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

_______________

FORM 10-QSB

_______________

(Mark One)

x

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR

 ̈

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE         SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission file Number: 000-30090

_______________

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

_______________



British Columbia, Canada(State or other jurisdiction of
incorporation or organization)Not Applicable(IRS Employer Identification No.)


1630  1075 West Georgia Street
Vancouver, British Columbia(Address of principal executive offices)

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

_______________



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



As of May 12, 2004, 15,484,999 common shares of the Issuer were issued and outstanding.



Transitional Small Business Disclosure Format (Check one): Yes o No x



1

---









IMAGIS TECHNOLOGIES INC.



FORM 10-QSB



For the Quarterly Period Ended March 31, 2004



INDEX





|PART I  | Financial Information                                                          |   
|------- | ------------------------------------------------------------------------------ | --
|Item 1. | Financial Statements                                                           | 4 
|Item 2. | Managements Discussion and Analysis or Plan of Operations                     | 21
|Item 3. | Controls and Procedures                                                        | 26
|        |                                                                               
|PART II | Other Information                                                              |   
|Item 1. | Legal Proceedings                                                              | 26
|Item 2. | Changes in Securities and Small Business Issuer Purchases of Equity Securities | 26
|Item 3. | Defaults Upon Senior Securities                                                | 26
|Item 4. | Submission of Matters to a Vote of Security Holders                            | 26
|Item 5. | Other Information                                                              | 26
|Item 6. | Exhibits and Reports on Form 8-K                                               | 27

2

---



NOTE REGARDING FORWARD-LOOKING STATEMENTS



Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  In some cases, you can identify the forward-looking statements by the Issuers 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.



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



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



3

---



PART 1  FINANCIAL INFORMATION

Item 1.   Financial Statements

The Companys financial statements for the three month period ended March 31, 2004 are included in response to Item 1 and have been compiled by management.  The financial statements should be read in conjunction with Managements Discussion and Analysis or Plan of Operations (Part 1, Item 2) and other financial information included elsewhere in this Form 10-QSB.



|IMAGIS TECHNOLOGIES INC.
BALANCE SHEETS
AS AT MARCH 31, 2004 AND DECEMBER 31, 2003
(expressed in Canadian dollars)
|------------------------------------------------------------------------------------------------------------------
|                                                                                                                  
|ASSETS                                                                                                            
|Current assets                                                                                                    
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|LIABILITIES AND SHAREHOLDERS DEFICIENCY                                                                          
|Current liabilities                                                                                               
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Long-term liabilities                                                                                             
|                                                                                                                  
|Shareholders' deficiency                                                                                          
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  

See accompanying notes to financial statements.





4

---



|IMAGIS TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(expressed in Canadian dollars)
(Unaudited  Prepared by Management)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|Revenues:                                                                                                                                                                            
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|Expenses:                                                                                                                                                                            
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|Loss for the period                                                                                                                                                                  
|                                                                                                                                                                                     
|Deficit, beginning of year                                                                                                                                                           
|                                                                                                                                                                                     
|Deficit, end of period                                                                                                                                                               
|                                                                                                                                                                                     
|Loss per share  basic and diluted                                                                                                                                                   
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|Weighted average number of
shares outstanding                                                                                                                                        

See accompanying notes to financial statements.





5

---



|IMAGIS TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(expressed in Canadian dollars)
(Unaudited  Prepared by Management)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|Cash provided by (used in):                                                                                                                                              
|Operations:                                                                                                                                                              
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|Investments:                                                                                                                                                             
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|Financing:                                                                                                                                                               
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|                                                                                                                                                                         
|Decrease in cash                                                                                                                                                         
|Cash and cash equivalents, beginning of period                                                                                                                           
|Cash and cash equivalents, end of period                                                                                                                                 
|                                                                                                                                                                         



6

---



|IMAGIS TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS (continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(expressed in Canadian dollars)
(Unaudited  Prepared by Management)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|Supplementary information and disclosures:                                                                                                                                           
|                                                                                                                                                                                     
|                                                                                                                                                                                     
|                                                                                                                                                                                     

See accompanying notes to financial statements.



7

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management







1.

Operations:

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

These financial statements have been prepared on a going concern basis which includes the assumption that the Company will be able to realize its assets and settle its liabilities in the normal course of business.  At March 31, 2004, the Company has a working capital deficiency of $1,890,222.  For the three month period ended March 31, 2004, the Company has incurred a loss from operations of $1,581,801 and a deficiency in operating cash flow of $390,528.  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 generally accepted accounting principles in Canada and, except as set out in Note 13, also complies, in all material respects, with accounting principles generally accepted in the United States. The financial statements reflect the following significant accounting policies:

(a)

Basis of consolidation:



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



(b)

Cash equivalents:



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



(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

Rate



Computer 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.



8

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



2.

Significant accounting policies contd:

(d)

Intangible assets:

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

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



Asset

Term



Intellectual property

3 years

Patents

3 years

License

3 years





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



(e)

Revenue recognition:



(i)

Software sales revenue:

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

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

9



---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



2.

Significant accounting policies contd:

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

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

(ii)

Support and services revenue:

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 generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates.

(g)

Foreign currency:

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

(h)

Income taxes:

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



(i)

Stock-based compensation:



The Company has a stock-based compensation plan, which is described in note 7.  Subsequent to January 1, 2003, the Company accounts for all stock-based payments to employees and non-employees using the fair value based method.  Under the fair value based method, stock-based payments are measured at the fair value of the equity instruments issued.



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



10



---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



2.

Significant accounting policies contd:

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-rate basis over the vesting period.

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



|                                  | Three months ended March 31,
|--------------------------------- | ----------------------------
|                                  | 2004                        
|                                  |                             
|Net loss   as reported           | $(1,581,801)                
|Net loss   pro forma             | $(2,549,167)                
|                                  |                             
|Net loss per share   as reported | $(0.14)                     
|Net loss per share  pro forma    | $(0.23)                     



The pro forma amounts exclude the effect of stock options granted prior to January 1, 2002. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs: volatility  120%, risk free interest rate  5%, option term  5 years, and dividend yield  nil.

The weighted average fair value of employee stock options granted during 2002 was $2.05 per share purchase option.

(j)

Loss per share:



Loss per share is calculated using the weighted average number of shares outstanding during the reporting period.  This average includes common shares issued in a reporting period from their date of issuance.  Diluted per share amounts are calculated by the treasury stock method whereby the assumed proceeds of dilutive exercisable instruments are applied to repurchase common shares at the average market price for the period.  The resulting net issuance is included in the weighted average number for purposes of the diluted per share calculation.  As all outstanding shares and warrants are anti-dilutive, there is no difference between basic and diluted loss per share.  Loss per share and weighted average number of shares outstanding for the comparative period ending March 31, 2003 have been restated to take into account the share consolidation completed during 2003 (note 7(b)).



11

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



2.

Significant accounting policies contd:



(k)

Comparative figures:



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

3.

Change in accounting for stock-based compensation:

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

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

4.

Equipment:



Accumulated                       
Net book

At March 31, 2004                                                                          Cost                  
amortization                           
value



Computer hardware

$

364,798

$

255,284

$

109,514

Furniture and fixtures

125,300

52,572

72,728

Software

115,416

113,579

1,837

Telephone Equipment

6,761

471

6,290

Tradeshow Equipment

64,897

38,872

26,025

Leasehold Improvements

734

734

0



$

677,906

$

461,512

$

216,394





Accumulated                       
Net book

At
December 31, 2003                                                                 
Cost                  
amortization                           
value



Computer hardware

$

419,263

$

282,389

$

136,874

Furniture and fixtures

165,373

86,380

78,993

Software

139,812

137,364

2,448

Telephone Equipment

19,178

12,550

6,628

Tradeshow Equipment

64,897

35,627

29,270

Leasehold Improvements

2,482

1,762

720



$

811,005

$

556,072

$

254,933



5.

Intellectual property:







Accumulated                       
Net book

At March 31, 2004                                                                           Cost                  
amortization                           
value



Intellectual property

$

3,872,551

$

447,897

$

3,424,655







Accumulated                       
Net book

At
December 31, 2003                                                                     Cost                  
amortization                           
value



Intellectual property

$

3,872,551

$

125,184

$

3,747,367





6.

Other assets:





Accumulated                       
Net book

At March 31, 2004                                                                             Cost                  
amortization                           
value



Patents

$

78,227

$

28,249

$

49,978

License

236,396

131,285

105,111



$

314,623

$

159,533

$

155,089





Accumulated                       
Net book

At
December  31, 2003                                                                Cost                  
amortization                           
value



Patents

$

78,227

$

21,730

$

56,497

License

236,396

111,584

124,812



$

314,623

$

133,314

$

181,309







12

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



7.

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, 2002

4,522,414

$

17,361,118



Issued during year for cash:

Options exercised

43,446

129,370

Warrants exercised

29,630

166,668

Issued in settlement of accounts payable

209,261

236,931

Issued for acquisition of Briyante Software

4,040,406

3,636,365

Share issuance costs

--

(2,031)



Balance, December 31, 2003

8,845,157

21,528,421



Issued on conversion of special warrants                                                     
1,090,158                       
846,235



Balance, March 31, 2004

9,935,315

$

22,374,656



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

(c)

Special warrants:

During October and November 2003, the Company sold a total of 9,796,087 Special Warrants at $0.1725 per Special Warrant in a series of four tranches.  Cash proceeds of $899,075 less commissions of $39,757 were received for the sale of 5,212,029 Special Warrants and 4,584,058 Special Warrants were issued in settlement of $790,750 in debt.  Each Special Warrant is exercisable, for no additional consideration, into Units consisting of 0.2222 common shares and 0.2222 share purchase warrants, with the exception of 1,002,899 Special Warrants issued to insiders of the Company.  The Units issued to insiders of the Company are exercisable into 0.2222 common shares with no share purchase warrant.  Each whole warrant entitles the holder for two years from the date of issue of the Special Warrants to acquire one additional common share at an exercise price of $1.04 per share in the first year and $1.14 per share in the second year.  The Special Warrants are convertible at the holders option at any time for an eighteen month period and will convert automatically at the end of the eighteen months.  The Company will not be required to meet any conditions prior to conversion.  Finders fees of $39,758 cash and 38,641 in brokers warrants exercisable at $1.04 per share were paid.  The brokers warrants are exercisable until October 30, 2004 and have been recorded at the fair value as at the date of issue of $7,327 as a reduction in the proceeds of the Special Warrants and an increase in Contributed Surplus.  As at March 31, 2004, 1,090,158 Units have been issued on conversion of the Special Warrants which resulted in the issuance of 1,090,158 common shares and 1,090,158 share purchase warrants.



13

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



(d)

Shares subscribed

As at March 31, 2004 the Company had received share subscriptions of $360,000, less finders fees of $15,000, to be applied to a private placement that was completed subsequent to March 31, 2004, see Note 12.

(e)

Warrants:

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



December 31,                                                                                        
March 31,      Exercise       
Expiry

2003        Granted      
Exercised      Expired                                 
2004         price            
date



11,111

-

-

(11,111)

-

$9.90

January 18, 2004

64,815

-

-

-

64,815

US$8.78

July 8, 2004

23,333

-

-

-

23,333

US$10.53

July 24, 2004

38,641

-

-

-

38,641

$1.04

October 30, 2004

670,930

-

-

-

670,930

$0.64

November 20, 2005

-

64,412

-

-

64,412

$1.04

September 30, 2005

-

128,824

-

-

128,824

$1.04

October 10, 2005

-

896,922

-

-

896,922

$1.04

October 31, 2005



808,830

1,090,158

-

(11,111)

1,887,877





(f)

Options:

The Company has a stock option plan that was approved at the Companys AGM on November 21, 2003.  Under the terms of the plan the Company may reserve up to 2,194,489 common shares for issuance under the plan.  The Company has granted stock options to certain employees, directors, advisors, and consultants.  These options are granted for services provided to the Company.  All options granted prior to November 25, 2003, expire five years from the date of grant with the exception of 22,222 options issued during 2002 to a consultant that expire two years from the date of grant.  All options granted subsequent to November 25, 2003, expire 3 years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options along with the Companys outstanding shares were consolidated on a 1 new option for 4.5 old options basis.  During the period ended March 31, 2004 all options outstanding as at December 31, 2003 were repriced to $0.78. A summary of the status of the Companys stock options at March 31, 2004 and December 31, 2003 and changes during the periods ended on those dates is presented below:



14

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management





7.

Share
capitalcontd:

(f)

Options contd:



March 31, 2004

December 31, 2003



Weighted average

Weighted average

Shares

exercise price

Shares

exercise price



Outstanding, beginning of period

770,294

$ 5.26

668,198

$ 7.56

Repriced to $0.78

-

(4.48)

-

-

Granted

1,336,104

0.77

421,557

1.51

Exercised

-

-

(43,446)

2.97

Cancelled

(35,555)

0.78

(276,015)

11.70



Outstanding, end of period

2,070,843

$ 0.77

770,294

$ 5.26



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



Options outstanding

Options exercisable



Number

Number

outstanding

Weighted

Weighted

exercisable,

Weighted

March 31,

remaining

average

March 31,

average

Exercise price

2004

contractual life

exercise price

2004

exercise price



$0.66

152,200

2.93

$0.66

50,736

$0.66

$0.78

1,918,643

2.50

$0.78

1,099,135

$0.78



2,070,843

2.50

$0.77

1,149,870

$0.77



The weighted average fair value of employee stock options granted during the period ended March 31, 2004 was $0.62 (2003: $NIL) per share purchase option. The weighted average fair value of employee stock options repriced during the period ended March 31, 2004 was $0.52 (2003: $NIL) per share purchase option as at the date of the reprice.

8.

Related party transactions not disclosed elsewhere are as follows:

At March 31, 2004, accounts payable and accrued liabilities included $441,346 (at December 31, 2003 - $418,258) owed by the Company to directors and officers and companies controlled by directors and officers of the Company.  These amounts are unsecured, non-interest bearing and payable on demand.  At March 31, 2004, accounts payable and accrued liabilities included $376,694 (at December 31, 2003 - $372,442) owed by the Company to companies formerly related by virtue of having a director or officer in common with the Company. These amounts are unsecured, non-interest bearing and $327,825 of this amount was due on March 20, 2004.



15

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



9.

Commitments:

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



Year

Equipment

Building

Total



2004

$

24,528

$

121,350

$

145,878

2005

3,361

60,675

64,036

2006

2,928

-

2,928

2007

1,708

-

1,708



$

32,525

$

182,025

$

214,550



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

(a)

the Company has entered into a strategic alliance to develop and market integrated airport and security products with the related company.  The Company has committed to expend a minimum of USD$125,000 on product development and the operation of an Airport Security Group to market the products, prior to December 31, 2004.  As at March 31, 2004, the Company has incurred USD$48,350 in expenditures on product development.

(b)

the Company has committed to engage the related company to provide software development services.  The Company has agreed to expend a minimum of USD$125,000, based on hourly rates charged at 85% of fair market value, prior to December 31, 2004.  No amounts have been expended to March 31, 2004.

(c)

the Company has entered into a Letter of Intent to form a joint venture for the purpose of establishing a manufacturing and marketing operation in Brazil.  The Company has agreed to invest USD$250,000 cash in the joint venture in order to acquire a 20% interest.  This investment is contingent upon the Companys joint venture partner fulfilling certain obligations prior to July 8, 2004.

10.

Financial instruments and risk management:

(a)

Fair values:

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

(b)

Credit risk:

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

(c)

Foreign currency risk:

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



17

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



11.

Segmented information:

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

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



2004

2003



Canada

$

34,015

$

47,794

United States

74,481

111,532

United Kingdom

80,247

44,123

Saudi Arabia

91,411

-

Other

5,901

74,059



$

286,055

$

277,508



Substantially all of the Companys fixed assets are in Canada.

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



2004

2003



Customer A

$

7,470

$

44,123

Customer B

5,901

34,500

Customer C

-

39,559

Customer D

72,777

-

Customer E

91,411

-





12.

Subsequent events:



Subsequent to March 31, 2004:



i)

The Company closed a private placement consisting of 4,007,875 Units at $0.40 per Unit. Each Unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 28, 2005 or at $0.75 from April 29, 2005 until April 28, 2006. The common shares and warrants are subject to a four month hold period that expires on August 28, 2004. Finders fees of $69,000 in cash were paid on a portion of the private placement. The total net proceeds to Imagis are $1,534,150, of which $345,000 were recorded in share subscriptions as at March 31, 2004.



ii)

The Company settled $616,723 in debt included in accounts payable as at March 31, 2004 through the issuance of 1,541,809 common shares and 226,584 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 29, 2005 or at $0.75 from April 30, 2005 until April 29, 2006. Debt settled with related parties and formerly related parties totaled $526,090 through the issuance of 1,315,225 common shares with no warrants. The common shares and warrants are subject to a four month hold period that expires on August 29, 2004.





18

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



13.

United States generally accepted accounting principles:

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



(a)

Stock-based compensation:



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



(b)

Beneficial conversion option:



During the year ended December 31, 2000, the Company issued convertible debentures with detachable warrants attached.  For Canadian GAAP purposes, the issuance is 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, this allocation results in a beneficial conversion option as the fair value of the shares issuable on conversion of the debt is in excess of the value at which such shares would be issuable based on the reduced carrying value of the debt element.  This beneficial conversion option was amortized over the period to the first conversion date.



(c)

Warrant issuance for services:



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



19

---

IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Unaudited  Prepared by Management



13.

United States generally accepted accounting principles contd:



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



|                                        |   | Three months ended
March 31,
|--------------------------------------- | - | ----------------------------
|                                        |   | 2004                        
|Deficit, Canadian GAAP                  | $ | (22,782,687)                
|Cumulative stock based compensation (a) |   | (1,358,323)                 
|Beneficial conversion options (b)       |   | (208,200)                   
|Warrants issued for services (c)        |   | (722,000)                   
|Deficit, U.S. GAAP                      | $ | (25,071,210)                



|                                              |   | Three months ended
March 31,
|--------------------------------------------- | - | ----------------------------
|                                              |   | 2004                        
|                                              |   |                             
|Loss for the period, Canadian GAAP            | $ | (1,581,801)                 
|Stock-based compensation                      |   | (13,125)                    
|Loss for the period, U.S. GAAP                |   | (1,594,926)                 
|Loss per share, U.S. GAAP  basic and diluted | $ | (0.14)                      



20



---



Item 2.  Managements Discussion and Analysis or Plan of Operations



About Imagis



Imagis develops and markets software that simplifies, accelerates, and economizes the process of connecting existing, disparate databases, enhanced as appropriate with biometric facial recognition technology. Imagis develops robust and easy-to-use software technologies for information sharing and biometric identification. This includes a standards-based data integration toolkit, known as the Briyante Integration Environment, as well as proprietary software algorithms enabling facial recognition and image matching. The combination of these technologies enables information owners to share data securely with external stakeholders and software systems using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image.



Overview

The Companys Business

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

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

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

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

Critical Accounting Polices

On December 12, 2001, the Securities and Exchange Commission issued a cautionary advice regarding the disclosure of critical accounting policies. Critical accounting policies are those that management believes are both most important to the portrayal of the Companys financial conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.

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

Revenue recognition

(i)

Software sales revenue:

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



21

---





reasonably assured.  Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue.

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

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

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

(ii)

Support and services revenue:

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

Intangible Assets:

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



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



Asset

Rate

Intellectual property

33.3%

Patents

33.3%

License

33.3%



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



22



---



Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates.

Stock-based compensation

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



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



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



Results of Operations for the three months ended March 31, 2004 compared to March 31, 2003:



Revenues



Imagis total revenues increased 3% to $286,055 for the period ended March 31, 2004 over the prior year level of $277,508. The higher revenues were primarily attributable to higher software sales revenues.



Revenues from the Companys software products rose 40% to $190,861 this year as compared to $135,983 for 2003. This growth was seen across all product lines. Imagis expects that revenues will continue to increase during the latter half of 2004 as the new products acquired and developed as a result of the acquisition of Briyante gain increasing customer acceptance.



Support and services revenues for 2004 were $93,088 and were 30% lower than in 2003 of $134,019. The support revenues decreased as a result of a large support contract that expired during 2003 and was taken over by our business partner.



Other revenues were $2,106 for 2004, whereas comparable revenues of $7,506 were earned in the prior year. These revenues were primarily earned through interest revenue and fluctuate with the Companys cash balances.



Operating Costs



Operating expenses totalled $1,867,856 for 2004, which is 9% lower than the 2003 operating expenses of $2,062,609. The 2004 expenses include stock-based compensation of $714,930 due to the restructuring of Imagis employee stock option plan and $387,472 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2004 operating expenses total $765,454. The 2003 expenses include a one-time charge of USD$250,000 (CDN$366,950) incurred as a management fee owing to OSI Systems Inc. (OSI) in consideration of renegotiating the terms of the agreements with OSI and amortization of $66,413. Excluding these items, the operating expenses for 2003 were $1,629,246.  The difference of $863,792 between 2004 and 2003 represents a 53% reduction in operating expenses over the prior year. The lower costs over the prior period resulted from significant decreases in the areas of administration, sales and marketing, and technical services. The operating expense rate has stabilized at approximately $3,200,000 per annum since July 2003 and we believe it will remain at that level.



23

---



Administration



Administrative costs for 2004 were $934,484, which is 2% lower than for 2003 of $951,651. These costs include the stock based compensation charge of $714,930 in 2004 and the one-time management fee of USD$250,000 (CDN$366,950) in 2003 described above. Excluding these charges, the administrative costs were $219,554 in 2004 versus $584,701 in 2003, which represents a 62% reduction.  Administrative costs include staff salaries and related benefits and travel, stock based compensation, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.



Generally all categories were lower, with the exception of stock based compensation, due to the effects of cost reducing strategies, in particular a significant reduction in travel costs and the use of outside consultants.  The Companys administrative costs have declined steadily since the second quarter of 2002, primarily due to no longer using financial advisory services and contract support staff.



Bad Debt Expense



The bad debt expense in 2003 of $42,074 consisted of a single customer that defaulted on payment for a software license. There were no bad debts incurred in 2004.



Interest and Amortization



The increase in interest expense of $5,052 over the prior year level is primarily due to interest charged on various supplier accounts. The increase in amortization expense is due to the amortization expense of $322,713 associated with the acquisition of the intellectual property of Briyante.



Sales and Marketing



Sales and marketing expenses for 2004 were $199,842 and were 65% lower than in 2003 of $573,996. Imagis significantly decreased its sales team after March 31, 2003 and streamlined its associated travel and marketing costs as part of its strategy of utilizing a more targeted marketing and sales strategy. No further decreases are currently contemplated. Sales and marketing costs will be increased if management identifies specific opportunities that require an increase in resources but only in the event that identifiable revenues exist.



Technology Development



The technology development expenses for 2004 were $262,684, which is comparable to the 2003 costs of $278,543. Technology development expenses were reduced during the second and third quarters of 2003 and then increased back to current levels with the addition of staff associated with the Briyante acquisition. Management expects that the increased revenues achieved as a result of the sale of new products acquired with Briyante will more than offset the increased costs. Management believes that continuing to invest in technology advancements is crucial to the future success of Imagis.



Technical Services



Costs for the technical services group were $71,992 this year, which is 49% lower than the comparable 2003 costs of $140,588. The technical services group generally assists the Companys strategic partners in their installation of Imagis products and also provides clients with any technical support they may require under annual support contracts, and includes primarily costs for salaries, facilities and travel. The reduction is due to cost reductions in all areas. Costs for future quarters will be dependent on the sales levels achieved by the Company.



24

---



Net Loss for the Period



Overall, the Company incurred a net loss for the period ended March 31, 2004 of $1,581,801 or $0.14 per share, which is 11% lower than the net loss incurred during the period ended March 31, 2003 of $1,785,101 or $0.48 per share. The loss per share figure for 2003 has been adjusted to take into account the Companys share consolidation that occurred in November of 2003. Adjusting the loss to take into account the non-cash and one-time expenses described above, the losses become $479,399 for 2004 and $1,351,738 for 2003, representing a 65% reduction. The current rate of loss represents slightly less than $160,000 per month and management believes that the Company will be able to achieve break even operations on a cash basis during the latter half of 2004.



Liquidity and Capital Resources



The Companys cash on hand at the beginning of the period aggregated $86,227. During the period, the Company received additional net funds of $345,000 in share subscriptions for a private placement that was closed on April 28, 2004.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,581,801, 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 $390,528. The Company also repaid capital leases of $5,753, and the Companys cash position declined by $51,281 to $34,946 at March 31, 2004.



The Company did not have sufficient cash flow from operations to fund its operations beyond March 31, 2004. Consequently the Company completed a private placement consisting of 4,007,875 Units at $0.40 per Unit. Each Unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 28, 2005 or at $0.75 from April 29, 2005 until April 28, 2006. The common shares and warrants are subject to a four month hold period that expires on August 28, 2004. Finders fees of $69,000 in cash were paid on a portion of the private placement conducted outside the United States. The total net proceeds to Imagis are $1,534,150, of which $345,000 were recorded in share subscriptions as at March 31, 2004.



Concurrently with the private placement the Company settled $616,723 in debt included in accounts payable as at March 31, 2004 through the issuance of 1,541,809 common shares and 226,584 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 29, 2005 or at $0.75 from April 30, 2005 until April 29, 2006. Debt settled with related parties and formerly related parties totaled $526,090 through the issuance of 1,315,225 common shares with no warrants. The common shares and warrants are subject to a four month hold period that expires on August 29, 2004.



Management of the Company believes that the funds received through the private placement combined with operating revenues and the reduction in liabilities achieved through the debt settlement will provide sufficient cash flow to fund the Companys operation for at least the next six months, even if no increases in revenue growth occur.



Should the operating revenues fail to increase enough to provide sufficient cash flow to fund operations the Company may require further financing. There is no assurance that the Company will be able to complete any financing or that any financing will be obtained on terms favourable to the Company.  The failure to obtain adequate financing could result in a substantial curtailment of Imagis operations.



Off-Balance Sheet Arrangements

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





25

---



Item 3.  Controls and Procedures



(a)

Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Vice President Finance, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (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 Vice President Finance concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or its consolidated subsidiaries) required to be included in reports the Company files or submits under the Securities Exchange Act of 1934, as amended.



A control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



(b)

Changes in Internal Control over Financial Reporting



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





PART II  OTHER INFORMATION



Item 1.  Legal Proceedings



As of the date of this report, the Company is not a party to any legal proceedings, 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 2.   Changes in Securities and Small Business Issuer Purchases of Equity Securities



(a)

None



(b)

None



(c)

During the quarter ended March 31, 2004, the Company issued 1,090,158 common shares and 1,090,158 common share purchase warrants on conversion of Special Warrants to individuals and companies in private transactions outside the United States.  The common shares and common share purchase warrants were issued in reliance upon an exclusion from registration available under Regulation S (Regulation S) promulgated under the Securities Act of 1933, as amended (the Securities Act).



(d)

None



(e)

None



Item 3.  Defaults Upon Senior Securities



None



Item 4.  Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the quarter ended
March 31, 2004.



Item 5. Other Information



None



26



---





Item 6.  Exhibits and Reports on Form 8-K



(a)

Exhibits



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



| | ExhibitNumber | Description                                                                                                         
| | ------------- | --------------------------------------------------------------------------------------------------------------------
| | 3.1(1)        | Articles of Incorporation                                                                                           
| | 4.1(1)        | Shareholder Agreement dated February 23, 1999 among the Original Shareholders and the Former Imagis Shareholders    
| | 4.2(5)        | Registration rights agreement dated July 8, 2002 between Imagis and OSI                                             
| | 10.1(1)*      | Employment Agreement dated February 23, 1999 between the Issuer and Iain Drummond                                   
| | 10.2(2)*      | Imagis Technologies Inc. 2000 Stock Option Plan                                                                     
| | 10.3(3)       | Form of Unit Subscription Agreement                                                                                 
| | 10.4(4)       | Software Assets Sale and Assignment Agreement dated October 31, 2001 between Imagis and API Technologies, LLC.      
| | 10.5(5)       | Subscription Agreement dated July 8, 2002 between Imagis and OSI                                                    
| | 10.6(5)       | Letter of Intent dated July 8, 2002 between Imagis and OSI                                                          
| | 10.7(5)       | Product Development and Marketing Agreement dated July 8, 2002 between Imagis and OSI                               
| | 10.8(5)       | Software Developer Services Agreement dated July 8, 2002 between Imagis and OSI                                     
| | 10.9(6)       | Purchase Agreement dated August 30, 2002 between Imagis and Intacta for certain data encoding technologies          
| | 10.10(6)      | Agreement to amend the terms of Item 10.9 dated October 8, 2002                                                     
| | 10.11(6)      | Agreement to amend the terms of Item 10.9 and 10.10 dated October 9, 2002                                           
| | 10.12(6)      | Agreement between Imagis and Intacta for the purchase of Intacta patents dated November 1, 2002                     
| | 10.13(6)*     | Consulting Agreement between Imagis and Altaf Nazerali dated October 1, 2002                                        
| | 10.14(6)      | Agreement between Imagis and Briyante for the development of a query application dated July 30, 2002                
| | 10.15(7)      | Revolving Line of Credit dated February 23, 2003 between Imagis and Altaf Nazerali                                  
| | 10.16(7)      | Amended and Restated Loan Agreement: Revolving Line of Credit dated April 15, 2003 between Imagis and Altaf Nazerali
| | 10.17(7)      | General Security Agreement dated April 15, 2003 between Imagis and Altaf Nazerali                                   
| | 10.18(7)      | Grid Promissory Note dated February 21, 2003 between Imagis and Altaf Nazerali                                      
| | 10.19(7)      | Grid Promissory Note Amended and Restated dated April 15, 2003 between Imagis and Altaf Nazerali                    
| | 10.20(7)      | Source Code License Agreement dated April 15, 2003 between Imagis and Altaf Nazerali                                
| | 10.21(7)      | Source Code Escrow Agreement dated April 15, 2003 between Imagis and Altaf Nazerali                                 
| | 10.22(8)      | Debenture agreement between the Company and 414826 B.C. Ltd dated May 30, 2003                                      
| | 10.23(9)*     | Consulting Agreement dated July 15, 2003 between Imagis and Roy Trivett                                             
| | 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 51-901F as required by the British Columbia Securities Commission                                              



*Indicates a management contract or compensatory plan or arrangement



(1)

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

(2)

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

(3)

Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended June 30, 2001.

(4)

Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended March 31, 2002.

(5)

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

(6)

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

(7)

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

(8)

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

(9)

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



(a)

Reports on Form 8-K

(1)

On February
23, 2004, the Company furnished on Form 8-K a press release dated February 20, 2004 announcing management change.

(2)

On March
12, 2004, the Company furnished on a Form 8-K  a press release dated March 4, 2004 announcing the appointments of  Clyde Farnsworth and Keith Kretschmer to the Board of Directors.



27



---



SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





IMAGIS TECHNOLOGIES INC.



Date: May 14, 2004

/s/ Wayne Smith

Wayne Smith

Vice President Finance, Chief Operating Officer

(Principal Financial and Accounting Officer and Duly Authorized Officer)





28

---

Exhibit
31.1

CERTIFICATION

I, Wayne Smith, certify that:



1.

I have reviewed this quarterly report on Form 10-QSB of Imagis Technologies Inc.;



2.

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



3.

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



4.

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



(a)

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



(b)

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



(c)

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



5.

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



(a)

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



(b)

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



Date: May 14, 2004

/s/ Wayne Smith

Wayne Smith

Chief Operating Officer and Vice-President Finance

(Principal Financial and Accounting Officer)



29

---

Exhibit
31.2



CERTIFICATION



I, Roy Trivett, certify that:



1.

I have reviewed this quarterly report on Form 10-QSB of Imagis Technologies Inc.;



2.

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



3.

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



4.

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



(a)

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



(b)

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



(c)

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



5.

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



(a)

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



(b)

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



Date: May 14, 2004

/s/ Roy Trivett

Roy Trivett

Chief Executive Officer

(Principal Executive Officer)



30

---

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

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



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



| | /s/ Wayne SmithWayne Smith
Chief Operating Officer and Vice-President Finance
(Principal Financial and Accounting Officer)
May 14, 2004
| | ---------------------------------------------------------------------------------------------------------------------------------------



31

---

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 Imagis Technologies Inc. (the Company) on Form 10-QSB for the period ended March 31, 2004 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)
May 14, 2004
| | ---------------------------------------------------------------------------------------------



32

---



Exhibit 99.1

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
Quarterly  Report, in connection with any investment in the Companys common shares.  If any of the events described below as risks occur, 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.

Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither the Company nor anyone else assumes responsibility for the accuracy or completeness its of forward-looking statements. You should consider the Companys forward-looking statements in light of the following risk factors and other information in this annual report. If any of the events described below actually occur, the Companys business, results of operation and financial condition could differ from those projected in its forward-looking statements. The Company is under no duty to update any of its forward-looking statements after the date of the annual report. You should not place undue reliance on forward-looking statements.

Limited Operating History; History of Losses

The Company commenced operations in March 1998 and, therefore, has only a limited operating history upon which an evaluation of its business and prospects can be based. The Company and its predecessors incurred net losses of $4,058,857 and $6,951,393 in the years ended December 31, 2003 and December 31, 2002, respectively and $1,581,801 for the quarter ended March 31, 2004 and $1,785,101 for the quarter ended March 31, 2003.  The Company has never been profitable and there can be no assurance that, in the future, the Company will be profitable on a quarterly or annual basis.

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

The Auditors Report on the Companys December 31, 2003 Financial Statements includes additional comments by the auditor on Canada-United States reporting differences that indicate 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



Management of the Company believes that current cash and accounts receivables combined with operating revenues will provide sufficient cash flow to fund the Companys operation for at least the next six months, even if no increases in revenue growth occur.



Should the operating revenues fail to increase enough to provide sufficient cash flow to fund operations the Company may require further financing. There is no assurance that the Company will be able to complete any financing or that any financing will be obtained on terms favourable to the Company.  The failure to obtain adequate financing could result in a substantial curtailment of Imagis operations.



33

---



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 light of the difficulties inherent in software development, the Company expects that it will experience delays in the completion and introduction of new software products.

Lengthy Sales Cycles

The purchase of any of the Companys software systems is often an enterprise-wide decision for prospective customers and requires the Company (directly or through its business partners) to engage in sales efforts over an extended period of time and to provide a significant level of education to prospective customers regarding the use and benefits of such systems. In addition, an installation generally requires approval of a governmental body such as municipal, county or state government, which can be a time-intensive process and require months before a decision to be made. Due in part to the significant impact that the application of the Companys products has on the operations of a business and the significant commitment of capital required by such a system, potential customers tend to be cautious in making acquisition decisions. As a result, the Companys products generally have a lengthy sales cycle ranging from six (6) to twelve (12) months. Consequently, if sales forecast from a specific customer for a particular quarter are not realized in that quarter, the Company may not be able to generate revenue from alternative sources in time to compensate for the shortfall. The loss or delay of a large contract could have a material adverse effect on the Companys quarterly 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, operating results for subsequent quarters may be adversely affected.

Dependence on a Small Number of Customers

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

Dependence on Key Personnel

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

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

Dependence on Marketing Relationships

The Companys products are primarily marketed by its business partners. The Companys existing agreements with business partners are nonexclusive and may be terminated by either party without cause at any time. Such organizations are not within the control of the Company, are not obligated to purchase products from the Company and may also represent and sell competing products. There can be no assurance that the Companys existing business partners will continue to provide the level of services and technical support necessary to provide a complete solution to its customers or that they will not emphasize their own or third-party products to the detriment of the Companys products. The loss of these business partners, the failure of such parties to perform under agreements



34

---



with the Company or the inability of the Company to attract and retain new business with the technical, industry and application experience required to market the Companys products successfully could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.

Additionally, with respect to most sales, the Company supplies products and services to a customer through a third-party supplier acting as a project manager or systems integrator. In such circumstances, the Company has a sub-contract to supply its products and services to the customer through the prime contractor. In these circumstances, the Company is at risk that situations may arise outside of its control that could lead to a delay, cost over-run or cancellation of the prime contract which could also result in a delay, cost over-run or cancellation of the Companys sub-contract. The failure of a third-party supplier to supply its products and services or perform its contractual obligations to the customer in a timely manner could have a material adverse effect on the Companys financial condition, results of operations and cash flows.

Competition

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

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

Proprietary Technology

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

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

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

Exchange Rate Fluctuations

Because the Companys reporting currency is the Canadian dollar, its operations outside Canada face additional risks, including fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. The Company does not currently engage in hedging activities or enter into foreign currency contracts in



35

---



an attempt to reduce the Companys exposure to foreign exchange risks. In addition, to the extent the Company has operations outside Canada, it is subject to the impact of foreign currency fluctuations and exchange rate charges on the Companys reporting in its financial statements of the results from such operations outside Canada. Since such financial statements are prepared utilizing Canadian dollars as the basis for presentation, results from operations outside Canada reported in the financial statements must be restated into Canadian dollars utilizing the appropriate foreign currency exchange rate, thereby subjecting such results to the impact of currency and exchange rate fluctuations.

Risk of Software Defects

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

Product Liability

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

Strategic Alliance with OSI



The Company entered into a share subscription agreement and ancillary business agreements with OSI, a diversified global developer, manufacturer and seller of optoelectronic based components and systems. The Company issued to OSI 1,166,667 common shares and 291,667 warrants, each warrant to purchase one common share exercisable until July 8, 2004, at an exercise price of US$1.50 per share, at an aggregate purchase price of US$1,750,000. The Company agreed to designate one nominee of OSI to its Board of Directors, and OSI designated Deepak Chopra, its Chief Executive Officer and a director, who was subsequently appointed as a director of Imagis. Mr. Chopra subsequently resigned as a Director of Imagis on March 21, 2003. OSI currently has not designated a nominee to the Board of Directors.

In connection with OSIs purchase of shares and warrants, on July 8, 2002, the Company entered into the following additional agreements with OSI:

i.

Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products using its facial recognition technologies and OSIs security products. The Company agreed to form an internal transportation security group and commit a minimum of US$250,000 to develop these products and operate this group. Imagis will receive a royalty for all sales made by OSI of products developed under this agreement.



ii.

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



iii.

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

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

i.

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



36

---



ii.

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



iii.

the Company agreed that, subject to regulatory approval, the exercise price of the warrants for the purchase of 291,667 shares, issued in conjunction with the private placement to OSI completed during 2002, will be reduced from US$1.50 (CDN$2.28) to the same price per share as that afforded the investors under the financing then under negotiation. Imagis completed a private placement in October 2003 and OSI declined to have its warrants repriced.



iv.

The Company has agreed to pay OSI a management fee of US$250,000 which was due on March 20, 2004, this amount has not yet been paid.

There can be no assurance that the relationships with OSI will prove to be successful in the future or will result in any material revenue for the Company.

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

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

Volatility of the Company's Share Price

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

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

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

Briyante Acquisition



Imagis is currently in the process of integrating the Briyante business with Imagis business and is expending significant financial resources in this effort. The integration of Briyante is subject to risks commonly encountered in acquisitions, including, among others, risk of loss of key personnel, difficulties associated with assimilating ongoing businesses and the ability of Briyantes sales force and consultants to integrate. Imagis will also need to integrate the products of Briyante into its products offering. Imagis may not successfully overcome these risks or any other problems that may be encountered in connection with the acquisition of Briyante. Accordingly, it is uncertain whether Imagis will receive the benefits it anticipates from this acquisition and it may not realize value from it comparable to the resources Imagis has invested in it.



Additional Disclosure Requirements Imposed on Penny Stock Trades



If the trading price of Imagis common shares is less than $5.00 per share, trading in its common shares may be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional



37

---





disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock. Broker-dealers are required to deliver to customer information regarding the risks of investing in penny stocks, its offer and bid prices for the penny stock and the amount of compensation received by the broker-dealer with respect to such transaction. The additional burdens imposed upon broker-dealers may discourage broker-dealers from effecting transactions in Imagis common shares, which could reduce the liquidity of Imagis common shares and thereby have a material adverse effect on the trading market for such securities.



Enforcement of Civil Liabilities



Imagis is a corporation incorporated under the laws of British Columbia, Canada.  A number of the Companys directors and professional advisors reside in Canada or outside of the United States.  All or a substantial portion of the assets of such persons are or may be located outside of the United States.  It may be difficult to effect service of process within the United States upon the Company or upon such directors or professional advisors 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 professional advisors 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 professional advisors 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.



Effects of Restructuring Activities



Beginning in 2002 and continuing into 2003, the Company reduced its workforce from approximately 48 to 25 employees. There have been substantial costs associated with this workforce reduction related to severance and other employee-related costs and the Companys restructuring plan may yield unanticipated consequences, such as attrition beyond its planned reduction in workforce.  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 workforce 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 the Company to the risk of litigation, which could result in substantial 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.





38