcement and security software solutions culminating in the Computerized Arrest & Booking System (CABS).



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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 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, the Company merged its operations with Briyante Software Corp. (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). The Company continues to use the Briyante brand name for the Companys data integration technology.



In November 2005, Visiphor acquired the integration consulting firm Sunaptic Solutions Inc (Sunaptic), which had an extensive collection of customer projects in the business integration area including a significant business process management practice.  The Sunaptic organization has provided a significant contribution of technical expertise in the design, development and implementation of data sharing and integration solutions. Sunaptic also had an extensive client list that included several regional health authorities in British Columbia, Canada. With the acquisition of Sunaptic, the Company expanded its ability to offer a powerful set of products and services facilitating enterprise-level data, process, and application integration.



Today, Visiphor offers a product and services 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 Company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. The full set of capabilities in the Company allows Visiphor to offer a broad complement of integration solutions addressing a wide range of business process and integration problems.

General Overview

Visiphor develops and markets robust software technologies and Professional Services for information sharing and biometric identification.



Products and Services

Briyante Integration Environment



Visiphors products include a standards-based data integration toolkit, known as the Briyante Integration Environment or BIE. BIE is an advanced 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 Visiphor, its business partners, and the Company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 gluing 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.





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BIE offers the following benefits:



·

Allowing developers to leverage new code along with pre-existing logic to build true composite applications;

·

Ensuring that customers and users can sidestep many of the typical challenges associated with data integration;

·

Reducing the complexity of political negotiations over data sharing by enabling extremely rapid implementation of governance decisions (typically measured in hours and days);

·

Allowing organizations to initiate the data sharing process with agreement on relatively few data elements, proving the concept and building trust between sharing partners; and

·

Iterating 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.



Visiphor 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 Visiphors ChildBase software system (see ChildBase below) to facilitate the matching of highly-similar child pornography photographs and video clips.



Turn-key Solutions



Based on the aforementioned core technologies, Visiphor 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 XDM.



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.



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Identity Server



The Visiphor Identity Server is an off-the-shelf component 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.

Visiphor Consulting Services

With the acquisition of Sunaptic, Visiphor created a Consulting Services Division that can provide services to organizations ranging from business process management support and development of an integration strategic plan, through to the design, development and implementation of a complete data sharing and integration solution for any combination of internal applications integration, business partner integration, process automation or workflow. Using industry standard Web Services, XML and Application Integration tools like Microsoft Biztalk® Server and Visiphors own BIE, Visiphor delivers an economical approach to the design and implementation of reliable, real-time application interoperability.

Customers and Market Opportunity

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, Visiphor 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 powerful capability to Visiphor 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 further acquisition of Sunaptic extended the Companys capabilities to provide complete, end-to-end integration solutions that utilize both its own proprietary technology platforms and those of its partners.



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) such that an integrated justice solution would be beneficial to their operations (http://www.ojp.usdoj.gov/bjs/welcome.html)



·

Thirty-one percent of local police departments and 34% of sheriffs' offices used computers for inter-agency information sharing in 2003. This includes more than half of all local departments serving 25,000 or more residents, and more than half of all sheriffs' offices serving 250,000 or more residents. (US Department of Justice - Bureau of Justice Statistics;

http://www.ojp.usdoj.gov/bjs/sandlle.htm#computers)



·

In 2003, 55% of local police departments and 58% 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%, respectively in 1997. During the same time period, use of computer and data devices for this purpose increased from 9% to 38% in local police departments and from 7% to 33% in sheriffs' offices.



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(US Department of Justice - Bureau of Justice Statistics; http://www.ojp.usdoj.gov/bjs/sandlle.htm)



·

Gartner Forecast: AIM and Portal Software, Worldwide, 2005-2010 - March 2006.  The application integration and middleware and portal market for license revenue is preliminarily estimated to have grown 2.9 percent to more than $6.4 billion in 2005. By 2010, the market is expected to grow to $7.3 billion, with a five-year compound annual growth rate of 2.6 percent.



·

Gartner Market Share and Forecast: AIM Software, Vertical Industries, Worldwide, 2003-2008 -  6 January 2005   Worldwide license revenue for application integration and middleware and portal software products grew 0.3 percent to $6.3 billion in 2003. The largest industry is financial services, with $1.3 billion in revenue, followed by services and discrete manufacturing.

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 Crossflow Systems, Inc. of San Diego, CA, Thinkstream, Inc. of Tigard, OR, Metatomix of Waltham, MS, and IBM WebSphere system integrators. Visiphor 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 companies in this area, of which Visiphor is one. The other three category leaders are: Identix Incorporated of Minnetonka, Minnesota, Viisage Technology of Littleton, Massachusetts (which recently acquired ZN Vision of Germany), and Cognitec Systems GmbH of Dresden, Germany.



Child Recovery and Identification Software

Visiphor 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 Visiphors scene recognition capabilities, at present this vendor does not have any face recognition capabilities within its product. Furthermore, the Company believes that the installation at the NCS, now known as SOCA, represents the worlds largest repository of child abuse imagery, and each image has been encoded using Visiphors 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 Visiphors 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 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 below.

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.





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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 Burnaby, 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 not registered any trademarks in Canada, the United States or elsewhere.

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, 2006, the Companys research and development staff consisted of twenty-three (23) employees, all of whom were located in the province of British Columbia.



During the fiscal years ended December 31, 2006 and December 31, 2005, the Companys total expenditures for research and development (technology development in the consolidated financial statements) were $1,773,875 and $1,745,715, 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



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



·

Direct Sales Force (to identify and develop client opportunities, business partners and strategic relationships);

·

Strategic Business Partnerships; and

·

Strategic Acquisitions.



Direct Sales Force



Visiphor employs business development and sales personnel whose duties include client opportunity development and the active recruitment of new business partners. Client opportunities are presented to the Company through marketing leads, prospecting and referrals.  Sales executives are positioned with vertical market expertise and engage with the opportunities using a strategic selling approach.  A monthly sales funnel management process is used to ensure that the quantity and quality of opportunities are aligned with the Companys business goals.  Technical sales support is integrated with the Companys support services in order to provide current expertise to the field opportunities and position them for implementation.  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.  The sales team also recruits new partners to fulfill exposure opportunities, regional needs and provide additional implementation and delivery options.



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Strategic Business Partnerships and Alliances



One of Visiphors avenues of global distribution is 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 Visiphors network of direct sales people, gives the Company global visibility and ensures that customers receive 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 its products with their solutions in order to market complete 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 the Companys 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 Companys partners to create compelling business solutions for end-users.



Visiphors business partnerships include Microsoft Corp.; SRA Orion Systems; Abbey Group, Hunter Research Inc.; Forensic Logic Inc.; and Tiburon Inc. (formerly CompuDyne Public Safety), CopLink and Total Computer Group..



Strategic Acquisitions



The Company is continually evaluating potential strategic acquisition candidates. The acquisition of Sunaptic during 2005 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 an acquisition can be negotiated on acceptable terms to the Company.



Marketing Strategy



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



·

Visiphor engages with strong systems integrators already entrenched in their respective regions, ensuring they are trained on the Companys 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 partners involved in state and local government public safety and law enforcement agencies.  The Company is also in discussions with a few partner 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 parties on terms acceptable to Visiphor.



·

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 Visiphor can provide a rapid iteration 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.



·

The Company engages in 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 rapidly deployed solutions to their data sharing problems.





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·

The Company provides pilot or proof of concept strategies to encourage ownership and adoption of the technologies as part of the Companys seeing-is-believing strategy.



Visiphor 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;

·

Identifying best-in-class application vendor partners that need Visiphors ability to rapidly deploy data sharing infrastructure to enhance their applications effectiveness;

·

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 an expanding 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 has completed and continues to expand on implementations of large scale workflow automation solutions and has established a track record for delivering these types of solutions,

·

The Company believes that its biometric identification technology is recognized as a market leader in face recognition and identification.

·

Visiphor 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 King County Sheriffs Office, Charlotte Mecklenburg Police Department, Contra Costa County, and over 30 police departments and sheriffs offices in Alameda County, California  the largest digital imaging system on the West Coast.

·

Visiphors 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.

·

The Company has the consulting expertise and scale to take on larger more demanding integration initiatives with customers either directly or through business partners.

Employees

As of December 31, 2006, the Company had 55 employees of which 47 were full-time employees and 8 were contract staff. There were 23 employees in research and development, 5 employees in sales and marketing, 6 employees in customer support, 10 in consulting services, and 11 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.   See Risk Factors  Dependence on Key Personnel.

Financial Statements

The Companys financial statements are prepared in accordance with generally accepted accounting principles of Canada (Canadian GAAP) and Note 20 to the financial statements includes a reconciliation of the Companys financial information from Canadian GAAP to generally accepted accounting principles of the United States (U.S. GAAP) and a discussion of the differences between Canadian GAAP and U.S. GAAP that affect the Company and its financial statements.



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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.

History of Losses; Ability to Continue as a Going Concern

The Company commenced operations in March 1998. The Company incurred net losses of $6,678,371 and $6,631,656 in the years ended December 31, 2006 and December 31, 2005, 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.

The Report of the Independent Registered Chartered Accountants on the Companys December 31, 2006 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 believes it currently has cash sufficient to fund its operations through to April 30, 2007.  The Company also has accounts receivable and has received orders that if completed will generate cash sufficient to fund its operations through June 30, 2007. Management believes that the revenues from the Companys sales will be sufficient to fund its consolidated operations through to June, 2007. If the accounts receivable are not collected, certain of the contracts are not completed, or the expected sales are not received, the Company may need to raise additional funds through private placements of its securities or seek other forms of financing during the 2007 financial year. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. Failure to obtain adequate financing if necessary could result in significant delays in development of new products and a substantial curtailment of Visiphors operations. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contractual obligations.

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 can 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 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



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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 is 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 forecasts 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 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. The Company does not currently maintain key man insurance for any senior management or other key employees.



Reduction in Staff Levels



During the fiscal year ended December 31, 2006, the Company reduced its staff levels from approximately 100 to 55 employees.  There have been and may continue to be substantial costs associated with this staff level reduction related to severance and other employee-related costs and the Companys streamlining efforts may yield unanticipated consequences, such as attrition beyond its planned reduction in staff levels.  This workforce reduction has placed an increased burden on the Companys administrative, operational and financial resources and has resulted in increased responsibilities for each of its management personnel.  As a result, the Companys ability to respond to unexpected challenges may be impaired and it may be unable to take advantage of new opportunities.



In addition, many of the employees who were terminated possessed specific knowledge or expertise, and that knowledge or expertise may prove to have been important to the Companys operations.  In that case, their absence may create significant difficulties.  Further, the reduction in staff levels may reduce employee morale and may create concern among potential and existing employees about job security at the Company, which may lead to difficulty in hiring and increased turnover in its current workforce, and divert managements attention.  In addition, this headcount reduction may subject costs to it and could divert managements time and attention away from business operations.  Any failure by the Company to properly manage this rapid change in workforce could impair its ability to efficiently manage its business to maintain and develop important relationships with third parties and to attract and retain customers.  It could also cause the Company to incur higher operating costs and delays in the execution of its business plan or in the reporting or tracking of its financial results.





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Dependence on Marketing Relationships



The Companys products are also 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, the Company supplies products and services to customers 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 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 to 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  Description of 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



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segments overlap. 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 changes 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.

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. For example, 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.

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, 2006. 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.



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Additional Disclosure Requirements Imposed on Penny Stock Trades



If the trading price of Visiphors 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 Visiphors common shares, which could reduce the liquidity of Visiphors common shares and thereby have a material adverse effect on the trading market for Visiphors securities.



Enforcement of Civil Liabilities



Visiphor is a corporation incorporated under the laws of 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 its 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.



Material weaknesses related to the operational ineffectiveness of internal control over financial reporting at December 31, 2006 that could impact our ability to report our results of operations and financial condition accurately.



We have identified material weakness in the operational effectiveness of our internal control over financial reporting as at December 31, 2006. See the Controls and Procedures section of this report. We continue to identify, develop and implement remedial measures and compensating procedures to address these material weaknesses.  These material weaknesses, unless addressed, could potentially result in accounting errors as discussed in the Controls and Procedures sections of this report.



Item 2.  Description of Property.



The Companys head office in Burnaby, B.C. leases space under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Vancouver space has been sublet to another company for monthly rent of $7,000 commencing on March 1, 2007 and expiring on September 29, 2008.



Item 3.  Legal Proceedings.



The Company is not a party to any legal proceedings as of the date of this report, the adverse outcome of which in managements opinion, individually or in the aggregate, would have a material effect on the Companys results of operations or financial position.



Item 4.

Submission of Matters to a Vote of Security Holders.



During the quarter ended December 31, 2006, 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 and Related Stockholder Matters.



The Companys common shares, no par value, began trading on the TSX Venture Exchange under the symbol CAP on September 29, 1998.  The Company changed its symbol to NAB on February 25, 1999, and changed its symbol to WSI following its consolidation of its share capital on November 26, 2003.  On July 6, 2005, the Company changed its symbol to VIS following its change of name. 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, 2005 to December 31, 2006 (as reported on the TSX Venture Exchange). The last reported closing price of the Companys common shares on the TSX Venture Exchange on March 22, 2007 was $0.085.



|                   |       |      
|------------------ | ----- | -----
|                   | High  | Low  
|2005               |       |      
|March 31, 2005     | $0.43 | $0.35
|June 30, 2005      | $0.93 | $0.52
|September 30, 2005 | $0.73 | $0.41
|December 31, 2005  | $0.50 | $0.34
|                   |       |      
|2006               |       |      
|March 31, 2006     | $0.44 | $0.29
|June 30, 2006      | $0.33 | $0.16
|September 30, 2006 | $0.23 | $0.14
|December 31, 2006  | $0.20 | $0.09
|                   |       |      



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 and on July 6, 2005, the Company changed its symbol to VISRF following its change of name. 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, 2005 to December 31, 2006.  These OTCBB quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  On March 22, 2007, the closing price of the Companys common shares on the OTCBB was US$0.085.



|                   |             |           
|------------------ | ----------- | ----------
|                   | High
(U.S.) | Low
(U.S.)
|2005               |             |           
|March 31, 2005     | $0.42       | $0.24     
|June 30, 2005      | $0.75       | $0.30     
|September 30, 2005 | $0.65       | $0.34     
|December 31, 2005  | $0.51       | $0.27     
|                   |             |           
|2006               |             |           
|March 31, 2006     | $0.38       | $0.23     
|June 30, 2006      | $0.29       | $0.12     
|September 30, 2006 | $0.22       | $0.13     
|December 31, 2006  | $0.19       | $0.06     



As of March 22, 2007, there were 95 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 (the Board) 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, 2006
|Plan Category                                                | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans
|Equity compensation plan approved by security holders        | 8,292,500                                                                                    | $0.32                                                                        | 322,618                                                                                     
|Equity compensation plans not approved by security holders   | N/A                                                                                          | N/A                                                                          | N/A                                                                                         
|                                                             | 8,292,500                                                                                    | $0.32                                                                        | 322,618                                                                                     



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 Visiphor.  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 the Companys 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 Visiphor unless it could be established that, on the acquisition, Visiphor was not controlled in fact by the acquirer 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 2006 is $265 million and 2007 will be 281 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 $265 million (for 2006) 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, and

·

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.

Dividends

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



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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 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.



Small Business Issuer Purchases of Equity Securities

During the quarter ended December 31, 2006, there were no purchases of equity securities affected by the Company or any affiliated purchasers.





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

About Visiphor

Visiphor is a software product and consulting services company that is in the business of helping enterprises by connecting what matters. The Company specializes in the development and deployment of solutions to the problem of integrating disparate business processes and databases. In so doing, the Company has developed a number of sophisticated products and specialized consulting skills. These have allowed Visiphor to gain industry recognition as a leader in providing advanced solutions to the system disparity problem that permeates the law enforcement, security, health care and financial services industries.



Visiphor provides solutions for;



·

Enterprise Information Integration (EII);

·

Data Migration via Extract, Transform and Load (ETL); and

·

Enterprise Application Integration (EAI).



Visiphors products consist of servers and applications that produce one-time software licensing revenues and recurring support revenues. Its consulting services are highly specialized and focus on facilitating the solution to business integration related problems.



The Company develops and markets software products that simplify, accelerate, and economize the process of connecting existing, disparate databases. The Companys technologies enable information owners to share data securely with internal line of business applications and external stakeholders and business partners 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.



In addition to a suite of data sharing and integration products, Visiphor also has a premier consulting team, Visiphor Consulting Services, that can provide services to organizations ranging from business process management support, development of an integration strategic plan, through to the design, development and implementation of a complete data sharing and integration solution for any combination of internal applications integration, business partner integration, process automation or workflow.



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 and services to a limited number of customers, and from the consulting segment of the business. Additional revenues are achieved through the implementation and customization of software as well as from the support, training, and ongoing maintenance that results from each software sale and from consulting services revenues. 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 customer base.

Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and time and materials contracts for 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. Standalone services contracts revenues are recognized as the services are delivered.

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



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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 Visiphor.  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 and Estimates

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.

Visiphor 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 the SEC Staff Accounting Bulletin No. 104 and 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.



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 is deferred and is amortized to revenue 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 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

Term



Briyante technology

3 years

Patents

3 years

License

3 years

Customer relationships

3 years

Contract backlog

4 months





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 accounting principles generally accepted in Canada 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; estimated useful lives of equipment and intangible assets; valuation of acquired intangible assets; valuation of stock-based awards, and the valuation allowance of future income tax assets.

Stock-based compensation

The Company has a stock-based compensation plan, which is described in note 11.  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, whichever is more reliably measured.



The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is complete, 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, 2006 compared to December 31, 2005:

Non-GAAP Operating Cash Flow

The Company presents income excluding non-cash items and one-time unusual expenses which is a supplemental financial measure that is not required by, or presented in accordance with, generally accepted accounting principles. The Company presents income excluding non-cash items and one-time unusual expenses because the Company considers it an important supplemental measure of its operations as it provides an indicator of the Companys progress towards achieving a cash flow from revenues that is equal to or greater than the cash expense level, and it enhances period-to-period comparability of the cash flow of the Companys operations. This non-GAAP financial measure may not be comparable to the calculation of similar measures reported by other companies. This measure has limitations as an analytical tool. It should not be considered in isolation, as an alternative to, or more meaningful than financial measures calculated and reported in accordance with GAAP. It should not be considered as an



24







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alternative to cash flow from operations determined in accordance with GAAP. Included below is a reconciliation of income excluding non-cash items and one-time unusual expenses, a non-GAAP financial measure, to cash flow used for operations, the most directly comparable financial measure calculated and reported in accordance with GAAP.





| |                                                |                                          |                         |           |             |           |             |           |             |          
| | ---------------------------------------------- | ---------------------------------------- | ----------------------- | --------- | ----------- | --------- | ----------- | --------- | ----------- | ---------
| |                                                | Three months ended
December  31,         | Year ended
December 31,
| |                                                |                                          | 2006                    |           | 2005        |           | 2006        |           | 2005       
| |                                                |                                          |                         |           |             |           |             |           |            
| | Loss for the period                            | $                                        | (1,221,734)             |           | (1,964,380) | $         | (6,678,371) | $         | (6,631,656)
| | Items not involving cash:                      |                                          |                         |           |             |           |             |           |            
| |                                                | Amortization                             |                         | 321,620   |             | 528,051   |             | 1,850,535 |             | 1,716,746
| |                                                | Stock-based compensation                 |                         | 133,250   |             | 169,236   |             | 797,730   |             | 858,209  
| | Accretion of convertible debenture             | 22,724                                   |                         | -         |             | 40,860    |             | -        
| | Deferred financing costs expensed              | 6,113                                    |                         | -         |             | 11,206    |             | -        
| | Write-down of doubtful accounts                | 86,301                                   |                         | -         |             | 86,301    |             | -        
| | Foreign exchange adjustment on loan payable    | 19,080                                   |                         | -         |             | 19,080    |             | -        
| | Changes in non-cash operating working capital: |                                          |                         |           |             |           |             |          
| |                                                | Accounts receivable                      |                         | (513,403) |             | 83,429    |             | 252,848   |             | (517,342)
| |                                                | Accrued revenue receivable               |                         | 68,476    |             | (13,157)  |             | 100,910   |             | (13,157) 
| |                                                | Prepaid expenses and deposit             |                         | 49,637    |             | (117,615) |             | 133,677   |             | (191,246)
| |                                                | Accounts payable and accrued liabilities |                         | 706,857   |             | (472,854) |             | 633,178   |             | 9,356    
| |                                                | Deferred revenue                         |                         | 65,747    |             | (31,995)  |             | 149,798   |             | 77,886   
| | Cash used for operations                       |                                          | (255,332)               |           | (1,819,286) |           | (2,602,248) |           | (4,691,204)
| | Excluded from non-GAAP measure                 |                                          |                         |           |             |           |             |           |            
| | Changes in non-cash operating working capital: |                                          |                         |           |             |           |             |          
| |                                                | Accounts receivable                      |                         | 513,403   |             | (83,429)  |             | (252,848) |             | 517,342  
| |                                                | Accrued revenue receivable               |                         | (68,476)  |             | 13,157    |             | (100,910) |             | 13,157   
| |                                                | Prepaid expenses and deposit             |                         | (49,637)  |             | 117,615   |             | (133,677) |             | 191,246  
| |                                                | Accounts payable and accrued liabilities |                         | (706,857) |             | 472,854   |             | (633,178) |             | (9,356)  
| |                                                | Deferred revenue                         |                         | (65,747)  |             | 31,995    |             | (149,798) |             | (77,886) 
| | Included in non-GAAP measure                   |                                          |                         |           |             |           |             |           |            
| | Restructuring charge                           |                                          | -                       |           | -           |           | (102,462)   |           | -          
| | Non-GAAP operating cash flow                   | $                                        | (632,646)               |           | (1,267,093) |           | (3,975,121) |           | (4,056,701)



Based on the non-GAAP financial measure the Companys revenues generated or will generate $3,975,121 less cash than its expenses required for the year ended December 31, 2006, which is $81,580 or 2% more than for the year ended December 31, 2005. The Companys revenues generated or will generate $632,646 less cash than its expenses required for the three month period ended December 31, 2006, which is $634,447 or 50% more than for the three month period ended December 31, 2005. The Company is working towards an immediate goal of achieving a positive cash flow from its operations based on this non-GAAP financial measure and expects to achieve this goal by the end of the first quarter of 2007.



As part of the Companys commitment to achieving a positive cash flow from its operations based on the non-GAAP financial measure by the end of the first quarter of 2007, subsequent to December 31, 2006 the Company has continued its plan of reducing its monthly cash operating expenses.  The cost reductions have been achieved through a consolidation of the Vancouver and Burnaby, B.C. offices into the Burnaby head office location; changes to the executive compensation structure; general cost saving measures; and a lay-off of staff. The lay-off of staff in November 2006, consisted of 16 full-time staff members representing 20% of the Companys employees, of which three have been subsequently recalled to work due to increasing sales volumes.





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Revenues

Visiphors total revenues for the three-month period ended December 31, 2006 were
$1,458,707, which is 36% greater than the prior year level of $1,076,312. The year-to-date revenues increased 92% to $6,383,383 over the prior year level of $3,330,141. The increase is due to increased consulting services revenues as a result of the acquisition of Sunaptic in November of 2005 and increased services revenues from the installation of software products sold in prior periods.



Software Licensing and Related Services revenues were $422,338 for the three month period ended December 31, 2006 compared to the prior years level of $308,076, an increase of 37%. Software Licensing and Related Services revenues were $1,358,473 for the year compared to the prior years level of $2,291,730, a decrease of 41%. The decreased software licensing and related services revenues were primarily due to lower sales volumes combined with delays in customer delivery acceptance schedules and are expected to increase in subsequent periods as deliveries are completed.



Professional services revenues for the three-month period ended December 31, 2006 were $812,070 as compared to $580,629 in 2005. Professional services revenues for the year ended December 31, 2006 were $4,211,611 as compared to $580,629 in 2005. The comparative figure from 2005 only represented the amount recognized after the November 19th, 2005 acquisition of Sunaptic.



Support revenue for the three-month period ended December 31, 2006 was 12% lower at $90,471 compared to $102,286 for 2005. Support revenue year-to-date was 18% higher at $435,165 than the prior year level of $368,377.



As of March 8, 2007, Visiphor had work in process and contracted orders totalling approximately $3.1 million that are not recorded in the financial statements as at December 31, 2006. Consequently, Visiphor expects that revenues will increase during 2007 and will continue to increase as the Companys current and newly developed products and solutions continue to gain increasing customer acceptance. The Company has been attracting new business opportunities in the U.S. market and anticipates significant growth in the U.S. There can be no assurance; however, that such future revenue or future growth will materialize or if such revenue or future growth does materialize that it will be significant.



Other revenues for the three-month period ended December 31, 2006 were $133,828, whereas other revenues of $85,321 were earned in the prior year. Other revenues year-to-date was $378,134 compared to $89,004 for 2005. The increase was primarily due to revenue earned in 2006 of $166,512 through a contract where a sub-contractor is providing the services, and $47,400 from the resale of third party software.  The costs associated with these revenues are included in cost of materials.

Operating Expenses

Operating expenses totalled $2,680,441 for the three-month period ended December 31, 2006, which is 12% less than the 2005 operating expenses of $3,040,691 for the same period. The decreased costs were primarily due to the reduction of the salary expenses during the quarter.



Operating expenses totalled $13,061,754 for the year ended December 31, 2006, which is 31% greater than the 2005 operating expenses of $9,961,797.  Professional Services was the major factor contributing to the increase in overall operating expenses. The consulting area within Professional Services was created in late 2005 as a result of the acquisition of Sunaptic. Professional Services expenses increased $3,251,492 or 268% due to having consulting expenses, primarily wages, for an entire year as compared to 2005 when the Company had only recorded two months of similar expenses. Sales and marketing costs increased due to additional sales staff being hired. This was offset slightly by a reduction in the Companys marketing staff costs. Administration costs decreased 7% this year as the Companys effort to manage overall cost has been effective.



Staff levels decreased from 100 employees at January 1, 2006 to 55 at December 31, 2006. In January 2006, through the integration process with Sunaptic, the Company was able to streamline its operations and achieve operational efficiencies that allowed it to eliminate 16 full-time employee positions. The Company recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions. The Company also laid-off staff in the second and fourth quarters in order to achieve its goal of reducing expenses so that the Company can achieve break even operations for 2007.





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The Company continued to improve its operational efficiencies during 2006, including closing its Victoria, B.C. office and consolidating the Victoria operations into the Burnaby, B.C. head office.  During 2006 and subsequent to December 31, 2006, the Company consolidated its Vancouver and Burnaby, B.C. offices into the Burnaby head office location; changed its executive compensation structure and implemented general cost saving measures.

Administration

Administrative costs for the three-month period ended December 31, 2006 were $548,816, which is 18% lower than for 2005 administrative costs of $665,082. Administrative costs include staff salaries and related benefits and travel, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.



Administrative costs for the year ended December 31, 2006 were $2,587,779, which is 7% lower than administrative costs for 2005 of $2,781,853.  The decrease was primarily due to overall cost management.

Bad Debt

There was no bad debt recorded for the three-month period ended December 31, 2006 compared with $27,822 in the same period in 2005. For the year ended December 31, 2006, bad debts were $86,301 compared with $70,623 in the same period in 2005.  Bad debts in both periods are due to write-offs of an individual account for each year from customers that have defaulted on payment of their accounts or their accounts were considered uncollectible.

Cost of Materials

Cost of materials for the three-month period ended December 31, 2006 was $180,432 compared to $42,905 for 2005. The costs for the year ended December 31, 2006 were $352,142 and $66,005 in 2005. This cost includes approximately $121,000 for sub-contracted services required for the security assessments for the King County RAIN project and for software purchased for resale to other customers.

Interest and Amortization

Interest expense increased 83% to $126,167 for the three-month period ended December 31, 2006 compared with the same three-month period in 2005 of $42,905. For the year ended December 31, 2006, interest expense increased by 321% to $294,055 compared to $69,907 in 2005. The increases in both periods are primarily due to the interest expense on the convertible debenture and interest on the loans payable. Interest expense is expected to increase again in 2007 due to interest on the convertible debenture.



The amortization expense decreased by 39% for the three-month period ended December 31, 2006 to $321,620 compared to $528,051 in 2005. For the year ended December 31, 2006, amortization expense increased 8% to $1,850,535 compared to $1,716,746 in 2005. The increase for the year is related to technology equipment acquired during latter 2005 and during 2006. The decrease in the fourth quarter is due to the approximately $90,000 per month Briyante acquisition amortization expiring in November 2006. Amortization expense for 2007 is expected to be substantially lower than in 2006 due to the majority of the Companys intangible assets having been fully amortized during 2006.

Sales and Marketing

Sales and marketing expenses for the three-month period ended December 31, 2006 were $264,241 compared to $565,098 for 2005, which represents a 53% decrease.  Overall, the expenses related to sales and marketing decreased for the quarter as the Company continued to concentrate on building sales and relationships rather than on general marketing activities.



Sales and marketing expenses for the year ended December 31, 2006 decrease 14% to $1,537,207 compared to $1,790,258 in 2005. As part of the Companys overall cost-cutting efforts, there were reductions to the marketing salary expenses and general marketing activities for the year.

Professional Services

Costs for professional services group for the three-month period ended December 31, 2006 were $817,938, which is a 39% increase compared to costs of $587,802 in 2005. The increase is primarily due to the creation of the Consulting Services Division which was created after the acquisition of Sunaptic in November of 2005.



Costs for professional services group for the year ended December 31, 2006 were $4,464,292 which is 268% greater than costs for the Professional Services group of $1,212,800 in 2005. The increased costs include $3,612,240 due to



27







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the addition of the Consulting Services Division through the Sunaptic acquisition, which was partially offset by limited staff reduction in the non-consulting area of professional services.



Professional services is a relatively new department that was initiated in the second quarter of 2005.  Due to the corporate reorganization, some costs in other departments were reallocated to professional services during the first quarter of 2005 for comparative purposes. The professional services group is responsible for the installation of Visiphors products and training of Visiphors customers and business partners in the use of the Companys products as it was primarily built upon the Business Integration Consulting Services group added through the acquisition of Sunaptic. The costs include salaries, travel and general overhead expenses. Costs for future periods will be dependent on the sales levels achieved by the Company.

Technology Development

The technology development expenses for the three-month period ended December 31, 2006 were $415,114, which is 28% lower than the 2005 costs of $574,215. This decrease was primarily due to a reduction in the use of contract labour. Management expects that the increased revenues achieved as a result of the sale of products will cause development costs to increase. Management believes that continuing to invest in technology advancements is crucial to the future success of Visiphor, and expects that costs will continue to increase in future periods. Included in technology development expenses for the three-month period ended December 31, 2006 are net research and development costs of $8,091, consisting of incurred costs of $16,182 less a contribution of $8,091 from the National Research Council (the NRC). The cost recoveries are limited to a maximum of $225,000 under the terms of the agreement with the NRC and the program expires on March 31, 2007. During the fourth quarter, the Company had limited research and development activities as compared with other quarters due to the need to use research and development staff resources to help on deliverables on existing billable projects.



The technology development expenses for the year ended December 31, 2006 were $1,782,575, which is 2% higher than the 2005 costs of $1,745,715. The increase was primarily due to hiring additional staff and the associated costs required to maintain the Companys enhancement of existing products and new product development. Included in technology development expenses for the year ended December 31, 2006 are net research and development costs of $144,928 consisting of incurred costs of $289,855 less a contribution of $144,928 from the NRC.

Restructuring Charge

In January 2006, through the integration process with Sunaptic, the Company was able to streamline its operations and achieve operational efficiencies that allowed it to eliminate 16 employee positions. The Company has recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions.

Net Loss for the Period

Overall, the Company incurred a net loss for the three-month period ended December 31, 2006 of $1,221,734, or $0.03 per share, which is a 38% improvement compared with the net loss of $1,964,378 or $0.07 per share incurred during the three months ended December 31, 2005. This is the Companys smallest quarterly loss for the last eight quarterly periods.



The Company incurred a net loss for the year ended December 31, 2006 of $6,678,371 or $0.15 per share, which is a negligible increase over the net loss of $6,631,656, or $0.23 per share incurred during the period ended December 31, 2005.



As of December 31, 2006, the Company has work in progress and contracted sales orders totalling $0.9 million that have not commenced installation and the revenue will not be recognised until future quarters. There can be no assurance, however, that such revenue will be collected or if any of such revenue from such work in progress and sales orders is collected that it will be significant or will be timely paid.



Management believes that the Company would be able to achieve break-even operations on a operating cash flow (See non-GAAP Operating Cash Flows) basis by the end of the first quarter of 2007.  The estimated break-even timeline has been revised since last reported due to delays on delivery of project milestones. This statement is based on the non-GAAP measure, income excluding non-cash items and one time expenses, discussed above. While management continues to believe that it has sufficient sales and potential sales to achieve break-even operations on a cash operating basis, extended contract negotiations and installation delays due to customers not being ready to



28







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accept delivery of solutions could cause this to be delayed until future quarters as the recognition of the associated revenue may be delayed.

Summary of Quarterly Results

|                           |   |             |             |             |             |             |             |             |            
|-------------------------- | - | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | -----------
|                           |   | Q4-2006     | Q3-2006     | Q2-2006     | Q1-2006     | Q4-2005     | Q3-2005     | Q2-2005     | Q1-2005    
|                           |   |             |             |             |             |             |             |             |            
|Total Revenue              | $ | 1,458,707   | 1,120,766   | 1,488,828   | 2,315,083   | 1,076,312   | 1,008,581   | 920,620     | 324,628    
|Net Loss                   |   | (1,221,734) | (1,904,856) | (2,024,680) | (1,527,100) | (1,890,400) | (1,650,764) | (1,562,291) | (1,454,190)
|Net loss per share         |   | (0.03)      | (0.04)      | (0.05)      | (0.04)      | (0.05)      | (0.06)      | (0.06)      | (0.06)     
|Net loss as a %
of revenue |   | (84%)       | (170%)      | (136%)      | (66%)       | (176%)      | (164%)      | (170%)      | (448%)     



The Companys changes in its net losses per quarter fluctuate according to the volume of sales. To date there has been no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. In 2005, the Company hired additional staff to generate and meet the demands of the sales orders described above, causing a significant increase in expense levels. The Company also significantly increased both its revenues and expenses due to the acquisition of Sunaptic; however, these items are only included since the date of the acquisition on November 18, 2005. The Company is not aware of any significant seasonality affecting its sales.

Liquidity and Capital Resources

The Companys aggregated cash on hand at the beginning of the three-month period ended December 31, 2006 was $99,952. During the period, the Company received additional funds of $200,000 by way of loans by unrelated parties which were used to finance its operations for the period.



The impact on cash 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 $255,332, as compared to a negative cash flow from operations of $1,819,286 for the same period in 2005.  This is the companys smallest negative cash flow from operations for the past eight quarters. The Company repaid capital leases of $12,523 and purchased capital assets of $23,375. The Companys cash position decreased for the three month period by $57,614 to $43,338 cash on hand at December 31, 2006.



The Companys aggregated cash on hand at the beginning of the year ended December 31, 2006 was $790,091. During the year, the Company received additional net funds of $176,803 through the issuance of common shares, $1,600,000 by issuance of a convertible debenture, $1,227,080 through loans, repaid loans in the amount of $895,000 and paid deferred financing costs of $126,158.



The Company used these funds primarily to finance its operations for the period. The impact on cash 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 $2,602,248 as compared to a negative cash flow from operations of $2,723,503 for the same period in 2005. The Company also repaid capital leases of $69,944 during the year ended December 31, 2006 and purchased capital assets of $64,968. The Companys cash position decreased by $747,753 to $42,338 cash on hand at December 31, 2006.



Private Placements in 2006



On March 2, 2006, the Company completed a private placement consisting of 600,000 units at $0.45 per unit. Each unit consisted of one common share and one-half of one transferable common share purchase warrant.  Each whole warrant entitles the holder to acquire one additional common share at an exercise price of $0.50 until March 2, 2007. The common shares and warrants are subject to a four-month hold period that expires on July 2, 2006. Finders fees of $23,625 were paid in cash to persons outside the United States related to sales made outside the United States. The total net proceeds to Visiphor were $246,375, which included share subscriptions of $67,500 received prior to December 31, 2005 and share issuance costs.



Convertible Debenture



On July 14, 2006, the Company completed a private placement (the Offering) of an 8% convertible secured debenture in the principal amount of $1,600,000 maturing on December 15, 2009, convertible, subject to certain adjustments, at the price of $0.45 per common share, and of a performance warrant (the Warrant) to purchase up



29







---

to 2,350,000 common shares in the capital of the Company at a price of $0.30 per common share.  The Warrant is only exercisable in the event that the 30-day weighted average trading price of the Companys common shares has not exceeded $0.45 in at least one 30-day trading period on or before July 14, 2008. The Warrant is exercisable at any time after July 13, 2008 and prior to 4:30 p.m. EST on December 15, 2009, provided that the above event has not occurred. The common shares underlying the Offering will have a four-month hold period that expires on November 13, 2006. Under the terms of the agreement, the investor appointed a nominee to the Companys Board.



In connection with the Offering, two Directors, of which one is an officer of the Company, agreed to postpone and subordinate outstanding bridge loans to the Company in the amounts of $85,000 and US$400,000, respectively. As consideration, the Company issued a related promissory note secured by a second charge over the accounts receivable of the Company to each of the parties and the interest rate of such notes is 12%. The Company also repaid the balance of the other outstanding loans payable of $500,000.



Settlement of Debt



On August 31, 2006 the Company settled debt owed to two Directors of the Company, one of which is also an officer of the Company through 918,525 common shares at a deemed price of $0.45 per share.  This debt consisted of $413,337 of unpaid fees and expenses.  The common shares issued in settlement of the debt have a four-month hold period that expired on December 31, 2006.



Management believes that the revenues from the Companys futures sales combined with current accounts receivable, work in progress, and contracted orders will be sufficient to fund its consolidated operations. The Company believes it currently has cash, accounts receivable, and work in progress and contracted orders that, if completed, will generate cash sufficient to fund its operations through the second quarter of 2007. If the accounts receivable are not collected, certain of the contracts are not completed, or the expected sales are not received, the Company may need to raise additional funds through private placements of its securities or seek other forms of financing during the 2007 financial year and the Company may no longer continue to be a going concern. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. Failure to obtain adequate financing if necessary could result in significant delays in development of new products and a substantial curtailment of the Companys operations. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.

Differences to Net Income under Canadian and U.S. GAAP

Under Canadian GAAP, the net loss for the three months ended December 31, 2006 was $1,221,734 whereas under U.S. GAAP the loss for the period would be $1,166,170.  For the year ended December 31, 2006, the loss under Canadian GAAP was $6,678,371 whereas under U.S. GAAP the loss would be $6,657,613.  The difference of $11,663 for the three month ended period and $20,758 for the year ended period is attributable to the difference that exists between Canadian and U.S. GAAP relating to the accretion of the convertible debenture and the associated financing costs.  Earnings per share under both Canadian and U.S. GAAP are the same.

Recent Accounting Pronouncements

FIN 48

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective for fiscal years beginning after December 15, 2006.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, including the recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company will adopt FIN 48 on January 1, 2007, as required.  The impact of FIN 48 on the Companys consolidated financial statements is not yet known or reasonably estimable.





30







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EITF No. 06-3



In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force in Issue No. 06-3, How Taxes collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross Versus Net Presentation). Issue No. 06-3 requires disclosure of an entitys accounting policy regarding the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes.  The Company presents such taxes on a net basis (excluded from revenues and costs). The adoption of Issue No. 06-3, which is effective for interim and annual reporting periods beginning after December 15, 2006, will have no impact on the Companys consolidated financial statements.



FAS 157

In September 2006, the FASB issued FAS 157, Fair Value Measurements.  This financial accounting standard establishes a framework for measuring fair value and expands related disclosure requirements.  As applicable to Visiphor, this statement is effective as of the year beginning January 1, 2008. Visiphor is currently evaluating the impact that the adoption of FAS 157 would have on its consolidated financial statements.



Staff Accounting Bulletin 108

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108) SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.



Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements.  These methods are referred to as the roll-over and iron curtain method.  The roll-over method quantifies the amount by which the current year income statement is misstated.  Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts.  The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated.  Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that result from the correction of an error existing in previously issued financial statements.  The Company historically used the roll-over method for quantifying identified financial statement misstatements.



SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the Companys financial statements and the related financial statement disclosures.  This approach is commonly referred to as the dual approach because it requires quantification of errors under both the roll-over and iron curtain methods.



SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings.  Use of this cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.



The Company applied SAB 108 using the retroactive method in connection with the preparation of its annual consolidated financial statements for the year ended December 31, 2006. The initial adoption of SAB 108 resulted in no impact to the consolidated financial statements.









31







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Contractual Obligations

The Company is committed to the following payments for i) operating lease payments on the building under lease, ii) capital lease payments for equipment under lease (excluding interest) over the next three years:



Year
	
	Long Term Debt
	
	Equipment
	
	Building
	
	Total2007
	$
	58,667
	$
	91,577
	$
	290,887
	$
	441,1312008
	
	106,667
	
	70,707
	
	265,904
	
	443,2782009
	
	1,722,667
	
	19,999
	
	202,900
	
	1,945,565$
	1,888,000
	$
	182,283
	$
	759,691
	$
	2,829,974




The Companys head office in Burnaby, B.C. leases space under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Company also subleases 4,128 square feet of office space in Vancouver, B.C. with monthly rent of $7,000 which expires on September 29, 2008. This space is no longer used by the Company and has been sublet as of March 1, 2007 to cover the Companys costs. The lease to the tenant also expires September 29, 2008.

Off-Balance Sheet Arrangements

At December 31, 2006 the Company did not have any off-balance sheet arrangements.



32







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Item 7.  Financial Statements.



|                                                                 |   
|---------------------------------------------------------------- | --
|VISIPHOR CORPORATION

Index to Consolidated Financial Statements
|                                                                 |   
|Report of Independent Registered Chartered Accountants           | 35
|Consolidated Balance Sheets                                      | 36
|Consolidated Statements of Operations and Deficit                | 37
|Consolidated Statements of Cash Flows                            | 38
|Notes to Consolidated Financial Statements                       | 39







33







---





















Financial Statements

(Expressed in Canadian dollars)



VISIPHOR CORPORATION



Years ended December 31, 2006 and 2005





34







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[visiphor10ksb032607002.gif]



Grant Thornton LLP

Chartered Accountants

Management Consultants







Report of Independent Registered Chartered Accountants



To the Shareholders of Visiphor Corporation.



We have audited the accompanying consolidated balance sheets of Visiphor Corporation and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of operations and deficit and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).  These standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Visiphor Corporation and subsidiaries as of December 31, 2006 and 2005 and the results of their operations and their cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.



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 20 to the consolidated financial statements.





|                                 |                                             
|-------------------------------- | --------------------------------------------
|Vancouver, Canada
March 20, 2007 | Independent Registered
Chartered Accountants





Comment by Independent Registered Chartered Accountants for US Readers on Canada-US Reporting Differences.



The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Companys ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements.  Our report to the shareholders dated March 20, 2007, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the report of the independent registered Chartered Accountants when the event is properly accounted for and the events and conditions are adequately disclosed in the financial statements.



|                                 |                                             
|-------------------------------- | --------------------------------------------
|Vancouver, Canada
March 20, 2007 | Independent Registered
Chartered Accountants





35







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VISIPHOR CORPORATION

Consolidated Balance Sheets

(Expressed in Canadian dollars)



December 31, 2006 and 2005



|                                                             |                                          |           |              |           |              | 
|------------------------------------------------------------ | ---------------------------------------- | --------- | ------------ | --------- | ------------ | 
|                                                             |                                          |           | 2006         |           | 2005        
|                                                             |                                          |           |              |           |             
|Assets                                                       |                                          |           |              |          
|                                                             |                                          |           |              |           |             
|Current assets:                                              |                                          |           |              |          
|                                                             | Cash and cash equivalents                | $         | 42,338       | $         | 790,091     
|                                                             | Accounts receivable                      |           | 903,243      |           | 1,242,392   
|                                                             | Accrued revenue receivable               |           | 177,426      |           | 278,336     
|                                                             | Prepaid expenses and deposit             |           | 160,593      |           | 294,270     
|                                                             |                                          |           | 1,283,600    |           | 2,605,089   
|                                                             |                                          |           |              |           |             
|Equipment, net (note 3)                                      |                                          | 414,706   |              | 529,735  
|Goodwill (note 2)                                            |                                          | 1,684,462 |              | 1,684,462
|Other intangible assets (note 6)                             |                                          | 465,337   |              | 2,076,406
|Deferred financing costs (note 7)                            |                                          | 71,142    |              | -        
|                                                             |                                          | $         | 3,919,247    | $         | 6,895,692   
|                                                             |                                          |           |              |           |             
|Liabilities and Shareholders Deficit                        |                                          |           |              |          
|                                                             |                                          |           |              |           |             
|Current liabilities:                                         |                                          |           |              |          
|                                                             | Accounts payable and accrued liabilities | $         | 1,896,122    | $         | 1,676,280   
|                                                             | Loans payable (note 8)                   |           | 751,160      |           | 400,000     
|                                                             | Deferred revenue                         |           | 453,690      |           | 303,892     
|                                                             | Capital lease obligations (note 9)       |           | 89,776       |           | 62,981      
|                                                             |                                          |           | 3,190,748    |           | 2,443,153   
|                                                             |                                          |           |              |           |             
|Long-term liabilities:                                       |                                          |           |              |          
|                                                             | Capital lease obligations (note 9)       |           | 92,507       |           | 123,093     
|                                                             | Convertible debenture (note 10)          |           | 1,231,300    |           | -           
|                                                             |                                          |           | 1,323,807    |           | 123,093     
|Shareholders deficit:                                       |                                          |           |              |          
|                                                             | Share capital (note 11)                  |           | 35,570,362   |           | 34,912,723  
|                                                             | Contributed surplus (note 12)            |           | 3,437,431    |           | 2,639,702   
|                                                             | Share subscriptions (note 11)            |           | -            |           | 67,500      
|                                                             | Conversion rights (note 10)              |           | 365,749      |           | -           
|                                                             | Deficit                                  |           | (39,968,850) |           | (33,290,479)
|                                                             |                                          |           | (595,308)    |           | 4,329,446   
|                                                             |                                          |           |              |           |             
|                                                             |                                          | $         | 3,919,247    | $         | 6,895,692   
|                                                             |                                          |           |              |           |             
|Operations and going concern (note 1)                        |                                          |           |              |          
|Commitments (note 17)                                        |                                          |           |              |          
|See accompanying notes to consolidated financial statements. |                                          |           |              |          



Approved on behalf of the Board:



/s/ Clyde Farnsworth

/s/ Roy Trivett

Director                   
Director





36







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VISIPHOR CORPORATION

Consolidated Statements of Operations and Deficit

(Expressed in Canadian dollars)



Years ended December 31, 2006 and 2005



|                                                             |                                         |              |            |              |           | 
|------------------------------------------------------------ | --------------------------------------- | ------------ | ---------- | ------------ | --------- | 
|                                                             |                                         |              | 2006       |              | 2005     
|                                                             |                                         |              |            |              |          
|Revenue:                                                     |                                         |              |            |             
|                                                             | Software Licensing and Related Services | $            | 1,358,473  | $            | 2,291,731
|                                                             | Professional Services                   |              | 4,211,611  |              | 580,629  
|                                                             | Support                                 |              | 435,165    |              | 368,777  
|                                                             | Other                                   |              | 378,134    |              | 89,004   
|                                                             |                                         |              | 6,383,383  |              | 3,330,141
|                                                             |                                         |              |            |              |          
|Expenses:                                                    |                                         |              |            |             
|                                                             | Administration                          |              | 2,587,779  |              | 2,781,853
|                                                             | Amortization                            |              | 1,850,535  |              | 1,716,746
|                                                             | Bad debt expense                        |              | 86,301     |              | 70,623   
|                                                             | Cost of materials                       |              | 345,342    |              | 66,005   
|                                                             | Financing expense                       |              | 11,206     |              | -        
|                                                             | Interest                                |              | 294,055    |              | 69,907   
|                                                             | Sales and marketing                     |              | 1,537,207  |              | 1,790,258
|                                                             | Professional services                   |              | 4,464,292  |              | 1,212,800
|                                                             | Technology development (note 13)        |              | 1,782,575  |              | 1,745,715
|                                                             | Technical services                      |              | -          |              | 507,890  
|                                                             | Restructuring costs (note 14)           |              | 102,462    |              | -        
|                                                             |                                         |              | 13,061,754 |              | 9,961,797
|                                                             |                                         |              |            |              |          
|Loss for the year                                            |                                         | (6,678,371)  |            | (6,631,656) 
|                                                             |                                         |              |            |              |          
|Deficit, beginning of year                                   |                                         | (33,290,479) |            | (26,658,823)
|                                                             |                                         |              |            |              |          
|Deficit, end of year                                         | $                                       | (39,968,850) | $          | (33,290,479)
|                                                             |                                         |              |            |              |          
|Loss per share  basic and diluted                           | $                                       | (0.15)       | $          | (0.23)      
|                                                             |                                         |              |            |              |          
|Weighted average number of shares outstanding                |                                         | 43,258,807   |            | 28,712,720  
|                                                             |                                         |              |            |              |          
|                                                             |                                         |              |            |              |          
|See accompanying notes to consolidated financial statements. |                                         |              |           





37







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VISIPHOR CORPORATION

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)



Years ended December 31, 2006 and 2005



|                                                 |                                                                                         |                                             |             |           |             |          
|------------------------------------------------ | --------------------------------------------------------------------------------------- | ------------------------------------------- | ----------- | --------- | ----------- | ---------
|                                                 |                                                                                         |                                             | 2006        |           | 2005       
|                                                 |                                                                                         |                                             |             |           |            
|Cash provided by (used for):                     |                                                                                         |                                             |             |          
|                                                 |                                                                                         |                                             |             |           |            
|Operations:                                      |                                                                                         |                                             |             |          
|                                                 | Loss for the year                                                                       | $                                           | (6,678,371) | $         | (6,631,656)
|                                                 | Items not involving cash:                                                               |                                             |             |           |            
|                                                 |                                                                                         | Amortization                                |             | 1,850,536 |             | 1,716,746
|                                                 |                                                                                         | Stock-based compensation                    |             | 797,729   |             | 858,209  
|                                                 |                                                                                         | Accretion of convertible debenture          |             | 40,860    |             | -        
|                                                 |                                                                                         | Deferred financing costs expensed           |             | 11,206    |             | -        
|                                                 |                                                                                         | Write-down of doubtful accounts             |             | 86,301    |             | -        
|                                                 |                                                                                         | Foreign exchange adjustment on loan payable |             | 19,080    |             | -        
|                                                 |                                                                                         |                                             |             |           |             |          
|                                                 | Changes in non-cash operating working capital net of effects from business acquisition: |                                             |             |           |            
|                                                 |                                                                                         | Accounts receivable                         |             | 252,848   |             | (517,342)
|                                                 |                                                                                         | Accrued revenue receivable                  |             | 100,910   |             | (13,157) 
|                                                 |                                                                                         | Prepaid expenses and deposit                |             | 133,677   |             | (191,246)
|                                                 |                                                                                         | Accounts payable and accrued liabilities    |             | 633,178   |             | 9,356    
|                                                 |                                                                                         | Deferred revenue                            |             | 149,798   |             | 77,886   
|                                                 |                                                                                         |                                             | (2,602,248) |           | (4,691,202)
|                                                 |                                                                                         |                                             |             |           |            
|Investments:                                     |                                                                                         |                                             |             |          
|                                                 | Purchase of equipment                                                                   |                                             | (58,286)    |           | (244,109)  
|                                                 | Acquisition of subsidiary (net of cash acquired of $672,088)                            |                                             | -           |           | (2,266,212)
|                                                 |                                                                                         |                                             | (58,286)    |           | (2,510,321)
|                                                 |                                                                                         |                                             |             |           |            
|Financing:                                       |                                                                                         |                                             |             |          
|                                                 | Issuance of common shares for cash                                                      |                                             | 202,500     |           | 8,013,046  
|                                                 | Share issue costs                                                                       |                                             | (25,697)    |           | (555,577)  
|                                                 | Share subscriptions received                                                            |                                             | -           |           | 67,500     
|                                                 | Proceeds of loans payable                                                               |                                             | 1,227,080   |           | 400,000    
|                                                 | Repayment of loans payable                                                              |                                             | (895,000)   |           | -          
|                                                 | Proceeds of convertible debenture                                                       |                                             | 1,600,000   |           | -          
|                                                 | Capital lease repayments                                                                |                                             | (69,944)    |           | (56,503)   
|                                                 | Deferred financing costs                                                                |                                             | (126,158)   |           | -          
|                                                 |                                                                                         |                                             | 1,912,781   |           | 7,868,466  
|                                                 |                                                                                         |                                             |             |           |            
|(Decrease) increase in cash                      |                                                                                         | (747,753)                                   |             | 666,943  
|                                                 |                                                                                         |                                             |             |          
|Cash and cash equivalents, beginning of the year |                                                                                         | 790,091                                     |             | 123,148  
|                                                 |                                                                                         |                                             |            
|Cash and cash equivalents, end of the year       | $                                                                                       | 42,338                                      | $           | 790,091  

See accompanying notes to consolidated financial statements.



38







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VISIPHOR CORPORATION

Consolidated Statements of Cash Flows, Continued

(Expressed in Canadian dollars)



Years ended December 31, 2006 and 2005



|                                                                          |                                                                                     |   |         |   |        
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | - | ------- | - | -------
|                                                                          |                                                                                     |   | 2006    |   | 2005   
|                                                                          |                                                                                     |   |         |   |        
|Supplementary information and disclosures:                                |                                                                                     |   |         |  
|                                                                          | Interest paid                                                                       | $ | 253,030 | $ | 53,250 
|Non-cash investing and financing transactions not included in cash flows: |                                                                                     |   |         |  
|                                                                          | Issuance of common shares on settlement of accounts payable                         |   | 413,336 |   | -      
|                                                                          | Issuance of common shares for share subscriptions received in prior period          |   | 67,500  |   | -      
|                                                                          | Equipment acquired under capital lease                                              |   | 60,241  |   | 171,291
|                                                                          | Issuance of commons shares on conversion of special warrants (note 11)              |   | -       |   | 781,801
|                                                                          | Issuance of common shares for acquisition of subsidiary (note 4)                    |   | -       |   | 469,333
|                                                                          | Issuance of brokers options as finders fees                                        |   | -       |   | 142,001
|                                                                          | Issuance of warrants as financing costs                                             |   | -       |   | 51,548 
|                                                                          | Issuance of common shares as financing costs                                        |   | -       |   | 49,000 
|                                                                          | Finders fee recorded on issuance of common shares on conversion of special warrants |   | -       |   | 33,709 
|                                                                          | Issuance of common shares as finders fees                                           |   | -       |   | 30,000 
|See accompanying notes to consolidated financial statements.              |                                                                                     |   |         |  





39







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VISIPHOR CORPORATION

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006 and 2005





1.

Operations and going concern:

Visiphor Corporation (the Company or Visiphor) was incorporated under the Company Act (British Columbia) on March 23, 1998 under the name Imagis Technologies Inc. (the Company). On July 6, 2005, the Company changed its name to Visiphor Corporation and continued under the Canada Business Corporation Act. The Company operates in two segments, being the development and sale of software applications and solutions and the provision of business integration consulting services.

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, 2006, the Company incurred a loss from operations of $6,678,371 and a deficiency in operating cash flow of $2,602,248. In addition, the Company has incurred significant operating losses and net utilization of cash in operations in all prior periods. 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 accounting principles generally accepted in Canada and, except as set out in Note 20, 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 subsidiaries, Briyante Software Corp. (Briyante), since the date of its acquisition on November 25, 2003 until the date that it was wound up (November 1, 2005), Visiphor (US) Corporation since the date of incorporation (August 18, 2005) and Sunaptic Solutions Inc (Sunaptic), since the date of its acquisition on November 18, 2005. All material inter-company accounts and transactions have been eliminated. Briyante was inactive when it was wound up.



(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.



40







---





2.

Significant accounting policies contd:



(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 is capitalized only when technical feasibility has been established, the asset is clearly defined and costs can be reliably measured, management has both the intent and ability to produce or use the intangible asset, adequate technical and financial resources exist to complete the development, and management can demonstrate the existence of an external market or internal need for the completed product or asset. Costs incurred to maintain the service potential of an intangible asset are expensed as incurred. No amounts have been capitalized to date in connection with internally developed intangible assets.



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
	TermBriyante technology
	3 yearsCustomer relationships
	3 yearsContract backlog
	4 months




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.



41







---





2.

Significant accounting policies contd:

(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.

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 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 is deferred and is 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 accounting principles generally accepted in Canada 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; estimated useful lives of equipment and intangible assets; valuation of acquired intangible assets; valuation of stock-based awards, fair valuation of liability and equity components of convertible debentures and the valuation allowance of future income tax assets.

(g)

Foreign currency:

The Company and its subsidiaries considers the Canadian dollar its functional 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.

(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.



42







---







2.

Significant accounting policies contd:



(i)

Stock-based compensation:



The Company has a stock-based compensation plan, which is described in note 11.  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, whichever is more reliably measured.



The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is complete, 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.

(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.



(k)

Goodwill



Goodwill represents the excess of acquisition cost over fair value of net assets for acquired businesses.  It has an indefinite useful life and is not amortized, but is tested annually for impairment.  No impairment exists for 2005 or 2006.



(l)

Comparative figures:



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



43







---





3.

Equipment:



Accumulated
	
	Net book2006
	
	Cost
	
	amortization
	
	valueComputer hardware
	$
	710,927
	$
	511,676
	$
	199,251Furniture and fixtures
	
	259,603
	
	152,902
	
	106,701Software
	
	198,857
	
	186,423
	
	12,434Tradeshow Equipment
	
	69,162
	
	63,478
	
	5,684Leasehold Improvements
	
	136,688
	
	46,052
	
	90,636$
	1,375,237
	$
	960,531
	$
	414,706Accumulated
	
	Net book2005
	
	Cost
	
	amortization
	
	valueComputer hardware
	$
	647,682
	$
	405,852
	$
	241,830Furniture and fixtures
	
	254,701
	
	104,169
	
	150,532Software
	
	152,742
	
	147,157
	
	5,585Tradeshow Equipment
	
	64,897
	
	53,957
	
	10,940Leasehold Improvements
	
	136,688
	
	15,840
	
	120,848$
	1,256,710
	$
	726,975
	$
	529,735




Equipment under Capital lease:



Included in computer hardware is $248,438 (December 31, 2005: $188,197) in cost and accumulated amortization of $153,680 (December 31, 2005: $89,565) of computer hardware under capital lease.



Included in furniture and fixtures is $103,107 (December 31, 2005: $103,107) in cost and accumulated amortization of $34,517 (December 31, 2005: $13,895) of furniture and fixtures under capital lease.



4.

Acquisition of Subsidiary



In 2005 the Company acquired 100% of the outstanding shares of a privately-held company, Sunaptic for consideration of $3,189,333 plus acquisition costs of $218,300.  The consideration consisted of $2,720,000 in cash and 1,066,666 common shares of the Company issued at fair value of $0.44 per share. The common shares issued by the Company were held in escrow, with 50% released on the 12-month anniversary of closing of the acquisition (November 18, 2006) and 50% to be released on the 18-month anniversary of the closing of the acquisition, May 18, 2007. On November 18, 2006, 533,333 shares were released from escrow.



The acquisition of Sunaptic 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 number of shares to be issued was determined based on the acquisition agreement 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 and consideration issued are as follows:



44







---





4.

Acquisition of Subsidiary (contd):



Current assets
	$
	1,282,171Equipment
	
	89,064Current liabilities
	
	(619,815
	)Capital lease obligation
	
	(13,249
	)Contract backlog
	
	269,000Customer relationships
	
	716,000Goodwill
	
	1,684,462$
	3,407,633Cash
	$
	2,720,000Shares issued
	
	469,333Acquisition costs
	
	218,300$
	3,407,633






5.

Investment



On July 31, 2004, the Company entered into an agreement with a United Kingdom (UK) Company to form a jointly owned company, Imagis Technologies UK Limited (Imagis UK). Imagis UK was the exclusive distributor of Visiphors software products in the United Kingdom and a non-exclusive distributor on a world-wide basis. The Company owns a 25% interest in Imagis UK which it received as consideration for the grant of UK exclusivity, and the UK Company had committed to provide £500,000 (approximately $1.25 million) over the following 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 was recorded at a nominal amount of $1 and included in other intangible assets (note 6). Imagis UKs operations never progressed beyond the start-up phase, and there has been no significant gain or loss to date. The Company is not required to make any advances to Imagis UK and has not made any advances to date.  The Company has notified the UK Company that it is in breach of the agreement and that its exclusive and non-exclusive distribution rights have been revoked. During the year-ended December 31, 2006 the Company wrote-off its investment of $1.



45







---





6.

Other intangible assets:



Accumulated
	
	Net book2006
	
	Cost
	
	amortization
	
	valueContract backlog
	$
	269,000
	$
	269,000
	$
	-Customer relationships
	
	716,000
	
	278,441
	
	437,559Briyante Technology
	
	3,972,552
	
	3,944,774
	
	27,7784,957,552
	
	4,492,215
	
	465,337Accumulated
	
	Net book2005
	
	Cost
	
	amortization
	
	valueContract backlog
	$
	269,000
	$
	95,596
	$
	173,404Customer relationships
	
	716,000
	
	39,774
	
	676,226Briyante Technology
	
	3,972,552
	
	2,745,777
	
	1,226,775Investment in Imagis UK
	
	1
	
	-
	
	1$
	4,957,552
	$
	2,881,147
	$
	2,076,406




7.

Deferred financing costs



Deferred financing costs comprise costs associated with obtaining financing.  These costs are incurred prior to obtaining the financing and are deferred and applied against income over the period of the financing.





8.

Loans Payable



Unsecured loans totaling $200,000 (2005 - $400,000) are owed to two unrelated parties bearing an interest rate of 20% per annum. Subsequent to December 31, 2006 these unsecured loans were repaid. These loan sare due on demand.



Related party loans totaling $551,160 (2005 $nil) are owed to an officer and a Director. These loans are secured with a general charge against assets and bear interest at a rate of 12% per annum.





9.

Capital lease obligations:

2006
	
	
	2005$
	
	
	$Due 2006, including buy-out options
	
	-
	
	
	89,373Due 2007, including buy-out options
	
	116,099
	
	
	88,729Due 2008, including buy-out options
	
	79,878
	
	
	52,205Due 2009, including buy-out options
	
	21,952
	
	
	-217,929
	
	
	230,307Implicit interest portion (9% to 21%)
	
	(35,646
	)
	
	(44,233
	)182,283
	
	
	186,074Current portion of capital lease obligations
	
	89,776
	
	
	62,981Long-term portion of capital lease obligations
	
	92,507
	
	
	123,093






46







---





10.

Convertible Debenture



On July 12, 2006, the Company issued a non-brokered private placement of a secured convertible debenture. The convertible debenture matures on December 15, 2009 and interest is payable on the outstanding principal amount at a rate of 8% per annum, payable quarterly beginning after one year as the first years interest was paid in advance. The convertible debentures are also subject to certain debt convents.  At the option of the holder, the principal amount outstanding under the convertible debenture may be converted into common shares at any time until maturity at a price of $0.45 per share. The Company has the right to force a conversion at any time after the third anniversary if the holder would receive an internal rate of return of 25%, not including interest paid to the conversion date, and the common shares of the Company are trading on the Toronto Stock Exchange or TSX Venture Exchange with a minimum agreed trading volume.  In addition, the Company will issue 2,350,000 under-performance warrants if after the second anniversary of the debenture, the Companys common shares are not trading at greater than $0.45 per share, based on a 30-day weighted average. Each warrant would entitle the holder to acquire one common share at any time up to December 15, 2009 at $0.30 per share.  The Company's obligations under the convertible debenture are collateralized by a first charge on all of the Companys assets.  The Company agreed to pay the holder a structuring fee of $48,000 in respect of the placement.

The convertible debenture was accounted for as a compound debt instrument and proceeds were allocated between debt and equity using the residual method whereby the debt component was valued and the residual was allocated to equity items.

The Company has determined the fair value of the liability portion of the convertible debenture upon issuance to be approximately $1.2 million using a net present value calculation.  The fair value of the liability portion will be accreted to the convertible debenture face value of $1.6 million through interest expense charges computed at 18% per annum through to December 15, 2009. The balance of the convertible debenture approximating $409,000 has been credited to equity and represents the values ascribed to the convertible feature of the debenture with the contingent warrants.  The financing expenses have also been separated into equity and debt components at the same ratio as the convertible debenture.  The debt component has been classified as deferred financing costs and will be applied against income over the period of the financing, included in interest expense. The financing costs for the equity component have been treated as a capital transaction and applied against the equity component.

The following table summarizes the long term cash commitments relating to the convertible debt. The difference in the value between the face values of $1,231,300 as per the balance sheet and the $1,888,000 value as per the table below is related to the accretion of the debt.

Long Term Commitments:

Year
	Long Term Debt2007
	$
	58,6672008
	
	106,6672009
	
	1,722,667Total
	$
	1,888,000




At December 31, 2006, the Company was in violation of certain debt covenants in relation to this convertible debenture, however the Company has obtained a waiver of these covenants from the lender.







47







---





11.

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



|                                           |                    |            |            |          
|------------------------------------------ | ------------------ | ---------- | ---------- | ---------
|                                           | Number of shares   |            | Amount    
|Balance, December 31, 2004                 | 20,795,281         | $          | 26,230,920
|Issued during year for cash:               |                    |            |           
|                                           | Private Placements | 16,320,819 |            | 6,847,840
|                                           | Options exercised  | 211,895    |            | 86,630   
|                                           | Warrants exercised | 2,887,665  |            | 1,218,576
|Issued for acquisition of subsidiary       | 1,066,666          |            | 469,333   
|Special Warrants exercised                 | 1,007,151          |            | 781,801   
|Issuance of shares as share issuance costs | 186,111            |            | 79,000    
|Fair value of options exercised            | -                  |            | 60,458    
|Share issuance costs                       | -                  |            | (861,835) 
|                                           |                    |            |           
|Balance, December 31, 2005                 | 42,475,588         |            | 34,912,723
|                                           |                    |            |           
|Issued during the period for cash:         |                    |            |           
|                                           | Private Placements | 600,000    |            | 270,000  
|Issued for settlement of accounts payable  | 918,525            |            | 413,336   
|Share issuance costs                       | -                  |            | (25,697)  
|                                           |                    |            |           
|Balance, December 31, 2006                 | 43,994,113         | $          | 35,570,362



On August 31, 2006 the Company settled debt owed to two Directors of the Company, one of which is also an officer of the Company through 918,525 common shares at a value of $0.45 per share.  This debt consisted of $413,336 of unpaid fees and expenses.  The common shares issued in settlement of the debt have a four-month hold period that expired on December 31, 2006.

(c)

Warrants:

At December 31, 2005, and December 31, 2006, the following warrants were outstanding:



|                  |         |           |            |                   |                |                  
|----------------- | ------- | --------- | ---------- | ----------------- | -------------- | -----------------
|December 31, 2005 | Granted | Exercised | Expired    | December 31, 2006 | Exercise price | Expiry date      
|3,882,875         | -       | -         | 3,882,875  | -                 | $0.75          | April 28, 2006   
|226,584           | -       | -         | 226,584    | -                 | $0.75          | April 29, 2006   
|86,700            | -       | -         | 86,700     | -                 | $0.75          | May 20, 2006     
|2,380,000         | -       | -         | 2,380,000  | -                 | $0.55          | May 24, 2006     
|187,500           | -       | -         | 187,500    | -                 | $0.50          | November 29, 2006
|4,481,522         | -       | -         | 4,481,522  | -                 | $0.50          | November 29, 2006
|1,786,999         | -       | -         | 1,786,999  | -                 | $0.50          | November 30, 2006
|125,000           | -       | -         | 125,000    | -                 | $0.50          | December 13, 2006
|946,166           | -       | -         | 946,166    | -                 | $0.55          | December 31, 2006
|2,557,785         | -       | -         | -          | 2,557,785         | $0.55          | January 11, 2007 
|-                 | 300,000 | -         | -          | 300,000           | $0.50          | March 2, 2007    
|16,661,131        | 300,000 | -         | 14,103,346 | 2,857,785         |                |                  





48







---







11.

Share Capital (contd):

(c)

Warrants (contd):

Performance warrants:



On July 14, 2006, the Company issued a convertible debenture for proceeds of $1,600,000 (Note 10). Under the terms of the debenture, the Company will issue 2,350,000 under-performance warrants if after the second anniversary of the debenture, the Companys common shares are not trading at greater than $0.45 per share, based on a 30 day weighted average. Each warrant would entitle the holder to acquire one common share at any time up to December 15, 2009 at $0.30 per share.

(d)

Options:



The Company has a stock option plan that was most recently approved at the Companys annual general meeting of shareholders on May 8, 2006.  Under the terms of the plan, the Company may reserve up to 8,615,118 common shares for issuance under the plan.  The Company has granted stock options under the plan to certain employees, Directors, advisors and consultants.  These options are granted for services provided to the Company.  All existing options granted prior to November 25, 2003, expire five years from the date of grant.  All options granted subsequent to November 25, 2003, expire three 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 April 10, 2006, the Company re-priced 1,191,562 common share purchase options granted to employees to $0.45 per share from various prices ranging from $0.47 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged. On May 8, 2006, the Company also received shareholder approval and re-priced 2,535,001 common share purchase options granted to Directors and officers to $0.45 per share from various prices ranging from $0.55 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged.



These repricings constituted modifications and were accounted for using modification accounting, under which the incremental fair value of the benefit attributed to the repricing is measured as the difference between the fair value of the repriced award on the date of the repricing and the fair value of the old award determined on the same date.  This incremental fair value was determined to be $145,474 of which $75,760 was recognized on the date of the repricing in connection with options that were already vested at that date. The balance of the incremental fair value will be recognized over the remaining vesting period of the repriced options.



A summary of the status of the Companys stock options at December 31, 2006 and December 31, 2005 and changes during the periods ended on those dates are presented below:



|                                 |                   |                   |                  |      |           |           |                |     
|-------------------------------- | ----------------- | ----------------- | ---------------- | ---- | --------- | --------- | -------------- | ----
|                                 | December 31, 2006 | December 31, 2005
|                                 | Weighted Average  |                   | Weighted Average
|                                 | Shares            |                   | Exercise Price   |      | Shares    |           | Exercise Price
|Outstanding, beginning of period | 5,415,500         | $                 | 0.67             |      | 3,092,334 | $         | 0.61          
|                                 | Granted           | 5,246,468         |                  | 0.25 |           | 2,848,396 |                | 0.72
|                                 | Exercised         | -                 |                  | -    |           | (211,895) |                | 0.41
|                                 | Cancelled         | (2,369,468)       |                  | 0.65 |           | (313,335) |                | 0.61
|Outstanding, end of period       | 8,292,500         |                   | 0.32             |      | 5,415,500 | $         | 0.67          



49







---





11.

Share Capital  (contd):

(d)

Options (contd):



The following table summarizes information about stock options outstanding at December 31, 2006:



|               |                                      |                                     |      |                                 |                                       |           |                                 |       |  |  |  |  |  |  |  | 
|-------------- | ------------------------------------ | ----------------------------------- | ---- | ------------------------------- | ------------------------------------- | --------- | ------------------------------- | ----- |  |  |  |  |  |  |  | 
|               |                                      | Options Outstanding                 |      | Options exercisable            
|Exercise price | Number
outstanding
December 31, 2006 | Weighted remaining contractual life |      | Weighted average exercise price | Number exercisable, December 31, 2006 |           | Weighted average exercise price
|               |                                      |                                     |      |                                 |                                       |           |                                 |      
|               | $0.10                                | 270,000                             | 2.89 |                                 | $0.10                                 | 90,000    |                                 | $0.10
|               | $0.12                                | 34,722                              | 2.94 |                                 | $0.12                                 | 11,574    |                                 | $0.12
|               | $0.13                                | 1,003,960                           | 2.93 |                                 | $0.13                                 | 334,563   |                                 | $0.13
|               | $0.15                                | 10,000                              | 2.84 |                                 | $0.15                                 | 3,333     |                                 | $0.15
|               | $0.16                                | 500                                 | 2.84 |                                 | $0.16                                 | 167       |                                 | $0.16
|               | $0.17                                | 10,000                              | 2.49 |                                 | $0.17                                 | 3,333     |                                 | $0.17
|               | $0.18                                | 300,000                             | 2.72 |                                 | $0.18                                 | 100,000   |                                 | $0.18
|               | $0.19                                | 15,000                              | 2.47 |                                 | $0.19                                 | 5,000     |                                 | $0.19
|               | $0.20                                | 592,556                             | 2.67 |                                 | $0.20                                 | 197,519   |                                 | $0.20
|               | $0.21                                | 1,280,000                           | 2.62 |                                 | $0.21                                 | 426,667   |                                 | $0.21
|               | $0.25                                | 60,000                              | 2.41 |                                 | $0.25                                 | 20,000    |                                 | $0.25
|               | $0.26                                | 50,000                              | 2.39 |                                 | $0.26                                 | 16,667    |                                 | $0.26
|               | $0.29                                | 27,000                              | 2.12 |                                 | $0.29                                 | 9,000     |                                 | $0.29
|               | $0.31                                | 75,000                              | 2.24 |                                 | $0.31                                 | 25,000    |                                 | $0.31
|               | $0.33                                | 66,666                              | 0.96 |                                 | $0.33                                 | 66,666    |                                 | $0.33
|               | $0.34                                | 13,333                              | 0.86 |                                 | $0.34                                 | 13,333    |                                 | $0.34
|               | $0.35                                | 15,333                              | 1.63 |                                 | $0.35                                 | 8,000     |                                 | $0.35
|               | $0.36                                | 7,110                               | 1.13 |                                 | $0.36                                 | 4,740     |                                 | $0.36
|               | $0.39                                | 112,000                             | 1.31 |                                 | $0.39                                 | 74,667    |                                 | $0.39
|               | $0.40                                | 811,367                             | 0.64 |                                 | $0.40                                 | 808,034   |                                 | $0.40
|               | $0.43                                | 5,500                               | 1.83 |                                 | $0.43                                 | 3,667     |                                 | $0.43
|               | $0.44                                | 15,000                              | 1.86 |                                 | $0.44                                 | 10,000    |                                 | $0.44
|               | $0.45                                | 3,526,890                           | 1.57 |                                 | $0.45                                 | 2,051,012 |                                 | $0.45
|              
|               |                                      | 8,292,500                           | 1.99 |                                 | $0.32                                 | 4,282,940 |                                 | $0.36



The weighted average fair value of employee stock options granted during the period ended December 31, 2006 was $0.32 (2005-$0.72) per share purchase option. 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  58.2% (2005-66%); risk free interest rate - 5% (2005-5%); option term - 3 years (2005-3 years); and dividend yield  nil (2005-nil).  The total compensation expense of $797,729 (2005-$858,209) has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.





50







---





11.

Share Capital  (contd):



(e)

Agents Options



A summary of the status of the Companys Agents Options at December 31, 2006 and December 31, 2005 and changes during the periods ended on those dates is presented below:



|                                 |                   |                   |                  |   |         |         |                |     
|-------------------------------- | ----------------- | ----------------- | ---------------- | - | ------- | ------- | -------------- | ----
|                                 | December 31, 2006 | December 31, 2005
|                                 | Weighted Average  |                   | Weighted Average
|                                 | Shares            |                   | Exercise Price   |   | Shares  |         | Exercise Price
|Outstanding, beginning of period | 907,557           | $                 | 0.45             |   | -       | $       | -             
|                                 | Granted           | -                 |                  | - |         | 907,557 |                | 0.45
|                                 | Exercised         | -                 |                  | - |         | -       |                | -   
|                                 | Cancelled         | 907,557           |                  | - |         | -       |                | -   
|Outstanding, end of period       | -                 | $                 | 0.45             |   | 907,557 | $       | 0.45          



A November 29, 2005 private placement included non-transferable agents options to purchase 896,307 units on or before November 29, 2007 at a price of $0.45 per unit. Each unit consists of one common share and one-half of one common share purchase warrant, each full warrant exercisable for one common share at $0.50 until November 29, 2006.



Also in connection with a 2005 private placement, the Company issued non-transferable agents options to purchase 11,250 units on or before December 13, 2007 at a price of $0.45 per unit. Each unit consists of one common share and one-half of one common share purchase warrant, each full warrant exercisable for one common share at $0.50 until December 13, 2006.



The weighted average fair value of agents stock options granted during 2005 was $0.16 per share purchase option. 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 - 66%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil.  The total value of $142,001 was allocated to share issuance costs and credited to contributed surplus.



12.

Contributed surplus



|                                        |   |           |        | 
|--------------------------------------- | - | --------- | ------ | 
|                                        |   |           | Amount
|Balance, December 31, 2004              | $ | 1,648,402
|Value of employee options expensed      |   | 858,209  
|Value of options exercised              |   | (60,458) 
|Value of agents options                |   | 142,001  
|Value of warrants issued as commissions |   | 51,548   
|                                        |   |           |        | 
|Balance, December 31, 2005              |   | 2,639,702
|                                        |   |           |        | 
|Value of options expensed               |   | 797,729  
|                                        |   |           |        | 
|Balance, December 31, 2006              | $ | 3,437,431



13.

Technology development



Included in technology development expenses, for 2006, are net research and development costs of $144,928, consisting of incurred costs of $289,855 less a contribution of $144,928 from the National Research Council.



51







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14.

Restructuring charge



The Company recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with staff reductions due to the integration of its operations with those of its subsidiary,
Sunaptic.



15.

Related-party transactions not disclosed elsewhere are as follows:



At December 31, 2006, accounts payable and accrued liabilities included $230,215 (at December 31, 2005 - $400,539) 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 and consist of unpaid fees and expenses recorded at the exchange amount which is the amount agreed to by the parties. The exchange amount was negotiated and established and agreed to by the related parties.



The Company has a consulting agreement with Trivett Holdings Ltd., a Company controlled by Roy Trivett, the Companys President and Chief Executive Officer.  The contract consists of an annual fee of $200,000.  The agreement extends for 12 months from January to December unless renewed or terminated.  Either party may terminate the Agreement on notice given not less than, in the case of Visiphor, six (6) months or, in the case of Trivett Holdings Ltd, 1 months notice.  The six months notice from Visiphor will become the severance allowance.



The Company has a consulting agreement with AG Kassam and Associates, Inc., a Company controlled by Al Kassam, the Companys Vice President, Sales, Marketing & Support Services. The contract consists of an annual fee of $166,000.  The agreement will extend for a period of 12 months from the date first set forth above and will be renewed automatically for an additional period of 12 months concurrent with the expiry of the initial 12 month term without any additional requirement by either party unless terminated in the manner provided for under the agreement.  Either party may terminate the agreement on notice given not less than, in the case of Visiphor, twelve (12) months or, in the case of Kassam, 1 months notice.  The twelve months notice from Visiphor will become the severance allowance.



The Company had an employment agreement with Thomas James Healy, the Companys Vice President, Support Services.  Mr. Healys contract consisted of an annual fee of $137,500.  Mr. Healy resigned as Vice President, Support Services effective November 10, 2006. The agreement was terminated on November 10th, 2006.  Effective January 15th, 2007, Visiphor entered into a consulting agreement for the sole purpose of completing an internal project.  The fees and total compensation for the services include an hourly fee of $50 per hour for both onsite and offsite work as required, and an extension to the original expiry date of all stock options granted during employment at Visiphor, up to and including the last day of full-time employment, to 15 days following full acceptance and payment for the services provided.



The Company had entered into an employment agreement with Michael James Hilton, the Companys President and Chief Operating Officer.  Mr. Hiltons contract consisted of an annual fee of $150,000.  Mr. Hilton resigned as President and Chief Operating Officer, effective November 30, 2006.  The agreement was terminated on November 30th, 2006.  Effective January 15th, 2007, Visiphor entered into a consulting agreement for the sole purpose of completing an internal project.  The fees and total compensation for the services include an hourly fee of $50 per hour for both onsite and offsite work as required, and an extension to the original expiry date of all stock options granted during employment at Visiphor, up to and including the last day of full-time employment, to 15 days following full acceptance and payment for the services provided.





52







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16.

Income taxes:



Income tax expense differs from the amount that would be computed by applying the federal and provincial statutory income tax rates of 34.12% (2005  34.87%) to income before taxes.

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



2006
	
	
	2005Canadian statutory rates
	
	34.12
	%
	
	34.87
	%Canadian federal and provincial taxes
	$
	(2,278,660
	)
	$
	(2,312,458
	)Non-deductible items
	
	866,841
	
	
	880,360Permanent and other differences
	
	291,227
	
	
	(46,988
	)Effect of tax rate change
	
	72,878
	
	
	65,558Non-capital losses expired
	
	857,512
	
	
	-Changes in valuation allowance
	
	190,202
	
	
	1,413,528$
	-
	
	$
	-Future income tax assets:Non-capital losses carried forward
	$
	9,550,857
	
	$
	9,432,553Capital assets
	
	366,311
	
	
	305,736Financing costs
	
	153,381
	
	
	205,919Total future income tax assets
	
	9,988,926
	
	
	9,944,208Less valuation allowance
	
	(9,907,303
	)
	
	(9,717,102
	)81,623
	
	
	227,106Future income tax liability:Intellectual property and other assets
	
	(81,623
	)
	
	(227,106
	)Net future income taxes
	$
	-
	
	$
	-




In assessing whether the benefits of future tax assets will be realized, 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.



53







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16.

Income Taxes contd:



As at December 31, 2006, the Company has non-capital loss carry forwards aggregating approximately $28,592,000 available to reduce taxable income otherwise calculated in future years.  These losses expire as follows:



2007
	3,031,0002008
	4,129,0002009
	6,508,0002010
	3,734,0002014
	2,831,0002015
	3,583,0002026
	4,176,000




17.

Commitments:

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



Year
	
	Equipment
	
	Building
	
	Total2007
	$
	116,099
	$
	290,887
	$
	406,9862008
	
	79,878
	
	265,904
	
	345,7822009
	
	21,952
	
	202,900
	
	224,852$
	217,929
	$
	759,691
	$
	977,620




The Companys head office in Burnaby, B.C. leases space under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Company also subleases office space in Vancouver, B.C. of 4,128 square feet with monthly rent of $7,000 which expires on September 29, 2008. This space is no longer used by the Company and has been sublet as of March 1, 2007 to cover the Companys costs. The lease to the tenant also expires September 29, 2008.



18.

Financial instrumentsand risk management:

(a)

Fair values:



The fair value of the Companys financial instruments, represented by cash, accounts receivable, accounts payable and accrued liabilities, and loans payable approximates their carrying values due to their ability to be promptly liquidated or their immediate or short term to maturity. The carrying value of the convertible debenture approximates fair value. 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.

(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 and accrued revenues. 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.

(d)

Interest rate risk:

The Company is not exposed to any interest rate risk on the convertible debenture as the rate is fixed.



54







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19.

Segmentedinformation:



The Company operates in two segments, being the development and sale of software applications and solutions and the provision of business integration consulting services. Management of the Company makes decisions about allocating resources based on these two operating segments.



As at December 31, 2006

|                                  |   |                |   |                     |   |            
|--------------------------------- | - | -------------- | - | ------------------- | - | -----------
|                                  |   | Software Sales |   | Consulting Services |   | Total      
|                                  |   |                |   |                     |   |            
|Revenue                           | $ | 1,967,497      | $ | 4,415,886           | $ | 6,383,383  
|                                  |   |                |   |                     |   |            
|Operating Expenses                |   | 7,304,924      |   | 3,612,240           |   | 10,917,164 
|Interest Expense                  |   | 268,960        |   | 25,095              |   | 294,055    
|Amortization of Capital Assets    |   | 166,039        |   | 73,427              |   | 239,466    
|Amortization of Intangibles       |   | 1,198,997      |   | 412,072             |   | 1,611,069  
|Total Expenses                    |   | 8,938,920      |   | 4,115,334           |   | 13,061,754 
|                                  |   |                |   |                     |   |            
|Net Profit (Loss)                 | $ | (6,971,423)    | $ | 293,052             | $ | (6,678,371)
|                                  |   |                |   |                     |   |            
|Total Assets                      | $ | 1,099,190      | $ | 2,827,057           | $ | 3,926,247  
|Intangible Assets                 |   |                |   |                     |   |            
|Goodwill                          | $ | -              | $ | 1,684,462           | $ | 1,684,462  
|Intellectual Property             | $ | 27,778         | $ | -                   | $ | 27,778     
|Customer Backlog                  | $ | -              | $ | -                   | $ | -          
|Customer Relationships            | $ | -              | $ | 238,667             | $ | 238,667    
|Equipment, net                    | $ | 330,684        | $ | 84,022              | $ | 414,706    
|Non-cash Stock-based Compensation | $ | 649,363        | $ | 148,367             | $ | 797,730    
|Additions to Capital Assets       | $ | 50,552         | $ | 67,975              | $ | 118,527    





As at December 31, 2005

|                               |   |                |   |                     |   |            
|------------------------------ | - | -------------- | - | ------------------- | - | -----------
|                               |   | Software Sales |   | Consulting Services |   | Total      
|                               |   |                |   |                     |   |            
|Revenue                        | $ | 2,749,512      | $ | 580,629             | $ | 3,330,141  
|                               |   |                |   |                     |   |            
|Operating Expenses             |   | 7,762,719      |   | 412,425             |   | 8,175,144  
|Interest Expense               |   | 69,265         |   | 642                 |   | 69,907     
|Amortization of Capital Assets |   | 1,500,042      |   | 4,901               |   | 1,504,943  
|Amortization of Intangibles    |   | 76,434         |   | 135,369             |   | 211,803    
|Total Expenses                 |   | 9,408,460      |   | 553,337             |   | 9,961,797  
|                               |   |                |   |                     |   |            
|Net Profit (Loss)              | $ | (6,658,948)    | $ | 27,292              | $ | (6,631,656)





|                                          |   |                |   |                     |   |          
|----------------------------------------- | - | -------------- | - | ------------------- | - | ---------
|                                          |   | Software Sales |   | Consulting Services |   | Total    
|                                          |   |                |   |                     |   |          
|Total Assets                              | $ | 3,541,371      | $ | 3,354,321           | $ | 6,895,692
|Intangible Assets                         |   |                |   |                     |   |          
|Goodwill                                  | $ | -              | $ | 1,684,462           | $ | 1,684,462
|Intellectual Property                     | $ | 1,226,775      | $ | -                   | $ | 1,226,775
|Customer Relationships                    | $ | -              | $ | 676,226             | $ | 676,226  
|Contract Backlog                          | $ | -              | $ | 173,405             | $ | 173,405  
|Equipment, net                            | $ | 441,684        | $ | 88,054              | $ | 529,735  
|Non-cash Stock-based Compensation expense | $ | 858,209        | $ | -                   | $ | 858,209  
|Additions to Capital Assets               | $ | 411,509        | $ | 3,891               | $ | 415,400  



55







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| |  |  |  |  |  | 
| |  |  |  |  |  | 



19.

Segmented information contd:



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



2006
	
	2005Canada
	$
	4,039,282
	$
	1,233,499United States
	
	2,316,807
	
	2,055,720United Kingdom
	
	27,294
	
	40,013Other
	
	-
	
	909$
	6,383,383
	$
	3,330,141




Substantially all of the Companys equipment is in Canada.



Major customers, representing 10% or more of total revenue are:



2006
	
	2005Customer A
	$
	1,585,633
	$
	1,061,176Customer B
	
	857,746
	
	487,539Customer C
	
	666,437
	
	463,187Customer D
	
	-
	
	418,730




20.

United States generally accepted accounting principles:



These financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which differ in certain respects from 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 11, the Company has granted stock options to certain employees, Directors, advisors, and consultants.  These options are granted for services provided to the Company.  For Canadian GAAP purposes, the Company accounts for all stock-based payments to non-employees made subsequent to January 1, 2002 and to employees made subsequent to January 1, 2003 using the fair value based method.



Under US GAAP



·

Options granted to non-employees prior to January 1, 2002 are also required to be measured and recognized at their fair value as the services are provided and the options are earned.



·

During the years ended December 31, 2001 and 2002, the Company repriced certain options which were accounted for as variable options resulting in net increases in the underlying common share market price between repricing and exercise, expiring or forfeiture of the options.



·

An enterprise recognizes or, at its option, discloses the impact on net loss of the fair value of stock options and other forms of stock-based compensation awarded to employees.  While the Company has elected under U.S. GAAP to adopt fair value accounting for options awarded to employees on or after January 1, 2003, the Company has elected to continue to measure compensation cost for stock options granted to employees prior to January 1, 2003 by the intrinsic value method.





56







---





On January 1, 2006, the Company adopted Statement of Financial Account Standards (SFAS), Share-Based Payment (SFAS 123(R)), which requires the expensing of all options issued, modified or settled based on the grant date fair value over the period during which an employee is required to provide service (vesting period).



The Company adopted SFAS 123(R) using the modified prospective approach, which requires application of the standard to all awards granted, modified, repurchased or cancelled on or after January 1, 2006, and to all awards for which the requisite service has not been rendered as at such date.  Since January 1, 2003, the Company has been following the fair value based approach prescribed by SFAS 123, as amended by SFAS 148, for stock option awards granted, modified or settled on or after such date.  As such, the application of SFAS 123(R) on January 1, 2006 to all awards granted prior to its adoption did not have a significant impact on the financial statements.  In accordance with the modified prospective approach, prior period financial statements have not been restated to reflect the impact of SFAS 123(R).  The prospective adoption of this new U.S. GAAP pronouncement creates no new differences with the Companys stock compensation expense reported under Canadian GAAP.



Previously under U.S. GAAP, the Company accounted for its stock option plan under the principles of Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees and Related Interpretations (APB 25).  No compensation expense was recognized under APB 25 because the exercise price of the Companys stock options equals the market price of the underlying stock on the date of the grant.

(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.

(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 at that time, 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 The Black-Scholes option pricing model and recognized as the services are provided.

(d)

Convertible debenture:



During 2006, the Company issued a convertible debenture with detachable contingent warrants.  For Canadian GAAP purposes, the debenture was treated as a compound debt instrument and the debt component was allocated  between debt and equity using the residual method whereby the debt was fair valued and the residual value was applied to equity (consisting of the conversion feature and contingent warrants) net of the pro rata issuance costs.



For U.S. GAAP purposes, the relative fair value method was applied to bifurcate the contingent warrants from the debt instrument whereby debt and contingent warrants were fair valued.  Issuance costs were allocated proportionally to each component.  The warrants were evaluated as equity as they contain no net cash settlement terms outside of the control of the Company.  Conversion features of the debt did not meet the requirements for bifurcation.



The fair value of the warrants has been estimated to be $129,593 using the Black-Scholes option pricing model using the following average inputs:  volatility - 51%; risk free interest rate - 5% (2005-5%); option term  1 5/12 years; and dividend yield  nil (2005-nil).



57







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20.

United States generally accepted accounting principles contd:



(e)

Comprehensive loss:

Comprehensive loss equals net loss for all periods presented.

The effect of these accounting differences on contributed surplus, the equity and debt components of the convertible debenture, deficit, net loss, and net loss per share are as follows:



|                                                          |   |              |   |                         |   |                         |  |  |  |  |  | 
|--------------------------------------------------------- | - | ------------ | - | ----------------------- | - | ----------------------- |  |  |  |  |  | 
|                                                          |   |              |   | As at
December 31, 2006 |   | As at
December 31,
2005
|Contributed Surplus, Canadian GAAP                        | $ | 3,437,431    | $ | 2,639,702              
|Cumulative stock based compensation (a)                   |   |              |   | 1,380,198               |   | 1,380,198              
|Beneficial conversion options (b)                         |   |              |   | 208,200                 |   | 208,200                
|Warrants issued for services (c)                          |   |              |   | 722,000                 |   | 722,000                
|Contingent warrants (d)                                   |   |              |   | 129,593                 |   | -                      
|Additional paid-in capital, U.S. GAAP                     |   |              | $ | 5,877,422               | $ | 4,950,100              
|                                                          |   |              |   |                         |   |                        
|Equity Components of Convertible Debenture, Canadian GAAP | $ | 365,479      | $ | -                      
|Equity components of convertible debenture (d)            |   |              |   | (365,479)               |   | -                      
|Equity Components of Convertible Debenture, U.S. GAAP     | $ | -            | $ | -                      
|                                                          |   |              |   |                        
|Deferred financing charges, Canadian GAAP                 | $ | 71,142       |   | -                      
|Valuation differences (d)                                 |   | 32,604       |   | -                      
|Accretion differences (d)                                 |   | (4,373)      |   | -                      
|Deferred financing charges, U.S. GAAP                     |   | 99,373       |   |                        
|                                                          |   |              |   |                        
|Convertible debenture, Canadian GAAP                      | $ | 1,231,300    | $ | -                      
|Valuation differences (d)                                 |   |              |   | 268,755                 |   | -                      
|Accretion differences (d)                                 |   |              |   | (25,131)                |   | -                      
|Convertible debenture, U.S. GAAP                          |   |              | $ | 1,474,924               | $ | -                      
|                                                          |   |              |   |                        
|Deficit, Canadian GAAP                                    | $ | (39,924,950) | $ | (33,290,479)           
|Cumulative stock based compensation (a)                   |   |              |   | (1,380,198)             |   | (1,380,198)            
|Beneficial conversion options (b)                         |   |              |   | (208,200)               |   | (208,200)              
|Warrants issued for services (c)                          |   |              |   | (722,000)               |   | (722,000)              
|Convertible debenture (d)                                 |   |              |   | 20,758                  |   | -                      
|Deficit, U.S. GAAP                                        |   |              | $ | (42,214,590)            | $ | (35,600,877)           



|                                                                    |                                  |             |      |             |  | 
|------------------------------------------------------------------- | -------------------------------- | ----------- | ---- | ----------- |  | 
|                                                                    | Twelve months ended
December 31,
|                                                                    | 2006                             |             | 2005
|                                                                    |                                  |             |      |            
|Net Loss for the period, Canadian GAAP                              | $                                | (6,678,371) | $    | (6,631,656)
|Accretion on convertible debenture Canadian GAAP (d)                |                                  | 40,860      |      | -          
|Deferred financing expenses deducted under Canadian GAAP (d)        |                                  | 11,206      |      | -          
|                                                                    |                                  |             |      |             | 
|Accretion on convertible debenture U.S. GAAP (d)                    |                                  | (15,729)    |      | -          
|Deferred  financing expenses deducted under U.S. GAAP (d)           |                                  | (15,579)    |      | -          
|                                                                    |                                  |             |      |             | 
|Net Loss for the period, U.S. GAAP                                  | $                                | (6,657,613) |      | (6,631,656)
|                                                                    |                                  |             |      |            
|Net Loss per share, U.S. GAAP and Canadian GAAP  basic and diluted | $                                | (0.15)      | $    | (0.23)     



58







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21.

Recent accountingpronouncements:



FIN 48



In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective for fiscal years beginning after December 15, 2006.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, including the recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company will adopt FIN 48 on January 1, 2007, as required.  The impact of FIN 48 on the Companys consolidated financial statements is not yet known or reasonably estimated.



EITF No. 06-3



In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force in Issue No. 06-3, How Taxes collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross Versus Net Presentation). Issue No. 06-3 requires disclosure of an entitys accounting policy regarding the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes.  The Company presents such taxes on a net basis (excluded from revenues and costs). The adoption of Issue No. 06-3, which is effective for interim and annual reporting periods beginning after December 15, 2006, will have no impact on the Companys consolidated financial statements.



FAS 157



In September 2006, the FASB issued FAS 157, Fair Value Measurements.  This financial accounting standard establishes a framework for measuring fair value and expands related disclosure requirements.  As applicable to Visiphor, this statement is effective as of the year beginning January 1, 2008. Visiphor is currently evaluating the impact that the adoption of FAS 157 would have on its consolidated financial statements.



Staff Accounting Bulletin 108



In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.  SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.



Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements.  These methods are referred to as the roll-over and iron curtain method.  The roll-over method quantifies the amount by which the current year income statement is misstated.  Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts.  The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated.  Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that result from the correction of an error existing in previously issued financial statements.  The Company historically used the roll-over method for quantifying identified financial statement misstatements.



SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the companys financial statements and the related financial statement disclosures.  This approach is commonly referred to as the dual approach because it requires quantification of errors under both the roll-over and iron curtain methods.



SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings.  Use of this cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.



59







---







The Company applies SAB 108 using the retroactive method in connection with the preparation of its annual consolidated financial statements for the year ending December 31, 2006. The initial adoption of SAB 108 had no impact to the consolidated financial statements.



Item 8.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 8A. Disclosure Controls and Internal Controls Over Financial Reporting.

Disclosure Controls



Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, 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) as of the end of the period covered by this report (the Evaluation Date).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the the periods specified in the Securities and Exchange Commissions rules and forms, and accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.



In its assessment of the effectiveness of disclosure controls and procedures as of December 31, 2006, management of the Company, including the Chief Executive Officer and Chief Financial Officer, assessed what potential impact different possible material weaknesses as described below could have on the effectiveness of the Companys disclosure controls and procedures. Management, including the Chief Executive Officer and Chief Financial Officer, determined that due to the small size of the Company the Chief Executive Officer and Chief Financial Officer have knowledge of all aspects of the Companys operations at a detailed level sufficient to ensure that the Companys disclosure controls and procedures were effective in timely alerting them to the material information related to the Company required to be included in the Companys filings. This level of knowledge is considered by the certifying officers to be a compensating control and procedure that is adequate to eliminate the risk of a material error or omission in disclosure requirements.



Internal Control Over Financial Reporting



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management is also responsible for certifying the design of internal controls over financial reporting.



The Companys independent auditors, Grant Thornton LLP, have advised management and the audit committee of the Companys Board of matters that they considered to be material weaknesses in the Companys internal control.  The weaknesses were comprised of: insufficient systems and controls in place to evaluate the Companys internal control; insufficient segregation of duties; and inadequate preventive controls with too much reliance on detective and manual controls.  In order to remediate the matters that the Companys independent auditors and management considered to be material weaknesses in the Companys internal control, during August of 2005 the Company hired a new Controller who has significantly more experience and knowledge of internal control environments than the previous controller.  During the third quarter of 2006, the Company engaged an outside consulting group that specializes in internal control over financial reporting and the Sarbanes-Oxley Act of 2002. The consultants provided additional guidance in improving the Company's system of internal control over financial reporting and provided guidance on effective design of internal controls. During the third and fourth quarter of 2006, the Company addressed some of the weaknesses relating to segregation of duties reported by the auditors from the 2005 audit.  A significant number of the deficiencies relate to the Company's segregation of duties, so the Company has developed procedures to utilize additional staff and reassign duties of existing accounting department staff in order to address these deficiencies.  The Company continues to take steps to correct these weaknesses.



The management of the Company has evaluated the design of internal controls over financial reporting as outlined in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway



60







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Commission, (COSO). This included an assessment of the Companys internal control over financial reporting in particular the design of those internal controls. With the guidance of external and internal control consultants, the Company developed an assessment of current controls, reviewed existing deficiencies and developed a plan to address all known deficiencies, in particular issues relating to segregation of duties. As at December 31, 2006, the Company had created a design for internal controls over financial reporting. By December 31, 2007 the Company is required to certify the effectiveness of internal controls over financial reporting. This will be completed throughout the year by testing the operational effectiveness of internal controls over financial reporting.



Based on the assessment at December 31, 2006, management believes the Company has an effective design for internal controls over financial reporting however, also believes that certain material weaknesses exist that the Company will work to correct during 2007. The following is a summary of known material weaknesses:



Segregation of Duties



The management of the Company was advised by the auditors during the 2005 year end audit, they believed there were deficiencies in internal controls due to the lack of segregation and incompatibility of duties which could result in inaccurate financial reporting. Management addressed some of these issues during the second half of 2006 by using other resources to try to segregate some duties and by strengthening existing controls and procedures. The Company has a small finance group which has made total segregation of all duties challenging. There are compensating controls which the Company relies on to reduce the likelihood that material weaknesses will occur. The Company relies on managers to review certain transactions; the Chief Financial Officer reviews all material transactions.  Also, due to the relatively small size of the business, all transactions that may be material are known to the senior management as they are aware of all activities that are occurring in the business. However, these compensating controls do not fully mitigate this material weakness.  The Company plans to further address these issues in 2007.



Controls relating to Technology



Due to the relatively small size of the Companys finance team the Company uses accounting software that is off the shelf and common for a business of our size. The auditors noted that certain security and access features of the program were not being used. The Company realizes the importance of segregation of duties and limiting access of parts of the accounting software for different employees, however due to the limited size of the finance team; the Company cannot do so without negatively affecting the efficiency of the department. Compensating controls such as frequent reviews minimize the risk of material misstatements from occurring. However, these compensating controls do not fully mitigate this material weakness.  The Company plans to further address these issues in 2007.



Other than the foregoing, during the year ended December 31, 2006, there were no changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



Notwithstanding the foregoing, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Companys disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company and its subsidiaries to disclose material information otherwise required to be set forth in the Companys periodic reports; however, the Companys disclosure controls and procedures are designed to provide reasonable assurance that they will achieve their objective of ensuring that information required to be disclosed in the reports the Company files or submits under the Exchange Act is  recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Item 8B. Other Information.

None



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Part III

Item 9.

Directors, Executive Officers, Promoters and Control Persons, Corporate Governance 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 March 22, 2007:



Name

Age

Position with the Company



Oliver Buck Revell

68

Chairman of the Board

Roy Davidson Trivett

59

Chief Executive Officer and Director

Al Kassam

44

Vice-President, Sales & Marketing & Support and Director

Keith Kretschmer

72

Director

Michael C. Volker(1)

58

Director

Clyde Farnsworth(1)

66

Director

Norman Inkster (1)

68

Director

Wanda Dorosz

56

Director

Amin Sunil

31

Chief Financial Officer

___________________________

(1)

Audit Committee Member



Oliver "Buck" Revellwas appointed as the Companys Chairman of 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 the Company 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.



Al Kassamwas appointed Vice President, Sales in April 2004.  He originally joined the Company 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.



Keith Kretschmerwas appointed as a Director of the Company in March 2004.Mr. Kretschmer retired following a 30-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



62







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of Directors of Cogent Financial (d/b/a 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.



Michael C. Volkerwas appointed to the Board of the Company 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).



Clyde Farnsworthbecame a Director of the Company inMarch 2004.  Mr. 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.



Norman Inkster became a Director of the Company in June 2004. Prior to joining the Board at Visiphor, he was the Commissioner of the RCMP from 1987 to 1994, President of Interpol from 1992 to 1994, Special Adviser to the Auditor General of Canada, following the events of September 11, 2001, appointed Special Adviser on matters of security by the Government of Ontario, an Officer of the Order of Canada, Global Managing Partner of the forensic practice of a major international accounting firm, Member of the Canadian and International Associations of the Chiefs of Police, Honorary Chief of the Blackfoot Tribe and Honorary Member of the Bear Clan of the Cree Nation, Founder and President of the Inkster Group.



Wanda Doroszbecame a Director of the Company in August 2006.  Ms. Dorosz is currently the Chairman and CEO of Quorum Group of Companies.  Ms. Dorosz is a founder and the Chairman and CEO of Quorum Group of Companies (Quorum) which operate out of Toronto, New York and Bermuda.  From 1976 until 1987 Ms. Dorosz practiced law, specializing in tax and corporate finance issues primarily related to Canadian and U.S. technology companies. She is currently a Director of numerous private, public and not-for-profit organizations including CCR Technologies Ltd., Wellpoint Systems Inc., LxSix Photonics Inc., Positron Technologies Inc., NGRAIN Technology and Products, York University Schulich Business School Advisory Board, and Top 40 Under 40 Board of Directors.  Some of her prior Directorships include Investors Group, the Residential Equities Board of Trustees, the University of Toronto Governing Council, Toronto Stock Exchange Advisory Council, Abitibi-Price Office Products, Positron Fibre Systems, PC DOCS Group International, Inc., Promis Systems Corporation, Enghouse Systems Limited, National Advisory Board on Science and Technology (NABST), an appointment of the Prime Minister, Director and Executive Committee Member of the Harbourfront Corporation, Anderson Consulting (now Accenture) Canadian Advisory Board, and the Ontario Centre for Microelectronics. She has been a national judge of the Canadian Entrepreneur Program for a number of years.

Sunil Aminjoined Visiphor in August 2006 and has served as the Companys Controller from August 2006 to February 2007, at which time he was appointed Chief Financial Officer. From 2003 to 2006, Mr. Amin was with Stockgroup Media Ltd. which is a leading financial media company focused on user-generated content and collaborative technologies.   Prior to Stockgroup Media Ltd., Mr. Amin was involved with financial services at TD Canada Trust. Mr. Amin holds a Certified General Accountant designation.



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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 the Companys Bylaws. Officers serve at the discretion of the Board and are appointed annually.  None of the Directors serve as Directors of any other company with a class of securities registered pursuant to Section 12 of the Exchange Act.  The Company is not aware of any involvement in legal proceedings by any of the Companys Directors or executive officers that would be material to an evaluation of the ability or integrity of any Director or executive officer.  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

Visiphor has established a separately-standing audit committee in accordance with Section 3(a)(58)(A) of the Exchange Act which was comprised of Clyde Farnsworth, Chairman, Norman Inkster and Mike Volker, each of whom is independent for audit committee purposes according to the listing standards of the NASDAQ Stock Market and the regulations of the SEC. As at December 31, 2006, 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 the Exchange Act) meets all of the criteria required of an audit committee financial 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.

Code of Ethics

Visiphor 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.visiphor.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.



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Item 10.  Executive Compensation.

Compensation of Named Executive Officers

The following table sets forth compensation paid or earned for the year ended December 31, 2006 by the Companys Chief Executive Officer and each of the Companys next four most highly compensated executive officers that received compensation in excess of US$100,000 during the year (the Named Executive Officers).



Summary Compensation Table for 2006



|                                                      |      |            |           |                  |                      |                                             |                                                  |                             |          
|----------------------------------------------------- | ---- | ---------- | --------- | ---------------- | -------------------- | ------------------------------------------- | ------------------------------------------------ | --------------------------- | ---------
|Name and Principal Position                           | Year | Salary
($) | Bonus
($) | Stock Awards
($) | Option Awards(2)
($) | Non-Equity Incentive Plan Compensa-tion
($) | Nonqualified Deferred Compensa-tion Earnings
($) | All Other Compensa-tion ($) | Total
($)
|Roy Trivett
Chief Executive Officer                   | 2006 | 168,800    | N/A       | N/A              | 69,157               | N/A                                         | N/A                                              | N/A                         | 237,957  
|Wayne Smith
Chief Financial Officer(1)                | 2006 | 180,165    | N/A       | N/A              | 38,611               | N/A                                         | N/A                                              | N/A                         | 218,776  
|Al Kassam
Vice President, Sales                       | 2006 | 167,690    | N/A       | N/A              | 35,633               | N/A                                         | N/A                                              | N/A                         | 203,323  
|Thomas J. Healy
Vice President, Consulting Services   | 2006 | 122,853    | N/A       | N/A              | 36,501               | N/A                                         | N/A                                              | N/A                         | 159,354  
|Michael J. Hilton
President & Chief Operating Officer | 2006 | 145,931    | N/A       | N/A              | 19,110               | N/A                                         | N/A                                              | N/A                         | 165,041  



(1)

Wayne Smith resigned effective January 31, 2007.

(2)

The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006 in accordance with FAS 123(R) of option awards pursuant to the Companys stock option plan and thus may include amounts from awards granted in and prior to 2006.  Assumptions used in the calculations of these amounts are included in footnote 11 to the Companys audited financial statements for the fiscal year ended December 31, 2006 included in this Annual Report.



65







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Employment Agreements

Visiphor has a consulting agreement with Trivett Holdings Ltd., a Company controlled by Roy Trivett, the Companys President and Chief Executive Officer.  The contract consists of an annual fee of $200,000.  The agreement extends for 12 months from January to December unless renewed or terminated.  Either party may terminate the Agreement on notice given not less than, in the case of Visiphor, six (6) months or, in the case of Trivett Holdings Ltd, 1 months notice.  The six months notice from Visiphor will become the severance allowance.



Visiphor had a consulting agreement with TelePartners Consulting Inc., a Company controlled by Wayne Smith, the Companys former Chief Financial Officer and Chief Operating Officer.  The contract consisted of an annual fee of $175,000.  Effective March 1st, 2007 TelePartners Consulting Inc terminated this consulting agreement.  A new consulting agreement is currently under review.



Visiphor has a consulting agreement with AG Kassam and Associates, Inc., a Company controlled by Al Kassam, the Companys Vice President, Sales, Marketing & Support Services. The contract consists of an annual fee of $166,000.  The agreement will extend for a period of 12 months from the date first set forth above and will be renewed automatically for an additional period of 12 months concurrent with the expiry of the initial 12 month term without any additional requirement by either party unless terminated in the manner provided for under the agreement.  Either party may terminate the agreement on notice given not less than, in the case of Visiphor, twelve (12) months or, in the case of Kassam, 1 months notice.  The twelve months notice from Visiphor will become the severance allowance.



Visiphor had an employment agreement with Thomas James Healy, the Companys Vice President, Support Services.  Mr. Healys contract consisted of an annual fee of $137,500.  Mr. Healy resigned as Vice President, Support Services effective November 10, 2006. The agreement was terminated on November 10th, 2006.  Effective January 15th, 2007, Visiphor entered into a consulting agreement for the sole purpose of completing an internal project.  The fees and total compensation for the services include an hourly fee of $50 per hour for both onsite and offsite work as required, and an extension to the original expiry date of all stock options granted during employment at Visiphor, up to and including the last day of full-time employment, to 15 days following full acceptance and payment for the services provided.



Visiphor had entered into an employment agreement with Michael James Hilton, the Companys President and Chief Operating Officer.  Mr. Hiltons contract consisted of an annual fee of $150,000.  Mr. Hilton resigned as President and Chief Operating Officer, effective November 30, 2006.  The agreement was terminated on November 30th, 2006.  Effective January 15th, 2007, Visiphor entered into a consulting agreement for the sole purpose of completing an internal project.  The fees and total compensation for the services include an hourly fee of $50 per hour for both onsite and offsite work as required, and an extension to the original expiry date of all stock options granted during employment at Visiphor, up to and including the last day of full-time employment, to 15 days following full acceptance and payment for the services provided.





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Option Re-pricing



On May 8, 2006, the Company re-priced 1,500,000 common share purchase options previously granted to Named Executive Officers to $0.45 per share from various prices ranging from $0.78 to $0.79 per share.  The vesting provisions and expiry dates of the re-priced options remains unchanged.



The following table includes certain information with respect to the value of all previously awarded unexercised options held by the Named Executive Officers at December 31, 2006.



Outstanding Equity Awards at 2006 Fiscal Year-End

|                  |                                                                     |                                                                       |                                                                                                |                               |                                                                                              
|----------------- | ------------------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------------------------------------------------------------------
|                  | Option Awards                                                      
|Name              | Number
of
Securities Underlying Unexercised Options
(#)
Exercisable | Number of Securities Underlying Unexercised Options
(#)
Unexercisable | Equity Incentive
Plan Awards:
Number of Securities Underlying Unexercised Unearned Options
(#) | Option Exercise Price
($)     | Option Expiration Date                                                                       
|Roy Trivett       | 190,000
180,000
66,667
161,481
18,519                               | 0
90,000
133,333
322,963
37,037                                       | N/A                                                                                            | 0.40
0.45
0.21
0.13
0.085     | August 28, 2007
June 24, 2008
August 15, 2009
December 6, 2009
March 5, 2010                 
|Wayne Smith       | 5,556
5,556
100,000
86,667
66,667
86,296                            | 0
0
0
43,333
133,333
172,592                                          | N/A                                                                                            | 0.45
0.45
0.40
0.45
0.21
0.13 | June 30, 2007
October 31, 2007
August 18, 2007
June 24, 2007
August 15, 2009
December 6, 2009
|Al Kassam         | 31,111
60,000
33,334
10,119
16,178                                  | 0
0
66,666
20,237
32,355                                              | N/A                                                                                            | 0.45
0.45
0.21
0.13
0.085     | September 26, 2007
August 18, 2007
June 24, 2008
August 15, 2009
March 5, 2010               
|Thomas J. Healy   | 83,333
33,333                                                       | 166,667
66,667                                                        | N/A                                                                                            | 0.45
0.21                     | January 5, 2009
August 15, 2009                                                              
|Michael J. Hilton | 116,667
50,000
83,333                                               | 233,333
100,000
166,667                                               | N/A                                                                                            | 0.45
0.21
0.18                | January 5, 2009
August 15, 2009
September 22, 2009                                           



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.



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Compensation of Directors



The following table provides compensation information for the fiscal year ended December 31, 2006 for each of the Companys non-employee members of the Board.



Director Compensation for 2006

|                                    |                                 |                  |                   |                                            |                                             |                             |          
|----------------------------------- | ------------------------------- | ---------------- | ----------------- | ------------------------------------------ | ------------------------------------------- | --------------------------- | ---------
|Name(1)                             | Fees Earned or Paid in
Cash
($) | Stock
Awards
($) | Option
Awards
($) | Non-Equity
Incentive Plan
Compensation
($) | Nonqualified
Deferred
Compensation
Earnings | All Other
Compen-sation
($) | Total
($)
|Oliver Revell
Chairman of the Board | 8,500                           | N/A              | 13,094            | N/A                                        | N/A                                         | 55,225                      | 76,819   
|Clyde Farnsworth                    | 17,250                          | N/A              | 12,357            | N/A                                        | N/A                                         | N/A                         | 29,607   
|Norman Inkster                      | 12,500                          | N/A              | 28,505            | N/A                                        | N/A                                         | N/A                         | 41,005   
|Keith Kretschmer                    | 16,250                          | N/A              | 21,912            | N/A                                        | N/A                                         | N/A                         | 38,162   
|Michael Volker                      | 19,000                          | N/A              | 10,850            | N/A                                        | N/A                                         | N/A                         | 29,850   
|Wanda Dorosz                        | 7,250                           | N/A              | 4,777             | N/A                                        | N/A                                         | N/A                         | 12,027   



(1)

Roy Trivett and Al Kassam are not included in this table as they are employees of the Company and thus receive no compensation for services as directors on the Board.  The compensation received by Messrs. Trivett and Kassam as employees of Visiphor is shown in the Summary Compensation Table on page 62.



During the most recently completed financial year ended December 31, 2006, there was cash compensation of $80,750 earned by Visiphors directors.  The Company compensates directors that do not receive compensation as consultants or employees on a fee per meeting attended basis. There were eight meetings during 2006.  The payment structure is $2,500 for personal attendance at full Board 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.  The Compensation Committee (the Committee) is appointed by the Board of the Company from members of the Board of Directors, all of which are independent non-employee directors. No director may serve on the Committee unless he or she (i) is a "Non-employee Director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and (ii) satisfies the requirements of an "outside director" for purposes of Section 162(m) of the Internal Revenue Code.  The Committee Chair and members are designated annually by a majority of the full Board, and may be removed, at any time, with or without cause, by a majority of the full Board.

The Compensation Committee administers the incentive compensation plan and makes the recommendation to grant stock incentives to key employees of the Company reviewed on an annual basis.







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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 22, 2007 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
CLASS | NAME AND ADDRESS OF BENEFICIAL OWNER                                                       | AMOUNT AND NATURE OF BENEFICIAL OWNER | PERCENT
OF CLASS(1)
|               |                                                                                            |                                       |                    
|Common Shares  | Roy Davidson Trivett
2683 Country Woods Drive
Surrey, BC V3S 0E6 Canada                    | 4,698,944(2)                          | 10.5%              
|               |                                                                                            |                                       |                    
|Common Shares  | Oliver Buck Revell
36 Victoria Drive, Suite A
Rowlett, TX     75088-6062
USA             | 1,434,307(3)                          | 3.24%              
|               |                                                                                            |                                       |                    
|Common Shares  | Clyde Farnsworth
2256 Mariners Way SE
Southport, NC  28461
USA                             | 594,167(4)                            | 1.34%              
|               |                                                                                            |                                       |                    
|Common Shares  | Keith Kretschmer
294 Sunshine Avenue
Sequim, Washington  98382-9681
USA                    | 1,394,167(5)                          | 3.15%              
|               |                                                                                            |                                       |                    
|Common Shares  | Al Kassam
5518  129th Street
Surrey, BC  V3X 3G4 Canada                                   | 743,126(6)                            | 1.67%              
|               |                                                                                            |                                       |                    
|Common Shares  | Norman Inkster
16 Maple Avenue 
Toronto, Ont. M4W 2T6  Canada                              | 130,000(7)                            | *                  
|               |                                                                                            |                                       |                    
|Common Shares  | Michael C. Volker
7165 Cliff Rd
West Vancouver, BC  V7W 2L3 Canada                         | 270,000(8)                            | *                  
|               |                                                                                            |                                       |                    
|Common Shares  | Wanda Dorosz
13265 Fallbrook Trail, RR#5
Georgetown,  Ontario  L7G 4S8 Canada              | 33,334(9)                             | *                  
|               |                                                                                            |                                       |                    
|Common Shares  | Sunil Amin
7448 Broadway
Burnaby,  BC V5A 1S4 Canada                                       | 50,000(10)                            | *                  
|               |                                                                                            |                                       |                    
|Common Shares  | Fidelity Canadian Growth Fund**
483 Bay Street, Suite 200
Toronto, Ontario  M5G 2N7 Canada | 2,927,500                             | 6.64%              
|               |                                                                                            |                                       |                    
|Common Shares  | All Directors and officers as a group (9 persons)                                          | 9,348,045 (11)                        | 20.37%             

___________________

* Indicates less than one (1) percent

** based on  information available through EDGAR



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(1)

Based on an aggregate 44,114,775 common shares issued and outstanding as of March 22, 2007.

(2)

Includes (a) 616,667 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007, and (b) 3,727,777 common shares held by Trivett Holdings Ltd., a corporation in which Mr. Trivett is the sole shareholder, officer and Director.

(3)

Includes (a) 161,111 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007, and (b) 990,748 common shares held by Revell Group International, a corporation in which Mr. Revell is the officer and Director.

(4)

Includes 158,333 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007.

(5)

Includes 211,667 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007.

(6)

Includes (a) 270,742 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007, and (b) 93,333 common shares held by the Kassam Trust, a trust in which Mr. Kassam the trustee.

(7)

Includes 130,000 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007.

(8)

Includes 145,000 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007.

(9)

Includes 33,334 common shares issuable pursuant to stock options under the companys stock option plan exercisable within 60 days of March 22, 2007.

(10)

Includes 50,000 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007.

(11)

Includes (a) 1,776,854 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 22, 2007.



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, 2006
|Plan Category                                                | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans
|Equity compensation plan approved by security holders        | 8,292,500                                                                                    | $0.32                                                                        | 322,618                                                                                     
|Equity compensation plans not approved by security holders   | N/A                                                                                          | N/A                                                                          | N/A                                                                                         
|                                                             | 8,292,500                                                                                    | $0.32                                                                        | 322,618                                                                                     





70







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Item 12.  Certain Relationships and Related Transactions, and Director Independence.



The Company has employment and consulting agreements with certain related parties.  See Item 10  Executive Compensation  Employment Agreements and Item 10  Executive Compensation  Compensation of Directors.



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.

Item 13. Exhibits.

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



| |               |                                                                                                                                                                                                               
| | ------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ExhibitNumber | Description                                                                                                                                                                                                   
| | 2.1(7)        | Share Purchase Agreement dated October 5, 2005, among Michael James Hilton, Thomas James Healy, Ronald E. Matthews, Jason Fyfe, Paul McHenry, Simon Chester, Adam Bowron, Sunaptic Solutions Inc. and Visiphor
| | 3.1(5)        | Articles of Continuance                                                                                                                                                                                       
| | 3.2(5)        | Bylaw No.1                                                                                                                                                                                                    
| | 4.1(1)        | Shareholder Agreement dated February 23, 1999 among the original shareholders and the Former Visiphor Shareholders                                                                                            
| | 10.1(2)       | Revolving Line of Credit dated February 21, 2003 between Visiphor and Altaf Nazerali                                                                                                                          
| | 10.2(2)       | Amended and Restated Loan Agreement: RevolvingLine of Credit dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                         
| | 10.3(2)       | General Security Agreement dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                                           
| | 10.4(2)       | Grid Promissory Note dated February 21, 2003 between Visiphor and Altaf Nazerali                                                                                                                              
| | 10.5(2)       | Grid Promissory Note Amended and Restated dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                            
| | 10.6(2)       | Source Code License Agreement dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                                        
| | 10.7(2)       | Source Code Escrow Agreement dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                                         
| | 10.8(3)       | Debenture Agreement between Visiphor and 414826 B.C. Ltd dated May 30, 2003                                                                                                                                   
| | 10.9(4)       | Consulting Agreement dated July 15, 2003 between Visiphor and Roy Trivet                                                                                                                                      
| | 10.10(6)      | Visiphor Corporation Stock Option Plan                                                                                                                                                                        
| | 10.11(8)      | Sublease Agreement between Shaw Cablesystems Limited and Visiphor                                                                                                                                             
| | 10.12(8)      | Release of Claims Agreement between OSI Systems, Inc. and Visiphor dated September 14, 2005                                                                                                                   
| | 10.13(9)      | Placement Agent Agreement, effective as of November 7, 2005, between Visiphor and Certain Agents.                                                                                                             
| | 10.14(10) *   | Lease Agreement between Bremmvic Holdings Limited and Visiphor dated September 14, 2005                                                                                                                       
| | 10.15(10) *   | Sublease agreement between International Vision Direct and Visiphor dated November 1, 2004                                                                                                                    
| | 10.16(10) *   | Consulting Agreement with Trivett Holdings and Visiphor dated January 1, 2005                                                                                                                                 
| | 10.17(10) *   | Consulting Agreement with TelePartners and Visiphor dated January 1, 2005                                                                                                                                     
| | 10.18(10) *   | Consulting Agreement with AG Kassam and Visiphor dated January 1, 2005                                                                                                                                        
| | 10.19(10) *   | Employment Agreement with Colby James Smith and Visiphor dated January 1, 2005                                                                                                                                
| | 10.20(10)     | Consulting Agreement with Oliver Buck Revell and Visiphor dated January 1, 2005                                                                                                                             
| | 10.21(11)     | Convertible Secured Debenture of Visiphor in favor of Quorum Secured Equity Trust in the Principal Sum of Cdn$1,600,00, due December 15, 2009                                                                 
| | 10.22(11)     | Performance Warrant to purchase up to 2,350,000 common shares of Visiphor at a price of Cdn$0.30 per common share                                                                                             
| | 10.23(11)     | Subscription Agreement dated July 12, 2006 addressed to Visiphor and executed by Quorum Secured Equity Trust                                                                                                  
| | 10.24(11)     | General Security Agreement dated July 12, 2006 in favor of Quorum Secured Equity Trust between Visiphor and Quorum Secured Equity Trust                                                                       
| | 10.25(11)     | Postponement and Subordination Agreement dated July 12, 2006 between Roy Trivett, Quorum Secured Equity Trust and Visiphor                                                                                    
| | 10.26(11)     | Postponement and Subordination Agreement dated July 12, 2006 between Keith Kretschmer, Quorum Secured Equity Trust and Visiphor                                                                               
| | 10.27(11)     | Promissory Note of Visiphor dated July 12, 2006 in the amount of Cdn$85,000 payable to Roy Trivett                                                                                                            
| | 10.28(11)     | Promissory Note of Visiphor dated July 12, 2006 in the amount of US$400,000 payable to Keith Kretschmer                                                                                                       
| | 10.29(11)     | General Assignment of Accounts Receivable by Visiphor to Roy Trivett dated July 12, 2006                                                                                                                      
| | 10.30(11)     | General Assignment of Accounts Receivable by Visiphor to Keith Kretschmer dated July 12, 2006                                                                                                                 
| | 10.30(12) *   | Consulting Agreement between Visiphor and MIVA Holdings, Inc. dated September 16, 2006                                                                                                                        
| | 2.3.1         | Consent of Grant Thornton, LLP                                                                                                                                                                                
| | 2.4.1         | 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          | Risk Factors                                                                                                                                                                                                  
| | 99.2          | Form 51-9Form 51-901F as required by the British Columbia Securities Commission                                                                                                                               
| |               |                                                                                                                                                                                                               

_______________________





71







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*Indicates a management contract or compensatory plan or arrangement



(1)

Previously filed as part of Visiphors Registration Statement on Form 10-SB filed on September 8, 1999 (File No. 000-30090).

(2)

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

(3)

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

(4)

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

(5)

Previously filed as part of Visiphors Current Report on Form 8-K filed on July 18, 2005.

(6)

Previously filed as part of Visiphors Form S-B filed on August 19, 2005.

(7)

Previously filed as part of Visiphors Current Report on Form 8-K filed on November 25, 2005.

(8)

Previously filed as part of Visiphors Quarterly Report on Form 10-QSB for the period ended September 30, 2005.

(9)

Previously filed as part of Visiphors Current Report on Form 8-K filed on December 7, 2005.

(10)

Previously filed as part of Visiphors Annual Report on Form 10-KSB for the period ended December 31, 2005.

(11)

Previously filed as part of Visiphors Current Report on Form 8-K filed July 20, 2006.

(12)

Previously filed as part of Visiphors Current Report on Form 8-K filed on September 28, 2006.

Item 14.  Principal Accountant Fees and Services.

Audit Fees

Fees billed by Grant Thornton LLP, for professional services totaled $122,584 for the year ended December 31, 2006 and $24,500 for the year ended December 31, 2005, 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, 2006.   Audit-related fees incurred for the year ended December 31, 2005 were $nil.



Tax Fees



Fees for tax services, including fees for review of the Companys consolidated federal income tax return, billed by  Grant Thornton LLP totaled $1,090 for the year ended December 31, 2006 and $nil for the year ended December 31, 2005.



All other Fees



Fees billed by Grant Thornton LLP, for professional services rendered during the fiscal years ended December 31, 2006 totaled $nil and $nil for December 31, 2005 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 2006 that were not pre-approved by the Audit Committee. All services described above under the captions "Audit Fees", Audit Related Fees",  "Tax Fees" and All other Fees were approved by the Audit Committee pursuant to SEC Regulation S-X, Rule 2-01(c)(7)(i).







72







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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 22, 2007.

VISIPHOR CORPORATION



/s/ Roy Trivett

Roy Trivett



President and Chief Executive Officer







73







---





POWERS OF ATTORNEY



KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roy Trivett and Sunil Amin, 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.



|                                                  |                                                                      |               
|------------------------------------------------- | -------------------------------------------------------------------- | --------------
|Signature                                         | Title                                                                | Date          
|/s/ Oliver Revell                                 |                                                                      |               
|____________________
Oliver Revell                | Chairman and Director                                                | March 22, 2007
|/s/ Roy Trivett                                   |                                                                      |               
|____________________
Roy Trivett                  | Chief Executive Officer and Director
(principal executive officer )  | March 22, 2007
|/s/ Sunil Amin                                    |                                                                      |               
|____________________
Sunil Amin                   | Chief Financial Officer
(principal financial and accounting officer) | March 22, 2007
|/s/ Clyde Farnsworth                              |                                                                      |               
|____________________
Clyde Farnsworth             | Director                                                             | March 22, 2007
|/s/ Al Kassam                                     |                                                                      |               
|____________________
Al Kassam                    | Director                                                             | March 22, 2007
|/s/ Norman Inkster                                |                                                                      |               
|­­­­­­­­­­­­­­____________________
Norman Inkster | Director                                                             | March 22, 2007
|/s/ Keith Kretschmer                              |                                                                      |               
|____________________
Keith Kretschmer             | Director                                                             | March 22, 2007
|/s/ Michael Volker                                |                                                                      |               
|____________________
Michael Volker               | Director                                                             | March 22, 2007
|/s/ Wanda Dorosz                                  |                                                                      |               
|____________________
Wanda Dorosz                 | Director                                                             | March 22, 2007
|                                                  |                                                                      |               









74







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Exhibit 31.1

CERTIFICATION

I, Sunil Amin, certify that:



1.

I have reviewed this annual report on Form 10-KSB of Visiphor Corporation;



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 22, 2007

| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | /s/ Sunil AminSunil Amin
Chief Financial Officer
(principal financial and accounting officer)





1







---





Exhibit 31.2



CERTIFICATION



I, Roy Trivett, certify that:



1.

I have reviewed this annual report on Form 10-KSB of Visiphor Corporation;



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 22, 2007

| |                                                                                 
| | --------------------------------------------------------------------------------
| | /s/ Roy TrivettRoy Trivett
Chief Executive Officer
(principal executive officer)



1







---





Exhibit 32.1



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 Visiphor Corporation (the Company) on Form 10-KSB for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Sunil Amin, Chief Financial 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/ Sunil AminSunil Amin
Chief Financial Officer
(principal financial and accounting officer)
March 22, 2007





1







---





Exhibit 32.2



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 Visiphor Corporation (the Company) on Form 10-KSB for the period ended December 31, 2006 as 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
(principal executive officer)
March 22, 2007



1





---





Exhibit 99.1



BC FORM 51-102F1





QUARTERLY REPORT







ISSUER DETAILS:



|                         |                                                       
|------------------------ | ------------------------------------------------------
|Name of Issuer           | VISIPHOR CORPORATION                                  
|For the year Ended       | December 31, 2006                                     
|Date of Report           | March 22, 2007                                        
|Issuer Address           | 1100  4710 Kingsway
Burnaby, British Columbia
V5H 4M2
|Issuer Fax Number        | (604) 684-9314                                        
|Issuer Telephone Number  | (604) 684-2449                                        
|Contact Name             | Sunil Amin                                            
|Contact Position         | Chief Financial Officer                               
|Contact Telephone Number | (604) 684-2449                                        
|Contact Email Address    | Sunil.amin@visiphor.com                               
|Web Site Address         | www.visiphor.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) | 07/03/22
Date Signed (YY/MM/DD)
|                                  |                                  |                                
|Roy Trivett
Name of Director      | /s/ Roy Trivett
Sign (typed)     | 07/03/22
Date Signed (YY/MM/DD)





1





---





Supplementary Information to the Financial Statements



Managements Discussion and Analysis

As at March 22, 2007



Visiphor is a software product and consulting services company that is in the business of helping enterprises by connecting what matters. The Company specializes in the development and deployment of solutions to the problem of integrating disparate business processes and databases. In so doing, the Company has developed a number of sophisticated products and specialized consulting skills. These have allowed Visiphor to gain industry recognition as a leader in providing advanced solutions to the system disparity problem that permeates the law enforcement, security, health care and financial services industries.



Visiphor provides solutions for;



·

Enterprise Information Integration (EII);

·

Data Migration via Extract, Transform and Load (ETL); and

·

Enterprise Application Integration (EAI).



Visiphors products consist of servers and applications that produce one-time software licensing revenues and recurring support revenues. Its consulting services are highly specialized and focus on facilitating the solution to business integration related problems.



The Company develops and markets software products that simplify, accelerate, and economize the process of connecting existing, disparate databases. The Companys technologies enable information owners to share data securely with internal line of business applications and external stakeholders and business partners 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.



In addition to a suite of data sharing and integration products, Visiphor also has a premier consulting team, Visiphor Consulting Services, that can provide services to organizations ranging from business process management support, development of an integration strategic plan, through to the design, development and implementation of a complete data sharing and integration solution for any combination of internal applications integration, business partner integration, process automation or workflow.



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 and services to a limited number of customers, and from the consulting segment of the business. Additional revenues are achieved through the implementation and customization of software as well as from the support, training, and ongoing maintenance that results from each software sale and from consulting services revenues. 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 customer base.

Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and time and materials contracts for 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. Standalone services contracts revenues are recognized as the services are delivered.

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.



2





---





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 Visiphor.  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 and Estimates

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.

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

Revenue recognition

(ii)

Software sales revenue:

The Company recognizes revenue consistent with the SEC Staff Accounting Bulletin No. 104 and 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.



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.

(iii)

Support and services revenue:

Up front payments for contract support and services revenue is deferred and is amortized to revenue 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 capitalized as betterment.  Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.





3





---





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

Term



Briyante technology

3 years

Patents

3 years

License

3 years

Customer relationships

3 years

Contract backlog

4 months





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 accounting principles generally accepted in Canada 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; estimated useful lives of equipment and intangible assets; valuation of acquired intangible assets; valuation of stock-based awards, and the valuation allowance of future income tax assets.

Stock-based compensation

The Company has a stock-based compensation plan, which is described in note 11.  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, whichever is more reliably measured.



The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is complete, 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, 2006 compared to December 31, 2005:

Non-GAAP Operating Cash Flow

The Company presents income excluding non-cash items and one-time unusual expenses which is a supplemental financial measure that is not required by, or presented in accordance with, generally accepted accounting principles. The Company presents income excluding non-cash items and one-time unusual expenses because the Company considers it an important supplemental measure of its operations as it provides an indicator of the Companys progress towards achieving a cash flow from revenues that is equal to or greater than the cash expense level, and it enhances period-to-period comparability of the cash flow of the Companys operations. This non-GAAP financial measure may not be comparable to the calculation of similar measures reported by other companies. This measure has limitations as an analytical tool. It should not be considered in isolation, as an alternative to, or more meaningful than financial measures calculated and reported in accordance with GAAP. It should not be considered as an alternative to cash flow from operations determined in accordance with GAAP. Included below is a reconciliation of



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income excluding non-cash items and one-time unusual expenses, a non-GAAP financial measure, to cash flow used for operations, the most directly comparable financial measure calculated and reported in accordance with GAAP.





| |                                                |                                          |                         |           |             |           |             |           |             |          
| | ---------------------------------------------- | ---------------------------------------- | ----------------------- | --------- | ----------- | --------- | ----------- | --------- | ----------- | ---------
| |                                                | Three months ended
December  31,         | Year ended
December 31,
| |                                                |                                          | 2006                    |           | 2005        |           | 2006        |           | 2005       
| |                                                |                                          |                         |           |             |           |             |           |            
| | Loss for the period                            | $                                        | (1,221,734)             |           | (1,964,380) | $         | (6,678,371) | $         | (6,631,656)
| | Items not involving cash:                      |                                          |                         |           |             |           |             |           |            
| |                                                | Amortization                             |                         | 321,620   |             | 528,051   |             | 1,850,535 |             | 1,716,746
| |                                                | Stock-based compensation                 |                         | 133,250   |             | 169,236   |             | 797,730   |             | 858,209  
| | Accretion of convertible debenture             | 22,724                                   |                         | -         |             | 40,860    |             | -        
| | Deferred financing costs expensed              | 6,113                                    |                         | -         |             | 11,206    |             | -        
| | Write-down of doubtful accounts                | 86,301                                   |                         | -         |             | 86,301    |             | -        
| | Foreign exchange adjustment on loan payable    | 19,080                                   |                         | -         |             | 19,080    |             | -        
| | Changes in non-cash operating working capital: |                                          |                         |           |             |           |             |          
| |                                                | Accounts receivable                      |                         | (513,403) |             | 83,429    |             | 252,848   |             | (517,342)
| |                                                | Accrued revenue receivable               |                         | 68,476    |             | (13,157)  |             | 100,910   |             | (13,157) 
| |                                                | Prepaid expenses and deposit             |                         | 49,637    |             | (117,615) |             | 133,677   |             | (191,246)
| |                                                | Accounts payable and accrued liabilities |                         | 706,857   |             | (472,854) |             | 633,178   |             | 9,356    
| |                                                | Deferred revenue                         |                         | 65,747    |             | (31,995)  |             | 149,798   |             | 77,886   
| | Cash used for operations                       |                                          | (255,332)               |           | (1,819,286) |           | (2,602,248) |           | (4,691,204)
| | Excluded from non-GAAP measure                 |                                          |                         |           |             |           |             |           |            
| | Changes in non-cash operating working capital: |                                          |                         |           |             |           |             |          
| |                                                | Accounts receivable                      |                         | 513,403   |             | (83,429)  |             | (252,848) |             | 517,342  
| |                                                | Accrued revenue receivable               |                         | (68,476)  |             | 13,157    |             | (100,910) |             | 13,157   
| |                                                | Prepaid expenses and deposit             |                         | (49,637)  |             | 117,615   |             | (133,677) |             | 191,246  
| |                                                | Accounts payable and accrued liabilities |                         | (706,857) |             | 472,854   |             | (633,178) |             | (9,356)  
| |                                                | Deferred revenue                         |                         | (65,747)  |             | 31,995    |             | (149,798) |             | (77,886) 
| | Included in non-GAAP measure                   |                                          |                         |           |             |           |             |           |            
| | Restructuring charge                           |                                          | -                       |           | -           |           | (102,462)   |           | -          
| | Non-GAAP operating cash flow                   | $                                        | (632,646)               |           | (1,267,093) |           | (3,975,121) |           | (4,056,701)



Based on the non-GAAP financial measure the Companys revenues generated or will generate $3,975,121 less cash than its expenses required for the year ended December 31, 2006, which is $81,580 or 2% more than for the year ended December 31, 2005. The Companys revenues generated or will generate $632,646 less cash than its expenses required for the three month period ended December 31, 2006, which is $634,447 or 50% more than for the three month period ended December 31, 2005. The Company is working towards an immediate goal of achieving a positive cash flow from its operations based on this non-GAAP financial measure and expects to achieve this goal by the end of the first quarter of 2007.



As part of the Companys commitment to achieving a positive cash flow from its operations based on the non-GAAP financial measure by the end of the first quarter of 2007, subsequent to December 31, 2006 the Company has continued its plan of reducing its monthly cash operating expenses.  The cost reductions have been achieved through a consolidation of the Vancouver and Burnaby, B.C. offices into the Burnaby head office location; changes to the executive compensation structure; general cost saving measures; and a lay-off of staff. The lay-off of staff in November 2006, consisted of 16 full-time staff members representing 20% of the Companys employees, of which three have been subsequently recalled to work due to increasing sales volumes.





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Revenues

Visiphors total revenues for the three-month period ended December 31, 2006 were
$1,458,707, which is 36% greater than the prior year level of $1,076,312. The year-to-date revenues increased 92% to $6,383,383 over the prior year level of $3,330,141. The increase is due to increased consulting services revenues as a result of the acquisition of Sunaptic in November of 2005 and increased services revenues from the installation of software products sold in prior periods.



Software Licensing and Related Services revenues were $422,338 for the three month period ended December 31, 2006 compared to the prior years level of $308,076, an increase of 37%. Software Licensing and Related Services revenues were $1,358,473 for the year compared to the prior years level of $2,291,730, a decrease of 41%. The decreased software licensing and related services revenues were primarily due to lower sales volumes combined with delays in customer delivery acceptance schedules and are expected to increase in subsequent periods as deliveries are completed.



Professional services revenues for the three-month period ended December 31, 2006 were $812,070 as compared to $580,629 in 2005. Professional services revenues for the year ended December 31, 2006 were $4,211,611 as compared to $580,629 in 2005. The comparative figure from 2005 only represented the amount recognized after the November 19th, 2005 acquisition of Sunaptic.



Support revenue for the three-month period ended December 31, 2006 was 12% lower at $90,471 compared to $102,286 for 2005. Support revenue year-to-date was 18% higher at $435,165 than the prior year level of $368,377.



As of March 8, 2007, Visiphor had work in process and contracted orders totalling approximately $3.1 million that are not recorded in the financial statements as at December 31, 2006. Consequently, Visiphor expects that revenues will increase during 2007 and will continue to increase as the Companys current and newly developed products and solutions continue to gain increasing customer acceptance. The Company has been attracting new business opportunities in the U.S. market and anticipates significant growth in the U.S. There can be no assurance; however, that such future revenue or future growth will materialize or if such revenue or future growth does materialize that it will be significant.



Other revenues for the three-month period ended December 31, 2006 were $133,828, whereas other revenues of $85,321 were earned in the prior year. Other revenues year-to-date was $378,134 compared to $89,004 for 2005. The increase was primarily due to revenue earned in 2006 of $166,512 through a contract where a sub-contractor is providing the services, and $47,400 from the resale of third party software.  The costs associated with these revenues are included in cost of materials.

Operating Expenses

Operating expenses totalled $2,680,441 for the three-month period ended December 31, 2006, which is 12% less than the 2005 operating expenses of $3,040,691 for the same period. The decreased costs were primarily due to the reduction of the salary expenses during the quarter.



Operating expenses totalled $13,061,754 for the year ended December 31, 2006, which is 31% greater than the 2005 operating expenses of $9,961,797.  Professional Services was the major factor contributing to the increase in overall operating expenses. The consulting area within Professional Services was created in late 2005 as a result of the acquisition of Sunaptic. Professional Services expenses increased $3,251,492 or 268% due to having consulting expenses, primarily wages, for an entire year as compared to 2005 when the Company had only recorded two months of similar expenses. Sales and marketing costs increased due to additional sales staff being hired. This was offset slightly by a reduction in the Companys marketing staff costs. Administration costs decreased 7% this year as the Companys effort to manage overall cost has been effective.



Staff levels decreased from 100 employees at January 1, 2006 to 55 at December 31, 2006. In January 2006, through the integration process with Sunaptic, the Company was able to streamline its operations and achieve operational efficiencies that allowed it to eliminate 16 full-time employee positions. The Company recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions. The Company also laid-off staff in the second and fourth quarters in order to achieve its goal of reducing expenses so that the Company can achieve break even operations for 2007.



The Company continued to improve its operational efficiencies during 2006, including closing its Victoria, B.C. office and consolidating the Victoria operations into the Burnaby, B.C. head office.  During 2006 and subsequent to



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December 31, 2006, the Company consolidated its Vancouver and Burnaby, B.C. offices into the Burnaby head office location; changed its executive compensation structure and implemented general cost saving measures.

Administration

Administrative costs for the three-month period ended December 31, 2006 were $548,816, which is 18% lower than for 2005 administrative costs of $665,082. Administrative costs include staff salaries and related benefits and travel, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.



Administrative costs for the year ended December 31, 2006 were $2,587,779, which is 7% lower than administrative costs for 2005 of $2,781,853.  The decrease was primarily due to overall cost management.

Bad Debt

There was no bad debt recorded for the three-month period ended December 31, 2006 compared with $27,822 in the same period in 2005. For the year ended December 31, 2006, bad debts were $86,301 compared with $70,623 in the same period in 2005.  Bad debts in both periods are due to write-offs of an individual account for each year from customers that have defaulted on payment of their accounts or their accounts were considered uncollectible.

Cost of Materials

Cost of materials for the three-month period ended December 31, 2006 was $180,432 compared to $42,905 for 2005. The costs for the year ended December 31, 2006 were $352,142 and $66,005 in 2005. This cost includes approximately $121,000 for sub-contracted services required for the security assessments for the King County RAIN project and for software purchased for resale to other customers.

Interest and Amortization

Interest expense increased 83% to $126,167 for the three-month period ended December 31, 2006 compared with the same three-month period in 2005 of $42,905. For the year ended December 31, 2006, interest expense increased by 321% to $294,055 compared to $69,907 in 2005. The increases in both periods are primarily due to the interest expense on the convertible debenture and interest on the loans payable. Interest expense is expected to increase again in 2007 due to interest on the convertible debenture.



The amortization expense decreased by 39% for the three-month period ended December 31, 2006 to $321,620 compared to $528,051 in 2005. For the year ended December 31, 2006, amortization expense increased 8% to $1,850,535 compared to $1,716,746 in 2005. The increase for the year is related to technology equipment acquired during latter 2005 and during 2006. The decrease in the fourth quarter is due to the approximately $90,000 per month Briyante acquisition amortization expiring in November 2006. Amortization expense for 2007 is expected to be substantially lower than in 2006 due to the majority of the Companys intangible assets having been fully amortized during 2006.

Sales and Marketing

Sales and marketing expenses for the three-month period ended December 31, 2006 were $264,241 compared to $565,098 for 2005, which represents a 53% decrease.  Overall, the expenses related to sales and marketing decreased for the quarter as the Company continued to concentrate on building sales and relationships rather than on general marketing activities.



Sales and marketing expenses for the year ended December 31, 2006 decrease 14% to $1,537,207 compared to $1,790,258 in 2005. As part of the Companys overall cost-cutting efforts, there were reductions to the marketing salary expenses and general marketing activities for the year.

Professional Services

Costs for professional services group for the three-month period ended December 31, 2006 were $817,938, which is a 39% increase compared to costs of $587,802 in 2005. The increase is primarily due to the creation of the Consulting Services Division which was created after the acquisition of Sunaptic in November of 2005.



Costs for professional services group for the year ended December 31, 2006 were $4,464,292 which is 268% greater than costs for the Professional Services group of $1,212,800 in 2005. The increased costs include $3,612,240 due to the addition of the Consulting Services Division through the Sunaptic acquisition, which was partially offset by limited staff reduction in the non-consulting area of professional services.



Professional services is a relatively new department that was initiated in the second quarter of 2005.  Due to the corporate reorganization, some costs in other departments were reallocated to professional services during the first quarter of 2005 for comparative purposes. The professional services group is responsible for the installation of



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Visiphors products and training of Visiphors customers and business partners in the use of the Companys products as it was primarily built upon the Business Integration Consulting Services group added through the acquisition of Sunaptic. The costs include salaries, travel and general overhead expenses. Costs for future periods will be dependent on the sales levels achieved by the Company.

Technology Development

The technology development expenses for the three-month period ended December 31, 2006 were $415,114, which is 28% lower than the 2005 costs of $574,215. This decrease was primarily due to a reduction in the use of contract labour. Management expects that the increased revenues achieved as a result of the sale of products will cause development costs to increase. Management believes that continuing to invest in technology advancements is crucial to the future success of Visiphor, and expects that costs will continue to increase in future periods. Included in technology development expenses for the three-month period ended December 31, 2006 are net research and development costs of $8,091, consisting of incurred costs of $16,182 less a contribution of $8,091 from the National Research Council (the NRC). The cost recoveries are limited to a maximum of $225,000 under the terms of the agreement with the NRC and the program expires on March 31, 2007. During the fourth quarter, the Company had limited research and development activities as compared with other quarters due to the need to use research and development staff resources to help on deliverables on existing billable projects.



The technology development expenses for the year ended December 31, 2006 were $1,782,575, which is 2% higher than the 2005 costs of $1,745,715. The increase was primarily due to hiring additional staff and the associated costs required to maintain the Companys enhancement of existing products and new product development. Included in technology development expenses for the year ended December 31, 2006 are net research and development costs of $144,928 consisting of incurred costs of $289,855 less a contribution of $144,928 from the NRC.

Restructuring Charge

In January 2006, through the integration process with Sunaptic, the Company was able to streamline its operations and achieve operational efficiencies that allowed it to eliminate 16 employee positions. The Company has recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions.

Net Loss for the Period

Overall, the Company incurred a net loss for the three-month period ended December 31, 2006 of $1,221,734, or $0.03 per share, which is a 38% improvement compared with the net loss of $1,964,378 or $0.07 per share incurred during the three months ended December 31, 2005. This is the Companys smallest quarterly loss for the last eight quarterly periods.



The Company incurred a net loss for the year ended December 31, 2006 of $6,678,371 or $0.15 per share, which is a negligible increase over the net loss of $6,631,656, or $0.23 per share incurred during the period ended December 31, 2005.



As of December 31, 2006, the Company has work in progress and contracted sales orders totalling $0.9 million that have not commenced installation and the revenue will not be recognised until future quarters. There can be no assurance, however, that such revenue will be collected or if any of such revenue from such work in progress and sales orders is collected that it will be significant or will be timely paid.



Management believes that the Company would be able to achieve break-even operations on a operating cash flow (See non-GAAP Operating Cash Flows) basis by the end of the first quarter of 2007.  The estimated break-even timeline has been revised since last reported due to delays on delivery of project milestones. This statement is based on the non-GAAP measure, income excluding non-cash items and one time expenses, discussed above. While management continues to believe that it has sufficient sales and potential sales to achieve break-even operations on a cash operating basis, extended contract negotiations and installation delays due to customers not being ready to accept delivery of solutions could cause this to be delayed until future quarters as the recognition of the associated revenue may be delayed.



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Summary of Quarterly Results

|                           |   |             |             |             |             |             |             |             |            
|-------------------------- | - | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | -----------
|                           |   | Q4-2006     | Q3-2006     | Q2-2006     | Q1-2006     | Q4-2005     | Q3-2005     | Q2-2005     | Q1-2005    
|                           |   |             |             |             |             |             |             |             |            
|Total Revenue              | $ | 1,458,707   | 1,120,766   | 1,488,828   | 2,315,083   | 1,076,312   | 1,008,581   | 920,620     | 324,628    
|Net Loss                   |   | (1,221,734) | (1,904,856) | (2,024,680) | (1,527,100) | (1,890,400) | (1,650,764) | (1,562,291) | (1,454,190)
|Net loss per share         |   | (0.03)      | (0.04)      | (0.05)      | (0.04)      | (0.05)      | (0.06)      | (0.06)      | (0.06)     
|Net loss as a %
of revenue |   | (84%)       | (170%)      | (136%)      | (66%)       | (176%)      | (164%)      | (170%)      | (448%)     



The Companys changes in its net losses per quarter fluctuate according to the volume of sales. To date there has been no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. In 2005, the Company hired additional staff to generate and meet the demands of the sales orders described above, causing a significant increase in expense levels. The Company also significantly increased both its revenues and expenses due to the acquisition of Sunaptic; however, these items are only included since the date of the acquisition on November 18, 2005. The Company is not aware of any significant seasonality affecting its sales.

Liquidity and Capital Resources

The Companys aggregated cash on hand at the beginning of the three-month period ended December 31, 2006 was $99,952. During the period, the Company received additional funds of $200,000 by way of loans by unrelated parties which were used to finance its operations for the period.



The impact on cash 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 $255,332, as compared to a negative cash flow from operations of $1,819,286 for the same period in 2005.  This is the companys smallest negative cash flow from operations for the past eight quarters. The Company repaid capital leases of $12,523 and purchased capital assets of $23,375. The Companys cash position decreased for the three month period by $57,614 to $43,338 cash on hand at December 31, 2006.



The Companys aggregated cash on hand at the beginning of the year ended December 31, 2006 was $790,091. During the year, the Company received additional net funds of $176,803 through the issuance of common shares, $1,600,000 by issuance of a convertible debenture, $1,227,080 through loans, repaid loans in the amount of $895,000 and paid deferred financing costs of $126,158.



The Company used these funds primarily to finance its operations for the period. The impact on cash 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 $2,602,248 as compared to a negative cash flow from operations of $2,723,503 for the same period in 2005. The Company also repaid capital leases of $69,944 during the year ended December 31, 2006 and purchased capital assets of $64,968. The Companys cash position decreased by $747,753 to $42,338 cash on hand at December 31, 2006.



Private Placements in 2006



On March 2, 2006, the Company completed a private placement consisting of 600,000 units at $0.45 per unit. Each unit consisted of one common share and one-half of one transferable common share purchase warrant.  Each whole warrant entitles the holder to acquire one additional common share at an exercise price of $0.50 until March 2, 2007. The common shares and warrants are subject to a four-month hold period that expires on July 2, 2006. Finders fees of $23,625 were paid in cash to persons outside the United States related to sales made outside the United States. The total net proceeds to Visiphor were $246,375, which included share subscriptions of $67,500 received prior to December 31, 2005 and share issuance costs.



Convertible Debenture



On July 14, 2006, the Company completed a private placement (the Offering) of an 8% convertible secured debenture in the principal amount of $1,600,000 maturing on December 15, 2009, convertible, subject to certain adjustments, at the price of $0.45 per common share, and of a performance warrant (the Warrant) to purchase up to 2,350,000 common shares in the capital of the Company at a price of $0.30 per common share.  The Warrant is only exercisable in the event that the 30-day weighted average trading price of the Companys common shares has not exceeded $0.45 in at least one 30-day trading period on or before July 14, 2008. The Warrant is exercisable at any time after July 13, 2008 and prior to 4:30 p.m. EST on December 15, 2009, provided that the above event has



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not occurred. The common shares underlying the Offering will have a four-month hold period that expires on November 13, 2006. Under the terms of the agreement, the investor appointed a nominee to the Companys Board.



In connection with the Offering, two Directors, of which one is an officer of the Company, agreed to postpone and subordinate outstanding bridge loans to the Company in the amounts of $85,000 and US$400,000, respectively. As consideration, the Company issued a related promissory note secured by a second charge over the accounts receivable of the Company to each of the parties and the interest rate of such notes is 12%. The Company also repaid the balance of the other outstanding loans payable of $500,000.



Settlement of Debt



On August 31, 2006 the Company settled debt owed to two Directors of the Company, one of which is also an officer of the Company through 918,525 common shares at a deemed price of $0.45 per share.  This debt consisted of $413,337 of unpaid fees and expenses.  The common shares issued in settlement of the debt have a four-month hold period that expired on December 31, 2006.



Management believes that the revenues from the Companys futures sales combined with current accounts receivable, work in progress, and contracted orders will be sufficient to fund its consolidated operations. The Company believes it currently has cash, accounts receivable, and work in progress and contracted orders that, if completed, will generate cash sufficient to fund its operations through the second quarter of 2007. If the accounts receivable are not collected, certain of the contracts are not completed, or the expected sales are not received, the Company may need to raise additional funds through private placements of its securities or seek other forms of financing during the 2007 financial year and the Company may no longer continue to be a going concern. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. Failure to obtain adequate financing if necessary could result in significant delays in development of new products and a substantial curtailment of the Companys operations. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.

Differences to Net Income under Canadian and U.S. GAAP

Under Canadian GAAP, the net loss for the three months ended December 31, 2006 was $1,221,734 whereas under U.S. GAAP the loss for the period would be $1,166,170.  For the year ended December 31, 2006, the loss under Canadian GAAP was $6,678,371 whereas under U.S. GAAP the loss would be $6,657,613.  The difference of $11,663 for the three month ended period and $20,758 for the year ended period is attributable to the difference that exists between Canadian and U.S. GAAP relating to the accretion of the convertible debenture and the associated financing costs.  Earnings per share under both Canadian and U.S. GAAP are the same.

Recent Accounting Pronouncements

FIN 48

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective for fiscal years beginning after December 15, 2006.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, including the recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company will adopt FIN 48 on January 1, 2007, as required.  The impact of FIN 48 on the Companys consolidated financial statements is not yet known or reasonably estimable.





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EITF No. 06-3



In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force in Issue No. 06-3, How Taxes collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross Versus Net Presentation). Issue No. 06-3 requires disclosure of an entitys accounting policy regarding the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes.  The Company presents such taxes on a net basis (excluded from revenues and costs). The adoption of Issue No. 06-3, which is effective for interim and annual reporting periods beginning after December 15, 2006, will have no impact on the Companys consolidated financial statements.



FAS 157

In September 2006, the FASB issued FAS 157, Fair Value Measurements.  This financial accounting standard establishes a framework for measuring fair value and expands related disclosure requirements.  As applicable to Visiphor, this statement is effective as of the year beginning January 1, 2008. Visiphor is currently evaluating the impact that the adoption of FAS 157 would have on its consolidated financial statements.



Staff Accounting Bulletin 108

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108) SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.



Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements.  These methods are referred to as the roll-over and iron curtain method.  The roll-over method quantifies the amount by which the current year income statement is misstated.  Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts.  The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated.  Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that result from the correction of an error existing in previously issued financial statements.  The Company historically used the roll-over method for quantifying identified financial statement misstatements.



SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the Companys financial statements and the related financial statement disclosures.  This approach is commonly referred to as the dual approach because it requires quantification of errors under both the roll-over and iron curtain methods.



SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings.  Use of this cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.



The Company applied SAB 108 using the retroactive method in connection with the preparation of its annual consolidated financial statements for the year ended December 31, 2006. The initial adoption of SAB 108 resulted in no impact to the consolidated financial statements.









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Contractual Obligations

The Company is committed to the following payments for i) operating lease payments on the building under lease, ii) capital lease payments for equipment under lease (excluding interest) over the next three years:



Year
	
	Long Term Debt
	
	Equipment
	
	Building
	
	Total2007
	$
	58,667
	$
	91,577
	$
	290,887
	$
	441,1312008
	
	106,667
	
	70,707
	
	265,904
	
	443,2782009
	
	1,722,667
	
	19,999
	
	202,900
	
	1,945,565$
	1,888,000
	$
	182,283
	$
	759,691
	$
	2,829,974




The Companys head office in Burnaby, B.C. leases space under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Company also subleases 4,128 square feet of office space in Vancouver, B.C. with monthly rent of $7,000 which expires on September 29, 2008. This space is no longer used by the Company and has been sublet as of March 1, 2007 to cover the Companys costs. The lease to the tenant also expires September 29, 2008.



Off-Balance Sheet Arrangements

At December 31, 2006 the Company did not have any off-balance sheet arrangements.

Transactions with Related Parties



At December 31, 2006, accounts payable and accrued liabilities included $230,215 (at December 31, 2005 - $400,539) 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 and consist of unpaid fees and expenses recorded at the exchange amount which is the amount agreed to by the parties. The exchange amount was negotiated and established and agreed to by the related parties as if they were dealing at arms length.





12





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Other Management Discussion & Analysis Requirements



i.

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



ii.

Share Capital at March 22, 2007

(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



|                                           |                    |            |            |          
|------------------------------------------ | ------------------ | ---------- | ---------- | ---------
|                                           | Number of shares   |            | Amount    
|Balance, December 31, 2004                 | 20,795,281         | $          | 26,230,920
|Issued during year for cash:               |                    |            |           
|                                           | Private Placements | 16,320,819 |            | 6,847,840
|                                           | Options exercised  | 211,895    |            | 86,630   
|                                           | Warrants exercised | 2,887,665  |            | 1,218,576
|Issued for acquisition of subsidiary       | 1,066,666          |            | 469,333   
|Special Warrants exercised                 | 1,007,151          |            | 781,801   
|Issuance of shares as share issuance costs | 186,111            |            | 79,000    
|Fair value of options exercised            | -                  |            | 60,458    
|Share issuance costs                       | -                  |            | (861,835) 
|                                           |                    |            |           
|Balance, December 31, 2005                 | 42,475,588         |            | 34,912,723
|                                           |                    |            |           
|Issued during the period for cash:         |                    |            |           
|                                           | Private Placements | 600,000    |            | 270,000  
|Issued for settlement of accounts payable  | 1,039,187          |            | 461,601   
|Share issuance costs                       | -                  |            | (25,697)  
|                                           |                    |            |           
|Balance, March 22, 2007                    | 44,114,775         | $          | 35,618,627



On August 31, 2006 the Company settled debt owed to two Directors of the Company, one of which is also an officer of the Company through 918,525 common shares at a deemed price of $0.45 per share.  This debt consisted of $413,337 of unpaid fees and expenses.  The common shares issued in settlement of the debt have a four-month hold period that expired on December 31, 2006.



13





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(c)

Warrants

At December 31, 2005, and March 22, 2007, the following warrants were outstanding:



|                  |         |           |            |                |                |                  
|----------------- | ------- | --------- | ---------- | -------------- | -------------- | -----------------
|December 31, 2005 | Granted | Exercised | Expired    | March 22, 2007 | Exercise price | Expiry date      
|3,882,875         | -       | -         | 3,882,875  | -              | $0.75          | April 28, 2006   
|226,584           | -       | -         | 226,584    | -              | $0.75          | April 29, 2006   
|86,700            | -       | -         | 86,700     | -              | $0.75          | May 20, 2006     
|2,380,000         | -       | -         | 2,380,000  | -              | $0.55          | May 24, 2006     
|187,500           | -       | -         | 187,500    | -              | $0.50          | November 29, 2006
|4,481,522         | -       | -         | 4,481,522  | -              | $0.50          | November 29, 2006
|1,786,999         | -       | -         | 1,786,999  | -              | $0.50          | November 30, 2006
|125,000           | -       | -         | 125,000    | -              | $0.50          | December 13, 2006
|946,166           | -       | -         | 946,166    | -              | $0.55          | December 31, 2006
|2,557,785         | -       | -         | 2,557,785  | -              | $0.55          | January 11, 2007 
|-                 | 300,000 | -         | 300,000    | -              | $0.50          | March 2, 2007    
|-                 | 120,662 | -         | -          | 120,662        | $0.50          | February 9, 2009 
|16,661,131        | 420,662 | -         | 16,961,131 | 120,662        |                |                  



(d)

Options:



The Company has a stock option plan that was most recently approved at the Companys annual general meeting of shareholders on May 8, 2006.  Under the terms of the plan, the Company may reserve up to 8,615,118 common shares for issuance under the plan.  The Company has granted stock options under the plan to certain employees, Directors, advisors and consultants.  These options are granted for services provided to the Company.  All existing options granted prior to November 25, 2003, expire five years from the date of grant.  All options granted subsequent to November 25, 2003, expire three 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 April 10, 2006, the Company re-priced 1,191,562 common share purchase options granted to employees to $0.45 per share from various prices ranging from $0.47 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged. On May 8, 2006, the Company also received shareholder approval and re-priced 2,535,001 common share purchase options granted to Directors and officers to $0.45 per share from various prices ranging from $0.55 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged.



These repricings constituted modifications and were accounted for using modification accounting, under which the incremental fair value of the benefit attributed to the repricing is measured as the difference between the fair value of the repriced award on the date of the repricing and the fair value of the old award determined on the same date.  This incremental fair value was determined to be $145,474 of which $75,760 was recognized on the date of the repricing in connection with options that were already vested at that date. The balance of the incremental fair value will be recognized over the remaining vesting period of the repriced options.



14





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A summary of the status of the Companys stock options at March 22, 2007, and December 31, 2005 (giving retroactive effect to the 2003 share consolidation), and changes during the periods ended on those dates is presented below:





|                                 |                  |                   |                  |      |           |           |                |     
|-------------------------------- | ---------------- | ----------------- | ---------------- | ---- | --------- | --------- | -------------- | ----
|                                 | March 22, 2007   | December 31, 2005
|                                 | Weighted Average |                   | Weighted Average
|                                 | Shares           |                   | Exercise Price   |      | Shares    |           | Exercise Price
|Outstanding, beginning of period | 5,415,500        | $                 | 0.67             |      | 3,092,334 | $         | 0.61          
|                                 | Granted          | 5,505,001         |                  | 0.25 |           | 2,848,396 |                | 0.72
|                                 | Exercised        |                   |                  |      |           | (211,895) |                | 0.41
|                                 | Cancelled        | (3,357,834)       |                  | 0.44 |           | (313,335) |                | 0.61
|Outstanding, end of period       | 7,562,667        | $                 | 0.32             |      | 5,415,500 | $         | 0.67          

The following table summarizes information about stock options outstanding at March 22, 2007:



|               |                                   |                                     |      |                                 |                                    |           |                                 |        |  |  |  |  |  |  |  | 
|-------------- | --------------------------------- | ----------------------------------- | ---- | ------------------------------- | ---------------------------------- | --------- | ------------------------------- | ------ |  |  |  |  |  |  |  | 
|               |                                   | Options Outstanding                 |      | Options exercisable            
|Exercise price | Number
outstanding
March 22, 2007 | Weighted remaining contractual life |      | Weighted average exercise price | Number exercisable, March 22, 2007 |           | Weighted average exercise price
|               |                                   |                                     |      |                                 |                                    |           |                                 |       
|               | $0.085                            | 158,533                             | 2.62 |                                 | $0.085                             | 52,844    |                                 | $0.085
|               | $0.10                             | 170,000                             | 2.67 |                                 | $0.10                              | 56,667    |                                 | $0.10 
|               | $0.11                             | 100,000                             | 2.67 |                                 | $0.11                              | 33,333    |                                 | $0.11 
|               | $0.12                             | 34,722                              | 2.72 |                                 | $0.12                              | 11,574    |                                 | $0.12 
|               | $0.13                             | 1,003,960                           | 2.71 |                                 | $0.13                              | 334,563   |                                 | $0.13 
|               | $0.15                             | 10,000                              | 2.62 |                                 | $0.15                              | 3,333     |                                 | $0.15 
|               | $0.16                             | 500                                 | 2.61 |                                 | $0.16                              | 167       |                                 | $0.16 
|               | $0.17                             | 10,000                              | 2.27 |                                 | $0.17                              | 3,333     |                                 | $0.17 
|               | $0.18                             | 250,000                             | 2.51 |                                 | $0.18                              | 83,333    |                                 | $0.18 
|               | $0.20                             | 493,556                             | 2.45 |                                 | $0.20                              | 164,519   |                                 | $0.20 
|               | $0.21                             | 1,280,000                           | 2.40 |                                 | $0.21                              | 426,667   |                                 | $0.21 
|               | $0.25                             | 60,000                              | 2.19 |                                 | $0.25                              | 20,000    |                                 | $0.25 
|               | $0.29                             | 27,000                              | 1.90 |                                 | $0.29                              | 18,000    |                                 | $0.29 
|               | $0.31                             | 75,000                              | 2.02 |                                 | $0.31                              | 25,000    |                                 | $0.31 
|               | $0.33                             | 66,666                              | 0.74 |                                 | $0.33                              | 66,666    |                                 | $0.33 
|               | $0.34                             | 13,333                              | 0.64 |                                 | $0.34                              | 13,333    |                                 | $0.34 
|               | $0.35                             | 12,000                              | 1.62 |                                 | $0.35                              | 8,666     |                                 | $0.35 
|               | $0.36                             | 7,110                               | 0.90 |                                 | $0.36                              | 7,110     |                                 | $0.36 
|               | $0.39                             | 12,000                              | 1.34 |                                 | $0.39                              | 8,000     |                                 | $0.39 
|               | $0.40                             | 783,034                             | 0.42 |                                 | $0.40                              | 779,701   |                                 | $0.40 
|               | $0.43                             | 5,000                               | 0.25 |                                 | $0.43                              | 5,000     |                                 | $0.43 
|               | $0.44                             | 15,000                              | 1.61 |                                 | $0.44                              | 10,000    |                                 | $0.44 
|               | $0.45                             | 2,975,253                           | 1.64 |                                 | $0.45                              | 1,611,923 |                                 | $0.45 
|              
|               |                                   | 7,562,667                           | 1.92 |                                 | $0.32                              | 3,743,732 |                                 | $0.32 



The weighted average fair value of employee stock options granted during the period ended March 22, 2007 was $0.32 (2005-$0.72) per share purchase option. 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  58.2% (2005-66%); risk free interest rate - 5% (2005-5%); option term - 3 years (2005-3 years); and dividend yield  nil (2005-nil).  The total compensation expense of $802,924 for 2006(2005-$858,209) has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.





15





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Agents options



A summary of the status of the Companys Agents Options at March 22, 2007 and December 31, 2005 and changes during the periods ended on those dates is presented below:



|                                 |                  |                   |                  |   |         |         |                |     
|-------------------------------- | ---------------- | ----------------- | ---------------- | - | ------- | ------- | -------------- | ----
|                                 | March 22, 2007   | December 31, 2005
|                                 | Weighted Average |                   | Weighted Average
|                                 | Shares           |                   | Exercise Price   |   | Shares  |         | Exercise Price
|Outstanding, beginning of period | 907,557          |                   | 0.45             |   | -       | $       | -             
|                                 | Granted          | -                 |                  | - |         | 907,557 |                | 0.45
|                                 | Exercised        | -                 |                  | - |         | -       |                | -   
|                                 | Cancelled        | -                 |                  | - |         | -       |                | -   
|Outstanding, end of period       | 907,557          |                   | 0.45             |   | 907,557 | $       | 0.45          



A November 29, 2005 private placement included non-transferable agents options to purchase 896,307 units on or before November 29, 2007 at a price of $0.45 per unit. Each unit consists of one common share and one-half of one common share purchase warrant, each full warrant exercisable for one common share at $0.50 until November 29, 2006.



Also in connection with a 2005 private placement, the Company issued non-transferable agents options to purchase 11,250 units on or before December 13, 2007 at a price of $0.45 per unit. Each unit consists of one common share and one-half of one common share purchase warrant, each full warrant exercisable for one common share at $0.50 until December 13, 2006.

The following table summarizes information about Agents stock options outstanding at March 22, 2007:



|                                   
|-----------------------------------
|Options outstanding and exercisable
|Exercise price                     
|$0.45                              
|                                   



The weighted average fair value of agents stock options granted during 2005 was $0.16 per share purchase option. 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 - 66%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil.  The total value of $142,001 was allocated to share issuance costs and credited to contributed surplus.

Contributed surplus



|                                        |   |           |        | 
|--------------------------------------- | - | --------- | ------ | 
|                                        |   |           | Amount
|Balance, December 31, 2004              | $ | 1,648,402
|Value of options expensed               |   | 858,209  
|Value of options exercised              |   | (60,458) 
|Value of agents options                |   | 142,001  
|Value of warrants issued as commissions |   | 51,548   
|                                        |   |           |        | 
|Balance, December 31, 2005              |   | 2,639,702
|                                        |   |           |        | 
|Value of options expensed               |   | 802,921  
|                                        |   |           |        | 
|Balance, March 22, 2007                 | $ | 3,442,623







16