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 June 30, 2006

OR

 ̈

TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE

EXCHANGE ACT

For the transition period from  to

Commission file Number: 000-30090

_______________

VISIPHOR CORPORATION

(Exact name of small business issuer as specified in its charter)

_______________



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

Suite 1100  4710 Kingsway 
Burnaby, 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



Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No x



As of August 10, 2006, 43,075,588 common shares of the Issuer were issued and outstanding.



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







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VISIPHOR CORPORATION



FORM 10-QSB



For the Quarterly Period Ended June 30, 2006



INDEX





PART IFinancial InformationItem 1.Financial Statements4Item 2.Managements Discussion and Analysis or Plan of Operation23Item 3.Controls and Procedures32PART IIOther InformationItem 1.Legal Proceedings33Item 2.Unregistered Sales of Equity Securities and Use of Proceeds33Item 3.Defaults Upon Senior Securities33Item 4.Submission of Matters to a Vote of Security Holders33Item 5.Other Information34Item 6.Exhibits35










2



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NOTE REGARDING FORWARD-LOOKING STATEMENTS



Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  In some cases, you can identify the forward-looking statements by Visiphor Corporations (Visiphor or the Company) use of the words such as may, will, should, could, expect, plan, estimate, predict, potential, continue, believe, anticipate, intend, expect, or the negative or other variations of these words, or other comparable words or phrases.  Forward-looking statements in this report include, but are not limited to, the Companys expectation that revenues will increase during 2006 when compared to those of 2005 and that such revenues will continue to increase as newly developed products and solutions continue to gain increasing customer acceptance; managements belief that increased revenues achieved as a result of the sale of products will more than offset increased technology development costs; the Companys ability to fund its operations in the future from its current cash, accounts receivable, work in progress the Companys expectation that it will have positive operating cash flows by the end of 2006 and contracted orders; new contracts to be entered into in the near future; the Companys future operating expense levels; and the Companys ability to achieve break-even operations on an operating cash flow basis during the remainder of 2006.



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



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



All dollar amounts in this Quarterly Report are expressed in Canadian dollars, unless otherwise indicated.





3



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PART 1  FINANCIAL INFORMATION

Item 1.   Financial Statements

The Companys financial statements for the three-month and six-month periods ended June 30, 2006 are included in response to Item 1 and have been compiled by the Companys management.  The financial statements should be read in conjunction with the Annual Report on  Form 10-KSB for the year ended December 31, 2005 and Managements Discussion and Analysis or Plan of Operations (Part 1, Item 2) and other financial information included elsewhere in this Form 10-QSB.

VISIPHOR CORPORATION

Consolidated Balance Sheets

(Expressed in Canadian dollars)



June 30, 2006 (Unaudited) and December 31, 2005

|                                                                           |                                                    |           |               |           |                    | 
|-------------------------------------------------------------------------- | -------------------------------------------------- | --------- | ------------- | --------- | ------------------ | 
|                                                                           |                                                    |           | June 30, 2006 |           | December 31,  2005
|Assets                                                                     |                                                    |           |               |          
|                                                                           |                                                    |           |               |           |                   
|Current assets:                                                            |                                                    |           |               |          
|                                                                           | Cash and cash equivalents                          | $         | 205,957       | $         | 790,091           
|                                                                           | Accounts receivable                                |           | 884,996       |           | 1,242,392         
|                                                                           | Accrued revenue receivable                         |           | 220,605       |           | 278,336           
|                                                                           | Prepaid expenses and deposit                       |           | 161,693       |           | 294,270           
|                                                                           |                                                    |           | 1,473,251     |           | 2,605,089         
|                                                                           |                                                    |           |               |           |                   
|Equipment, net (note 3)                                                    |                                                    | 488,877   |               | 529,735  
|                                                                           |                                                    |           |               |           |                   
|Goodwill (note 4)                                                          |                                                    | 1,684,462 |               | 1,684,462
|                                                                           |                                                    |           |               |          
|Deferred financing costs (note 5)                                          |                                                    | 30,000    |               | -        
|                                                                           |                                                    |           |               |          
|Other intangible assets (note 7)                                           |                                                    | 1,121,576 |               | 2,076,406
|                                                                           |                                                    |           |               |           |                   
|                                                                           |                                                    | $         | 4,798,166     | $         | 6,895,692         
|                                                                           |                                                    |           |               |          
|Liabilities and Shareholders Equity                                       |                                                    |           |               |          
|                                                                           |                                                    |           |               |           |                   
|Current liabilities:                                                       |                                                    |           |               |          
|                                                                           | Accounts payable and accrued liabilities (note 14) | $         | 1,801,951     | $         | 1,676,280         
|                                                                           | Loans payable (note 8)                             |           | 1,031,480     |           | 400,000           
|                                                                           | Deferred revenue                                   |           | 331,336       |           | 303,892           
|                                                                           | Capital lease obligations (note 9)                 |           | 74,727        |           | 62,981            
|                                                                           |                                                    |           | 3,239,494     |           | 2,443,153         
|                                                                           |                                                    |           |               |           |                   
|Long-term liabilities:                                                     |                                                    |           |               |          
|                                                                           | Capital lease obligations (note 9)                 |           | 102,223       |           | 123,093           
|                                                                           |                                                    |           |               |           |                   
|Shareholders equity:                                                      |                                                    |           |               |          
|                                                                           | Share capital (note 10)                            |           | 35,157,026    |           | 34,912,723        
|                                                                           | Share subscriptions (note 10)                      |           | -             |           | 67,500            
|                                                                           | Contributed surplus (note 11)                      |           | 3,141,682     |           | 2,639,702         
|                                                                           | Deficit                                            |           | (36,842,259)  |           | (33,290,479)      
|                                                                           |                                                    |           | 1,456,449     |           | 4,329,446         
|                                                                           |                                                    |           |               |           |                   
|                                                                           |                                                    | $         | 4,798,166     | $         | 6,895,692         
|Operations and going concern (note 1)                                      |                                                    |           |               |          
|Commitments (note 15)                                                      |                                                    |           |               |          
|Subsequent events (note 16)                                                |                                                    |           |               |          
|See accompanying notes to the unaudited consolidated financial statements.





4



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VISIPHOR CORPORATION

Consolidated Statements of Operations and Deficit

(Expressed in Canadian dollars)

(Unaudited)



For the three- and six-month periods ended June 30, 2006 and 2005



|                                                                           |                                  |                             |                           |              |           |              |           |              |           |  |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------- | -------------------------------- | --------------------------- | ------------------------- | ------------ | --------- | ------------ | --------- | ------------ | --------- |  |  |  |  |  |  |  |  | 
|                                                                           |                                  | Three months ended June 30, | Six months ended June 30,
|                                                                           |                                  |                             | 2006                      |              | 2005      |              | 2006      |              | 2005     
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Revenue:                                                                   |                                  |                             |                           |              |           |              |           |             
|                                                                           | Software sales                   | $                           | 84,039                    | $            | 733,726   | $            | 346,537   | $            | 965,084  
|                                                                           | Support and services             |                             | 1,291,916                 |              | 185,465   |              | 3,228,022 |              | 277,769  
|                                                                           | Other                            |                             | 112,873                   |              | 1,429     |              | 229,352   |              | 2,395    
|                                                                           |                                  |                             | 1,488,828                 |              | 920,620   |              | 3,803,911 |              | 1,245,248
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Expenses:                                                                  |                                  |                             |                           |              |           |              |           |             
|                                                                           | Administration                   |                             | 736,282                   |              | 826,173   |              | 1,399,185 |              | 1,280,004
|                                                                           | Amortization                     |                             | 450,875                   |              | 412,731   |              | 1,073,370 |              | 794,740  
|                                                                           | Bad debt                         |                             | 61,988                    |              | -         |              | 61,988    |              | -        
|                                                                           | Cost of materials                |                             | 77,005                    |              | -         |              | 164,910   |              | -        
|                                                                           | Interest                         |                             | 46,839                    |              | 7,006     |              | 74,015    |              | 11,568   
|                                                                           | Sales and marketing              |                             | 317,149                   |              | 426,790   |              | 898,229   |              | 856,466  
|                                                                           | Professional services            |                             | 1,335,694                 |              | 361,504   |              | 2,618,808 |              | 476,941  
|                                                                           | Technology development (note 12) |                             | 487,676                   |              | 448,707   |              | 962,724   |              | 842,010  
|                                                                           | Restructuring charge (note 13)   |                             | -                         |              | -         |              | 102,462   |              | -        
|                                                                           |                                  |                             | 3,513,508                 |              | 2,482,911 |              | 7,355,691 |              | 4,261,729
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Loss for the period                                                        |                                  | (2,024,680)                 |                           | (1,562,291)  |           | (3,551,780)  |           | (3,016,481) 
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Deficit, beginning of period                                               |                                  | (34,817,579)                |                           | (28,113,013) |           | (33,290,479) |           | (26,658,823)
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Deficit, end of period                                                     | $                                | (36,842,259)                | $                         | (29,675,304) | $         | (36,842,259) | $         | (29,675,304)
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Loss per share  basic and diluted                                         | $                                | (0.05)                      | $                         | (0.06)       | $         | (0.08)       | $         | (0.12)      
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|Weighted average number of shares outstanding                              |                                  | 43,075,588                  |                           | 26,262,638   |           | 42,876,693   |           | 24,839,367  
|                                                                           |                                  |                             |                           |              |           |              |           |              |          
|                                                                           |                                  |                             |                           |              |           |              |           |             
|See accompanying notes to the unaudited consolidated financial statements.







5



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VISIPHOR CORPORATION

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

(Unaudited)



For the three- and six-month periods ended June 30, 2006 and 2005



|                                                   |                                                |                                          |                           |           |             |           |             |           |             |          
|-------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------------------------- | --------- | ----------- | --------- | ----------- | --------- | ----------- | ---------
|                                                   |                                                | Three months ended June 30,              | Six months ended June 30,
|                                                   |                                                |                                          | 2006                      |           | 2005        |           | 2006        |           | 2005       
|                                                   |                                                |                                          |                           |           |             |           |             |           |            
|Cash provided by (used for):                       |                                                |                                          |                           |           |             |           |             |          
|                                                   |                                                |                                          |                           |           |             |           |             |           |            
|Operations:                                        |                                                |                                          |                           |           |             |           |             |          
|                                                   | Loss for the period                            | $                                        | (2,024,680)               | $         | (1,562,291) | $         | (3,551,780) | $         | (3,016,481)
|                                                   | Items not involving cash:                      |                                          |                           |           |             |           |             |           |            
|                                                   |                                                | Amortization                             |                           | 450,875   |             | 412,731   |             | 1,073,370 |             | 794,740  
|                                                   |                                                | Stock-based compensation                 |                           | 249,113   |             | 391,667   |             | 501,980   |             | 494,261  
|                                                   | Changes in non-cash operating working capital: |                                          |                           |           |             |           |             |          
|                                                   |                                                | Accounts receivable                      |                           | 820,295   |             | (294,822) |             | 357,396   |             | (504,938)
|                                                   |                                                | Accrued revenue receivable               |                           | 191,853   |             | 74,950    |             | 57,731    |             | (32,523) 
|                                                   |                                                | Prepaid expenses and deposit             |                           | 124,928   |             | (121,877) |             | 132,577   |             | (95,201) 
|                                                   |                                                | Accounts payable and accrued liabilities |                           | (153,818) |             | 113,034   |             | 125,671   |             | 60,109   
|                                                   |                                                | Deferred revenue                         |                           | (101,821) |             | (11,489)  |             | 27,444    |             | 511,814  
|                                                   |                                                |                                          | (443,255)                 |           | (998,097)   |           | (1,275,611) |           | (1,788,221)
|                                                   |                                                |                                          |                           |           |             |           |             |           |            
|Investments:                                       |                                                |                                          |                           |           |             |           |             |          
|                                                   | Purchase of equipment                          |                                          | (10,448)                  |           | (163,186)   |           | (55,071)    |           | (186,776)  
|                                                   |                                                |                                          |                           |           |             |           |             |           |            
|Financing:                                         |                                                |                                          |                           |           |             |           |             |          
|                                                   | Issuance of common shares for cash             |                                          | -                         |           | 1,929,263   |           | 202,500     |           | 2,789,488  
|                                                   | Share issuance costs                           |                                          | -                         |           | (128,975)   |           | (25,697)    |           | (201,746)  
|                                                   | Proceeds of loans payable                      |                                          | 641,480                   |           | -           |           | 941,480     |           | -          
|                                                   | Repayment of loan payable                      |                                          | (110,000)                 |           | -           |           | (310,000)   |           | -          
|                                                   | Capital lease repayments                       |                                          | (16,498)                  |           | (8,434)     |           | (31,735)    |           | (18,850)   
|                                                   | Deferred financing costs                       |                                          | (30,000)                  |           | -           |           | (30,000)    |           | -          
|                                                   |                                                |                                          | 484,982                   |           | 1,791,854   |           | 746,548     |           | 2,568,892  
|                                                   |                                                |                                          |                           |           |             |           |             |           |            
|Increase (decrease in cash)                        |                                                | 31,279                                   |                           | 630,571   |             | (584,134) |             | 593,895  
|                                                   |                                                |                                          |                           |           |             |           |             |          
|Cash and cash equivalents, beginning of the period |                                                | 174,678                                  |                           | 86,472    |             | 790,091   |             | 123,148  
|                                                   |                                                |                                          |                           |           |             |           |            
|Cash and cash equivalents, end of the period       | $                                              | 205,957                                  | $                         | 717,043   | $           | 205,957   | $           | 717,043  

See accompanying notes to the unaudited consolidated financial statements.





6



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VISIPHOR CORPORATION

Consolidated Statements of Cash Flows, Continued

(Expressed in Canadian dollars)

(Unaudited)



For the three- and six-month periods ended June 30, 2006 and 2005



|                                                                           |                                                                                      |                             |                           |   |         |   |        |   |        
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------- | ------------------------- | - | ------- | - | ------ | - | -------
|                                                                           |                                                                                      | Three months ended June 30, | Six months ended June 30,
|                                                                           |                                                                                      |                             | 2006                      |   | 2005    |   | 2006   |   | 2005   
|                                                                           |                                                                                      |                             |                           |   |         |   |        |   |        
|Supplementary information and disclosures:                                 |                                                                                      |                             |                           |   |         |   |        |  
|                                                                           | Interest paid                                                                        | $                           | 20,054                    | $ | 7,006   | $ | 34,750 | $ | 11,568 
|Non-cash investing and financing transactions not included in cash flows:  |                                                                                      |                             |                           |   |         |   |        |  
|                                                                           | Issuance of common shares on conversion of special warrants                          |                             | -                         |   | 781,801 |   | -      |   | 781,801
|                                                                           | Finders fee recorded on issuance of common shares on conversion of special warrants |                             | -                         |   | 33,709  |   | -      |   | 33,709 
|                                                                           | Issuance of warrants as financing costs                                              |                             | -                         |   | 51,548  |   | -      |   | 51,548 
|                                                                           | Issuance of common shares as financing costs                                         |                             | -                         |   | 24,000  |   | -      |   | 24,000 
|                                                                           | Equipment acquired under capital lease                                               |                             | 14,599                    |   | 43,027  |   | 22,611 |   | 65,937 
|                                                                           | Issuance of common shares for share subscriptions received in prior period           |                             | -                         |   | -       |   | 67,500 |   | -      
|See accompanying notes to the unaudited consolidated financial statements.















7



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VISIPHOR CORPORATION

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Three-and Six-Month Periods ended June 30, 2006 (Unaudited)





1.

Operations and going concern:

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

These financial statements have been prepared on a going concern basis, which includes the assumption that the Company will be able to realize its assets and settle its liabilities in the normal course of business.  For the period ended June 30, 2006, the Company incurred a loss from operations of $3,551,780 and a deficiency in six-month operating cash flow of $1,275,611. In addition, the Company has incurred significant operating losses and net utilization of cash in operations in all prior periods. At June 30, 2006, the Company had a working capital deficiency of $1,766,243. 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. There is substantial doubt that the Company will be successful at achieving these results. Failure to obtain the 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 consolidated balance sheet as of June 30, 2006, the consolidated statements of operations and deficit for the three- and six-month periods ended June 30, 2006 and June 30, 2005, and the consolidated statements of cash flows for the three- and six-month periods June 30, 2006 and June 30, 2005, of the Company and its subsidiaries (collectively, the Company) are unaudited. The Company's consolidated balance sheet as of December 31, 2005, was derived from audited financial statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements are included herein. Other than those discussed in the notes below, such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The Company's consolidated financial statements and notes are presented in accordance with generally accepted accounting principles in Canada for interim financial information and in accordance with the instructions for Form 10-QSB and Article 10 of Regulation S-X, and do not contain certain information included in the Company's consolidated audited annual financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the Company's consolidated audited financial statements and related notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission (the SEC) on March 29, 2006 (file no. 000-30090). The Company prepares its financial statements in accordance with accounting principles generally accepted in Canada and, except as set out in Note 19, also complies, in all material respects, with accounting principles generally accepted in the United States of America. The financial statements reflect the following significant accounting policies:

(a)

Basis of consolidation:



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Visiphor (US) Corporation since the date of incorporation (August 18, 2005) and Sunaptic Solutions Incorporated (Sunaptic), since the date of its acquisition on November 18, 2005. All material inter-company accounts and transactions have been eliminated.







8



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2.

Significant accounting policies contd:

(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.

(d)

Intangible assets:



Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost.  The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values.  The cost of internally developed intangible assets is capitalized only when technological feasibility has been established, the asset is clearly defined and costs can be reliably measured, management has both the intent and ability to produce or use the intangible asset, adequate technical and financial resources exist to complete the development of the intangible asset, and management can demonstrate the existence of an external market or internal need for the completed product or asset. Costs incurred to enhance the service potential of an intangible asset are capitalized as a betterment when the above criteria are met. No amounts have been capitalized to date in connection with internally developed intangible assets.



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



|                       |         
|---------------------- | --------
|Asset                  | Term    
|Briyante technology    | 3 years 
|Patents                | 3 years 
|License                | 3 years 
|Customer relationships | 3 years 
|Contract backlog       | 4 months



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





9



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2.    Significant accounting policies contd:

(e)

Revenue recognition:



(i)

Software sales revenue:

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

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

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

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

(ii)

Support and services revenue:

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

(f)

Use of estimates:

The preparation of financial statements in accordance with accounting principles generally accepted in Canada requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements.  Actual amounts may differ from these estimates.  Areas of significant estimate include, but are not limited to: valuation of accounts receivable; estimated useful lives of equipment and intangible assets; valuation of acquired intangible assets; valuation of stock-based awards; and the valuation allowance of future income tax assets.

(g)

Foreign currency:

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

(h)

Income taxes:

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





10



---



2.

Significant accounting policies contd:

(i)

Stock-based compensation:



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



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



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

(j)

Loss per share:

Loss per share is calculated using the weighted average number of shares outstanding during the reporting period.  This average includes common shares issued in a reporting period from their date of issuance.  Diluted per share amounts are calculated by the treasury stock method whereby the assumed proceeds of dilutive exercisable instruments are applied to repurchase common shares at the average market price for the period.  The resulting net issuance is included in the weighted average number for purposes of the diluted per share calculation.  As all outstanding shares and warrants are anti-dilutive, there is no difference between basic and diluted loss per share.



(k)

Goodwill



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



(l)

Long-Lived Assets Impairment



Long-term assets of the Company are reviewed when changes in circumstances suggest their carrying value has become impaired, pursuant to Canadian accounting guidance for long-lived asset impairment.  Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges).  If impairment is deemed to exist, the assets will be written down to fair value.



(m)

Comparative figures:



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





11



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3.

Equipment:



|                       |   |           |   |                          |   |               
|---------------------- | - | --------- | - | ------------------------ | - | --------------
|At June 30, 2006       |   | Cost      |   | Accumulated amortization |   | Net book value
|Computer hardware      | $ | 676,821   | $ | 460,191                  | $ | 216,630       
|Furniture and fixtures |   | 258,664   |   | 128,403                  |   | 130,261       
|Software               |   | 197,322   |   | 168,089                  |   | 29,233        
|Tradeshow equipment    |   | 64,897    |   | 58,539                   |   | 6,358         
|Leasehold improvements |   | 136,688   |   | 30,293                   |   | 106,395       
|                       | $ | 1,334,392 | $ | 845,515                  | $ | 488,877       



|                       |   |           |   |                          |   |               
|---------------------- | - | --------- | - | ------------------------ | - | --------------
|At December 31, 2005   |   | Cost      |   | Accumulated amortization |   | Net book value
|Computer hardware      | $ | 647,682   | $ | 405,852                  | $ | 241,830       
|Furniture and fixtures |   | 254,701   |   | 104,169                  |   | 150,532       
|Software               |   | 152,742   |   | 147,157                  |   | 5,585         
|Tradeshow equipment    |   | 64,897    |   | 53,957                   |   | 10,940        
|Leasehold improvements |   | 136,688   |   | 15,840                   |   | 120,848       
|                       | $ | 1,256,710 | $ | 726,975                  | $ | 529,735       



Equipment under capital lease:



Included in computer hardware is $210,808 (December 31, 2005: $188,197) of cost and accumulated amortization of $119,802 (December 31, 2005: $89,565) related to computer hardware under capital lease.



Included in furniture and fixtures is $103,107 (December 31, 2005: $103,107) of cost and accumulated amortization of $24,206 (December 31, 2005: $13,895) related to furniture and fixtures under capital lease.



4.

Acquisition of subsidiary



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



The acquisition of Sunaptic has been accounted for as a business combination with the Company identified as the acquirer. In accordance with Canadian generally accepted accounting principles, the shares issued were valued based on their market price at the time the number of shares to be issued was determined based on the acquisition agreement as, at that time, the Company concluded that its shares traded in an active and liquid market.  The fair value of the net assets acquired and consideration issued are as follows:





12



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4.

Acquisition of subsidiary (contd):



|                         |   |          
|------------------------ | - | ---------
|Current assets           | $ | 1,282,171
|Equipment                |   | 89,064   
|Current liabilities      |   | (619,815)
|Capital lease obligation |   | (13,249) 
|Contract backlog         |   | 269,000  
|Customer relationships   |   | 716,000  
|Goodwill                 |   | 1,684,462
|                         | $ | 3,407,633



|                  |   |          
|----------------- | - | ---------
|Cash              | $ | 2,720,000
|Shares issued     |   | 469,333  
|Acquisition costs |   | 218,300  
|                  | $ | 3,407,633



5.

Deferred financing costs



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

6.

Investment



On July 31, 2004, the Company entered into an agreement with a United Kingdom (UK) company to form a jointly owned company, Imagis Technologies UK Limited (Imagis UK). Imagis UK is the exclusive distributor of Visiphors software products in the United Kingdom and a non-exclusive distributor on a world-wide basis. The Company owns a 25% interest in Imagis UK, which it received as consideration for the grant of UK exclusivity, and the UK company has committed to provide £500,000 (approximately $1.25 million) over two years to support the initial start-up costs of Imagis UK in consideration for a 75% ownership interest in Imagis UK. The Companys initial investment in Imagis UK has been recorded at a nominal amount of $1 and is included in other assets (note 7). The Companys share of Imagis UKs income, if any, will be accounted for using the equity method. Imagis UKs operations are in the start-up phase, and there has been no significant gain or loss to date.  The Company is not required to make any advances to Imagis UK and has not made any advances to date.



7.

Other assets:



|                        |   |           |   |                          |   |               
|----------------------- | - | --------- | - | ------------------------ | - | --------------
|At June 30, 2006        |   | Cost      |   | Accumulated amortization |   | Net book value
|Contract backlog        | $ | 269,000   | $ | 269,000                  |   | -             
|Customer relationships  |   | 716,000   |   | 159,108                  |   | 556,892       
|Briyante Technology     |   | 3,972,552 |   | 3,407,869                |   | 564,683       
|Investment in Imagis UK |   | 1         |   | -                        |   | 1             
|                        | $ | 4,957,553 | $ | 3,835,977                | $ | 1,121,576     



|                        |   |           |   |                          |   |               
|----------------------- | - | --------- | - | ------------------------ | - | --------------
|At December 31, 2005    |   | Cost      |   | Accumulated amortization |   | Net book value
|Contract backlog        | $ | 269,000   | $ | 95,596                   | $ | 173,404       
|Customer relationships  |   | 716,000   |   | 39,774                   |   | 676,226       
|Briyante Technology     |   | 3,972,552 |   | 2,745,777                |   | 1,226,775     
|Investment in Imagis UK |   | 1         |   | -                        |   | 1             
|                        | $ | 4,957,553 | $ | 2,881,147                | $ | 2,076,406     







13



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8.

Loans payable (see note 16 Subsequent events)



Loans payable consists of three loans payable to arms-length parties that total $500,000, are payable on demand, unsecured and bear interest at the rate of 20% per annum.; and two loans payable to directors of the Company, one of which is also an officer of the Company, in the amount of US$400,000 (CDN$446,480 at June 30, 2006) and $85,000. The two loans are payable on demand, bear interest at the rate of 8% to June 30, 2006 and at 18% after that date and are secured by a charge over the Companys accounts receivable.



On July 14, 2006, the two loans from the directors were converted to promissory notes due July 14, 2007, bearing interest at 12% per annum, and secured by a second charge over the Companys accounts receivable. Accrued interest on the loans from directors of $2,936 is included in accounts payable and accrued liabilities.   The three loans to arms-length parties were repaid in full, including both principal and accrued interest on July 24, 2006.

9.

Capital lease obligations:



|                                               |               |          |                   |         
|---------------------------------------------- | ------------- | -------- | ----------------- | --------
|                                               | June 30, 2006 |          | December 31, 2005
|2006, including buy-out options                | $             | 49,352   | $                 | 89,373  
|2007, including buy-out options                |               | 98,059   |                   | 88,729  
|2008, including buy-out options                |               | 65,710   |                   | 52,205  
|                                               |               | 213,121  |                   | 230,307 
|Implicit interest portion (9% to 21%)          |               | (36,171) |                   | (43,844)
|                                               |               | 176,950  |                   | 186,074 
|Current portion of capital lease obligations   |               | 74,727   |                   | 62,981  
|                                               |               |          |                   |         
|Long-term portion of capital lease obligations | $             | 102,223  | $                 | 123,093 



10.

Share capital:

(a)

Authorized:

100,000,000 common shares without par value

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

(b)

Issued

|                                           |                    |            |            |          
|------------------------------------------ | ------------------ | ---------- | ---------- | ---------
|                                           | Number of shares   |            | Amount    
|Balance, December 31, 2004                 | 20,795,281         | $          | 26,230,920
|Issued during year for cash:               |                    |            |           
|                                           | Private Placements | 16,320,819 |            | 6,847,840
|                                           | Options exercised  | 211,895    |            | 86,630   
|                                           | Warrants exercised | 2,887,665  |            | 1,218,576
|Issued for acquisition of subsidiary       | 1,066,666          |            | 469,333   
|Special Warrants exercised                 | 1,007,151          |            | 781,801   
|Issuance of shares as share issuance costs | 186,111            |            | 79,000    
|Fair value of options exercised            | -                  |            | 60,458    
|Share issuance costs                       | -                  |            | (861,835) 
|                                           |                    |            |           
|Balance, December 31, 2005                 | 42,475,588         |            | 34,912,723
|                                           |                    |            |           
|Issued during the period for cash:         |                    |            |           
|                                           | Private Placements | 600,000    |            | 270,000  
|Share issuance costs                       | -                  |            | (25,697)  
|                                           |                    |            |           
|Balance, June 30, 2006                     | 43,075,588         | $          | 35,157,026







14



---

10.   Share Capital (contd):

(c)

Warrants:

At December 31, 2005, and June 30, 2006, the following warrants were outstanding:



|                  |         |           |           |               |                |                  
|----------------- | ------- | --------- | --------- | ------------- | -------------- | -----------------
|December 31, 2005 | Granted | Exercised | Expired   | June 30, 2006 | Exercise price | Expiry date      
|3,882,875         | -       | -         | 3,882,875 | -             | $0.75          | April 28, 2006   
|226,584           | -       | -         | 226,584   | -             | $0.75          | April 29, 2006   
|86,700            | -       | -         | 86,700    | -             | $0.75          | May 20, 2006     
|2,380,000         | -       | -         | 2,380,000 | -             | $0.55          | May 24, 2006     
|187,500           | -       | -         | -         | 187,500       | $0.50          | November 29, 2006
|4,481,522         | -       | -         | -         | 4,481,522     | $0.50          | November 29, 2006
|1,786,999         | -       | -         | -         | 1,786,999     | $0.50          | November 30, 2006
|125,000           | -       | -         | -         | 125,000       | $0.50          | December 13, 2006
|946,166           | -       | -         | -         | 946,166       | $0.55          | December 31, 2006
|2,557,785         | -       | -         | -         | 2,557,785     | $0.55          | January 11, 2007 
|-                 | 300,000 | -         | -         | 300,000       | $0.50          | March 2, 2007    
|16,661,131        | 300,000 | -         | 6,576,159 | 10,384,972    |                |                  



(d)

Options:



The Company has a stock option plan that was most recently approved at the Companys annual general meeting of shareholders on May 8, 2006.  Under the terms of the plan, the Company may reserve up to 8,615,118 common shares for issuance under the plan.  The Company has granted stock options under the plan to certain employees, directors, advisors and consultants.  These options are granted for services provided to the Company.  All existing options granted prior to November 25, 2003 expire five years from the date of grant.  All options granted subsequent to November 25, 2003, expire three years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options, along with the Companys outstanding shares, were consolidated on a 1 new option for 4.5 old basis. During the year ended December 31, 2004, all options outstanding as at December 31, 2003 were repriced to $0.78. For options that were granted prior to the adoption of the fair value based method, the fair value of the award was remeasured at the date of modification, and the full amount of that fair value has been recorded as compensation cost to the extent that vesting has occurred on or before June 30, 2006.



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



On April 10, 2006, the Company re-priced 1,191,562 common share purchase options granted to employees to $0.45 per share from various prices ranging from $0.47 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged. On May 8, 2006, the Company also received shareholder approval and re-priced 2,535,001 common share purchase options granted to directors and officers to $0.45 per share from various prices ranging from $0.55 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged.



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









15



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10.

Share Capital (contd):



(d)

Options (contd):



A summary of the status of the Companys stock options at June 30, 2006 and December 31, 2005 (giving retroactive effect to the 2003 share consolidation), and changes during the periods ended on those dates are presented below:



|                                 |                   |                   |                  |        |           |           |                |     
|-------------------------------- | ----------------- | ----------------- | ---------------- | ------ | --------- | --------- | -------------- | ----
|                                 | June 30, 2006     | December 31, 2005
|                                 | Weighted average  |                   | Weighted average
|                                 | Shares            |                   | Exercise Price   |        | Shares    |           | Exercise Price
|Outstanding, beginning of period | 5,415,500         | $                 | 0.67             |        | 3,092,334 | $         | 0.61          
|                                 | Repriced to $0.45 | -                 |                  | (0.18) |           | -         |                | -   
|                                 | Granted           | 1,656,500         |                  | 0.41   |           | 2,848,396 |                | 0.72
|                                 | Exercised         | -                 |                  | -      |           | (211,895) |                | 0.41
|                                 | Cancelled         | (603,333)         |                  | 0.58   |           | (313,335) |                | 0.61
|Outstanding, end of period       | 6,468,667         | $                 | 0.43             |        | 5,415,500 | $         | 0.67          



The following table summarizes information about stock options outstanding at June 30, 2006:



|               |                                  |                                     |      |                                 |                                   |           |                                 |       |  |  |  |  |  |  |  | 
|-------------- | -------------------------------- | ----------------------------------- | ---- | ------------------------------- | --------------------------------- | --------- | ------------------------------- | ----- |  |  |  |  |  |  |  | 
|               |                                  | Options Outstanding                 |      | Options exercisable            
|Exercise price | Number
outstanding
June 30, 2006 | Weighted remaining contractual life |      | Weighted average exercise price | Number exercisable, June 30, 2006 |           | Weighted average exercise price
|               |                                  |                                     |      |                                 |                                   |           |                                 |      
|               | $0.17                            | 10,000                              | 2.99 |                                 | $0.17                             | 3,334     |                                 | $0.17
|               | $0.19                            | 15,000                              | 2.98 |                                 | $0.19                             | 5,000     |                                 | $0.19
|               | $0.21                            | 42,000                              | 2.96 |                                 | $0.21                             | 14,000    |                                 | $0.21
|               | $0.25                            | 60,000                              | 2.91 |                                 | $0.25                             | 20,000    |                                 | $0.25
|               | $0.26                            | 50,000                              | 2.90 |                                 | $0.26                             | 16,667    |                                 | $0.26
|               | $0.29                            | 27,000                              | 2.63 |                                 | $0.29                             | 9,001     |                                 | $0.29
|               | $0.31                            | 75,000                              | 2.74 |                                 | $0.31                             | 25,000    |                                 | $0.31
|               | $0.33                            | 81,666                              | 1.68 |                                 | $0.33                             | 31,666    |                                 | $0.33
|               | $0.34                            | 38,333                              | 2.18 |                                 | $0.34                             | 15,001    |                                 | $0.34
|               | $0.35                            | 40,333                              | 1.84 |                                 | $0.35                             | 17,666    |                                 | $0.35
|               | $0.36                            | 10,072                              | 1.63 |                                 | $0.36                             | 5,778     |                                 | $0.36
|               | $0.39                            | 112,000                             | 1.81 |                                 | $0.39                             | 72,334    |                                 | $0.39
|               | $0.40                            | 844,700                             | 1.14 |                                 | $0.40                             | 538,521   |                                 | $0.40
|               | $0.41                            | 10,000                              | 0.98 |                                 | $0.41                             | 10,000    |                                 | $0.41
|               | $0.43                            | 25,500                              | 2.30 |                                 | $0.43                             | 8,834     |                                 | $0.43
|               | $0.44                            | 15,000                              | 2.36 |                                 | $0.44                             | 5,000     |                                 | $0.44
|               | $0.45                            | 5,012,063                           | 1.71 |                                 | $0.45                             | 3,328,250 |                                 | $0.45
|              
|               |                                  | 6,468,667                           | 1.69 |                                 | $0.43                             | 4,126,052 |                                 | $0.44





The weighted average fair value of employee stock options granted during the period ended June 30, 2006 was $0.41 (2005-$0.75) per share purchase option. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 59% (2005-56%); risk free interest rate - 5% (2005-5%); option term - 3 years (2005-3 years); and dividend yield  nil (2005-nil).  The total compensation expense of $501,980 (2005-$494,261) has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.











16



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10.

Share Capital  (contd):



(e)

Agents options



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



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



A summary of the status of the Companys Agents Options at June 30, 2006 and December 31, 2005 and changes during the periods ended on those dates is presented below:



|                                 |                  |                   |                  |   |         |         |                |     
|-------------------------------- | ---------------- | ----------------- | ---------------- | - | ------- | ------- | -------------- | ----
|                                 | June 30, 2006    | December 31, 2005
|                                 | Weighted average |                   | Weighted average
|                                 | Shares           |                   | Exercise Price   |   | Shares  |         | Exercise Price
|Outstanding, beginning of period | 907,557          | $                 | 0.45             |   | -       | $       | -             
|                                 | Granted          | -                 |                  | - |         | 907,557 |                | 0.45
|                                 | Exercised        | -                 |                  | - |         | -       |                | -   
|                                 | Cancelled        | -                 |                  | - |         | -       |                | -   
|Outstanding, end of period       | 907,557          | $                 | 0.45             |   | 907,557 | $       | 0.45          



The following table summarizes information about agents stock options outstanding at June 30, 2006:



|                                    |                                  |                                     |                                 |                                      |                                     |                                
|----------------------------------- | -------------------------------- | ----------------------------------- | ------------------------------- | ------------------------------------ | ----------------------------------- | -------------------------------
|Options outstanding and exercisable
|Exercise price                      | Number outstanding June 30, 2006 | Weighted remaining contractual life | Weighted average exercise price | Number outstanding December 31, 2005 | Weighted remaining contractual life | Weighted average exercise price
|$0.45                               | 907,557                          | 2.33                                | $0.45                           | 907,557                              | 2.83                                | $0.45                          
|                                    | 907,557                          | 2.33                                | $0.45                           | 907,557                              | 2.83                                | $0.45                          



The weighted average fair value of agents stock options granted during the year ended December 31, 2005 was $0.16 per share purchase option. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 66%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil.  The total value of $142,001 has been allocated to share issuance costs and credited to contributed surplus.





17



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11.

Contributed surplus



|                                        |   |           |        | 
|--------------------------------------- | - | --------- | ------ | 
|                                        |   |           | Amount
|Balance, December 31, 2004              | $ | 1,648,402
|Value of options expensed               |   | 858,209  
|Value of options exercised              |   | (60,458) 
|Value of brokers options               |   | 142,001  
|Value of warrants issued as commissions |   | 51,548   
|                                        |   |           |        | 
|Balance, December 31, 2005              |   | 2,639,702
|                                        |   |           |        | 
|Value of options expensed               |   | 501,980  
|                                        |   |           |        | 
|Balance, June 30, 2006                  | $ | 3,141,682



12.

Technology development



Included in technology development expenses are net research and development costs of $99,027, consisting of incurred costs of $198,054 less a contribution of $99,027 from the National Research Council.



13.

Restructuring charge



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

14.

Related-party transactions not disclosed elsewhere are as follows:



At June 30, 2006, accounts payable and accrued liabilities included $553,448 (at December 31, 2005 - $400,539) owed by the Company to directors, officers and companies controlled by directors and officers of the Company. These amounts are unsecured, non-interest bearing and payable on demand and consist of unpaid fees and expenses.

15.

Commitments:

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



|     |   |           |   |          |   |          
|---- | - | --------- | - | -------- | - | ---------
|Year |   | Equipment |   | Building |   | Total    
|2006 | $ | 35,614    | $ | 159,563  | $ | 195,177  
|2007 |   | 80,400    |   | 286,905  |   | 367,305  
|2008 |   | 60,936    |   | 265,904  |   | 326,840  
|2009 |   | -         |   | 202,900  |   | 202,900  
|     | $ | 176,950   | $ | 915,272  | $ | 1,092,222



The Company leases its head office in Burnaby, B.C. under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Company also leases 5,938 square feet of office space in Victoria, B.C. with monthly rent of $5,109 which expires on September 30, 2006 and subleases 4,128 square feet of office space in Vancouver, B.C. with monthly rent of $7,000 which expires on September 29, 2008.





18



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16.

Subsequent events (see note 8 Loans payable)



On July 14, 2006, Visiphor completed a private placement of an 8% convertible secured debenture in the principal amount of $1,600,000 maturing on December 15, 2009, convertible, subject to certain adjustments, at the price of $0.45 per common share, and of a performance warrant to purchase up to 2,350,000 common shares in the capital of the Company at a price of $0.30 per common share.  The warrant is only exercisable in the event that the 30-day weighted average trading price of the Companys common shares has not exceeded $0.45 in at least one 30-day trading period on or before July 14, 2008. The warrant is exercisable at any time after July 13, 2008 and prior to 4:30 p.m. EST on December 15, 2009, provided that the above event has not occurred. The common shares underlying the offering will have a four-month hold period that expires on November 13, 2006. Under the terms of the agreement, the investor will be appointing a nominee to the Visiphor Board of Directors.



In connection with the offering, two directors, of which one is an officer of the Company, have agreed to postpone and subordinate outstanding bridge loans to the Company in the amounts of $85,000 and US$400,000, respectively. As consideration, the Company issued a promissory note secured by a charge over the accounts receivable of the Company to each of the parties and the interest rate of such notes is 12%.

17.

Financial instruments and risk management:

(a)

Fair values:



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





19



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18.

Segmented information:



The Company operates in two segments, being the development and sale of software applications and solutions and related services and the other being the provision of one business integration consulting services. Management of the Company makes decisions about allocating resources based on these two operating segments.  Prior to November 18, 2005, the Company operated in a single segment, being the development and sale of software applications and solutions.

As at June 30, 2006

|                                          |   |                |   |                     |   |            
|----------------------------------------- | - | -------------- | - | ------------------- | - | -----------
|                                          |   | Software Sales |   | Consulting Services |   | Total      
|                                          |   |                |   |                     |   |            
|Revenue                                   | $ | 1,025,449      | $ | 2,778,462           | $ | 3,803,911  
|                                          |   |                |   |                     |   |            
|Operating Expenses                        |   | 4,064,322      |   | 2,143,984           |   | 6,208,306  
|Interest Expense                          |   | 72,274         |   | 1,741               |   | 74,015     
|Amortization of Capital Assets            |   | 747,352        |   | 33,280              |   | 780,632    
|Amortization of Intangibles               |   | -              |   | 292,738             |   | 292,738    
|Total Expenses                            |   | 4,883,948      |   | 2,471,743           |   | 7,355,691  
|                                          |   |                |   |                     |   |            
|Net Earnings (Loss)                       | $ | (3,858,499)    | $ | 306,719             | $ | (3,551,780)
|                                          |   |                |   |                     |   |            
|Total Assets                              | $ | 1,811,687      | $ | 2,986,479           | $ | 4,798,166  
|Intangible Assets                         |   |                |   |                     |   |            
|Goodwill                                  | $ | -              | $ | 1,684,462           | $ | 1,684,462  
|Intellectual Property                     | $ | 564,684        | $ | -                   | $ | 564,684    
|Customer Relationships                    | $ | -              | $ | 556,892             | $ | 556,892    
|Equipment, net                            | $ | 385,832        | $ | 103,045             | $ | 488,877    
|Non-cash Stock-based Compensation expense | $ | 398,655        | $ | 103,325             | $ | 501,980    
|Additions to Capital Assets               | $ | 30,836         | $ | 46,846              | $ | 77,682     
|                                          |   |                |   |                     |   |            
|                                          |   |                |   |                     |   |            



As at December 31, 2005

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





20



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18.

Segmented information (contd):



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



|               |  |  |   |           |   |          
|-------------- |  |  | - | --------- | - | ---------
|               |  |  |   | 2006      |   | 2005     
|Canada         |  |  | $ | 2,512,625 | $ | 45,879   
|United States  |  |  |   | 1,277,417 |   | 1,175,955
|United Kingdom |  |  |   | 13,869    |   | 23,232   
|Other          |  |  |   | -         |   | 182      
|               |  |  | $ | 3,803,911 | $ | 1,245,248



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

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



|           |  |  |   |         |   |        
|---------- |  |  | - | ------- | - | -------
|           |  |  |   | 2006    |   | 2005   
|Customer A |  |  | $ | 537,987 | $ | -      
|Customer B |  |  |   | 417,793 |   | 273,632
|Customer C |  |  |   | 414,670 |   | -      
|Customer D |  |  |   | 260,145 |   | 497,666



19.

United States generally accepted accounting principles:

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

(a)

Stock-based compensation:



As described in note 10, the Company has granted stock options to certain employees, directors, advisors, and consultants.  These options are granted for services provided to the Company.  For Canadian GAAP purposes, the Company accounts for all stock-based payments to non-employees made subsequent to January 1, 2002 and to employees made subsequent to January 1, 2003 using the fair value based method.



Under US GAAP

·

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

·

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



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



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

19.

United States generally accepted accounting principles contd:





21



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



In addition, during the years ended December 31, 2001 and 2002, the Company repriced certain options and consequently, in accordance with the intrinsic value method under U.S. GAAP, such options are accounted for as variable options and net increases in the underlying common shares market price since the repricing date are recognized as compensation cost. No such options remain outstanding.

(b)

Beneficial conversion option:



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

(c)

Warrant issuances for services:

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

(d)

Comprehensive loss:

Comprehensive loss equals net loss for all periods presented.

The effect of these accounting differences on contributed surplus, deficit, net loss, and net loss per share are as follows:

U.S. GAAP

|                                        |   |           |   |               |   |                  
|--------------------------------------- | - | --------- | - | ------------- | - | -----------------
|                                        |   |           |   | June 30, 2006 |   | December 31, 2005
|Contributed Surplus, Canadian GAAP      | $ | 3,141,682 | $ | 2,639,702    
|Cumulative stock based compensation (a) |   |           |   | 1,380,198     |   | 1,380,198        
|Beneficial conversion options (b)       |   |           |   | 208,200       |   | 208,200          
|Warrants issued for services (c)        |   |           |   | 722,000       |   | 722,000          
|                                        |   |           |   |               |   |                  
|Additional paid in capital, U.S. GAAP   |   |           | $ | 5,452,080     | $ | 4,950,100        



|                                                               |                                                                                                |              |   |               |   |                  
|-------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------ | - | ------------- | - | -----------------
|                                                               |                                                                                                |              |   | June 30, 2006 |   | December 31, 2005
|Deficit, Canadian GAAP                                         | $                                                                                              | (36,842,259) | $ | (33,290,479) 
|Cumulative stock based compensation (a)                        |                                                                                                |              |   | (1,380,198)   |   | (1,380,198)      
|Beneficial conversion options (b)                              |                                                                                                |              |   | (208,200)     |   | (208,200)        
|Warrants issued for services (c)                               |                                                                                                |              |   | (722,000)     |   | (722,000)        
|Deficit, U.S. GAAP                                             |                                                                                                |              | $ | (39,152,657)  | $ | (35,413,477)     
|                                                               | 6 months ended June 30,   6 months ended June 30,
2006                                    2005
|Net Loss for the period, Canadian and U.S. GAAP                |                                                                                                |              | $ | (3,551,780)   | $ | (3,016,481)      
|Net Loss per share, Canadian and U.S. GAAP  basic and diluted | $                                                                                              | (0.08)       | $ | (0.12)       







22



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



About Visiphor

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



Visiphor provides solutions for:



·

Enterprise Information Integration (EII);

·

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

·

Enterprise Application Integration (EAI).



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



The Company develops and markets software products that simplify, accelerate, and economize the process of connecting existing, disparate databases. The Companys technologies enable information owners to share data securely with internal line of business applications and external stakeholders and business partners using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image.This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.



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



Overview

The Companys Business

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

Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and time and materials contracts for the provision of specific services.  When a software product requires significant production, modification or customization 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. When software is sold under contractual arrangements that include multiple elements, the elements are accounted for separately if vendor specific objective evidence of fair value exists for all undelivered elements. Standalone services contracts revenues are recognized as the services are delivered.

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





23



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

Critical Accounting Polices

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

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

Revenue recognition

(i)

Software sales revenue:

The Company recognizes revenue consistent with the SEC Staff Accounting Bulletin No. 104 and Statement of Position 97-2, Software Revenue Recognition. In accordance with this statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured.  Cash received in advance of meeting the revenue recognition criteria is recorded as deferred revenue.



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

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

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

(ii)

Support and services revenue:

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

Intangible Assets:

Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost.  The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values.  The cost of internally developed intangible assets is capitalized only when technological feasibility has been established, the asset is clearly defined and costs can be reliably measured, management has both the intent and ability to produce or use the intangible asset, adequate technical and financial resources exist to complete the development, and management can demonstrate the existence of an external market or internal need for the completed product or asset. Costs incurred to enhance the service potential of an intangible asset are capitalized as a betterment when the above criteria are met. No amounts have been capitalized to date in connection with internally developed intangible assets





24



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



Asset

Term



Briyante technology

3 years

Patents

3 years

License

3 years

Customer relationships

3 years

Contract backlog

4 months





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



Goodwill



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

Use of estimates

The preparation of financial statements in accordance with accounting principles generally accepted in Canada requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements.  Actual amounts may differ from these estimates.  Areas of significant estimate include, but are not limited to: valuation of accounts receivable; estimated useful lives of equipment and intangible assets; valuation of acquired intangible assets; valuation of stock-based awards, and the valuation allowance of future income tax assets.

Stock-based compensation

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



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



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

.





25



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Results of Operations for the three- and six-month periods ended June 30, 2006 as compared to the three- and six-month periods ended June 30, 2005:

Management believes that presenting results of operations that exclude certain non-cash expenses and certain one-time unusual expenses in addition to results of operations that include these expenses can be helpful to investors in understanding the Company's results of operations. By excluding such items, the Company believes investors are provided with a more accurate period-to-period comparison and information regarding the cash expenditures in each expense category.  Non-cash expenses that are excluded in various places below include amortization amounts that the Company has incurred primarily as a result of its acquisition of certain intellectual property of Briyante and the intangibles acquired through the acquisition of Sunaptic, as well as stock-based compensation that does not require cash payments, and one-time unusual expenses.

Revenues

Visiphors total revenues for the three-month period ended June 30, 2006 were $1,488,828, which is 62% greater than the prior year level of $920,620. The year to date revenues increased 205% to $3,803,911 over the prior year level of $1,245,248. The increase is due to increased consulting services revenues as a result of the acquisition of Sunaptic in November of 2005 and increased services revenues from the installation of software products sold in prior periods. Revenues from the Companys software products were $84,039 for the current three-month period as compared to $733,726 for 2005, a decrease of 89%. Software revenues were $346,537 for the year compared to the prior years level of $965,084 a decrease of 64%. The decreased software revenues were due to delays in customer delivery acceptance schedules and are expected to increase in subsequent periods as the deliveries are completed.



Support and services revenues for the three-month period ended June 30, 2006 were 7 times greater at $1,291,916 compared to $185,465 for 2005. Support and services revenues year to date were over 11.5 times higher at $3,228,022 than the prior year level of $277,769. The increase consisted of $2,778,462 in consulting services revenue earned as a result of the acquisition of Sunaptic that took place on November 18, 2005, with the balance consisting of the delivery of services associated with software sales from prior periods.



As of August 10, 2006, Visiphor had work in process and contracted orders totalling approximately $2.9 million that are not recorded in the financial statements as at June 30, 2006. Consequently, Visiphor expects that revenues will increase in the subsequent quarters of 2006 when compared to revenues of 2005 and will continue to increase as the Companys current and newly developed products and solutions continue to gain increasing customer acceptance. There can be no assurance, however, that such future revenue will materialize or if such revenue does materialize that it will be significant.



Other revenues for the three-month period ended June 30, 2006 were $112,873, whereas other revenues of $1,429 were earned in the prior year. Other revenues year to date was $229,352 compared to $2,395 for 2005. The increase was primarily due to revenue earned in 2006 of $166,512 through a contract where a sub-contractor is providing the services, and $47,400 from the resale of third party software.  The costs associated with these revenues are included in cost of materials. The balance of the revenue in both years was earned through interest revenue.

Operating Expenses

Operating expenses totalled $3,513,508 for the three-month period ended June 30, 2006, which is 42% greater than the 2005 operating expenses of $2,482,911. The 2006 expenses include stock-based compensation of $249,113 due to the increase of Visiphors employee stock option plan and $450,875 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition and $59,666 in amortization of customer relationships relating to the Sunaptic acquisition. Excluding these non-cash charges, the operating expenses for the three months ended June 30, 2006 total $2,813,520. The 2005 expenses include stock-based compensation of $391,667 and amortization of $412,731, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these expenses, the operating expenses for 2005 were $1,678,513. Excluding the non-cash charges previously mentioned, the increase of $1,135,007 between 2006 and 2005 represents a 68% increase in operating expenses over the prior period. The increased costs were primarily due to $1,037,916 in additional costs from the addition of the consulting services division through the Sunaptic acquisition, which is included in the professional services department.



Operating expenses totalled $7,355,691 for the six-month period ended June 30, 2006, which is 73% greater than the 2005 operating expenses of $4,261,729. The 2006 expenses include stock-based compensation of $501,980 due to Visiphors employee stock option plan and $1,073,370 in amortization, which includes $645,426 in amortization costs for the intellectual property acquired in the Briyante acquisition and $292,738 in amortization of customer relationships relating to the Sunaptic acquisition. Excluding these non-cash charges, the one-time restructuring charge of $102,462 relating to the Sunaptic acquisition, the operating expenses for the six months ended June 30, 2006 total $5,677,879. The 2005 expenses include stock-based compensation of $494,261 and amortization of





26



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$794,740. Excluding these items, the operating expenses for the six months ended June 30, 2005 were $2,972,729. Excluding these non-cash charges, the difference of $2,705,150 between 2006 and 2005 represents a 91% increase in operating expenses over the prior year. The increased costs include $2,145,725 due to the addition of the consulting services division through the Sunaptic acquisition, which is included in the professional services department. Sales and marketing costs increased by $41,763 primarily due to an increase in sales and marketing staff.  Administration costs increased $119,000 due to the addition of an investor relations program that was initiated in the second quarter of 2005, and due to an overall increase in the Companys staff. There were costs of materials of $165,000 in 2006 relating to a sub-contractor providing services for a specific project that was completed in the second quarter of 2006 and the resale of third party software, bad debts of $62,000 relating to a support contract with one customer, and an increase in interest of $62,000 relating to the outstanding loans in 2006



Staff levels increased from 35 at January 1, 2005 to 100 at December 31, 2005. In January 2006, through the integration process with Sunaptic, the Company was able to streamline its operations and achieve operational efficiencies that allowed it to eliminate 16 employee positions. The Company recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions. The company continued to improve its operational efficiencies during the second quarter of 2006, including closing its Victoria, B.C. office and consolidating the Victoria operations into the Burnaby, B.C. head office.  The staff level at August 10, 2006 is 74 and the current operating cash expense level is approximately $700,000 per month or $8.5 million per year, and is expected to increase as additional resources are required to meet sales demands.

Administration

Administrative costs for the three-month period ended June 30, 2006 were $736,282, which is 11% lower than for 2005 of $826,173. These costs include stock-based compensation charges of $121,587 in 2006 and $201,740 in 2005. Excluding these charges, the administrative costs were $614,695 in 2006 versus $624,433 in 2005, which represents a 2% decrease. Administrative costs include staff salaries and related benefits and travel, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.



Administrative costs for the six months ended June 30, 2006 were $1,399,185, which is 9% higher than administrative costs for 2005 of $1,280,004. These costs include stock-based compensation charges of $182,806 in 2006 and $270,122 in 2005. Excluding these charges, the administrative costs were $1,216,379 in 2006 versus $1,009,882 in 2005, which represents a 20% increase.  The increase was primarily due to the addition of an investor relations program in the second quarter of 2005 that was expanded in 2006 and general operating expenses associated with an overall growth in the Companys staff. The current level of administrative cost is expected to remain the same for the balance of 2006.

Bad Debt

Bad debt for both the three- and six-month periods ended June 30, 2006 was $62,000 and relates to a support contract defaulted upon by one customer. There was no bad debt expense in 2005.

Cost of Materials

Cost of materials for the three-month period ended June 30, 2006 were $77,005 and $nil in 2005. This cost was for sub-contracted services required for the security assessments for the King County RAIN project. The cost for the six months ended June 30, 2006 were $164,910 and $nil in 2005. This cost includes $121,000 for sub-contracted services required for the security assessments for the King County RAIN project which has been completed and $43,901 for software purchased for resale to a customer.

Interest and Amortization

The increase in interest expense of $39,833 for the three-month period ended June 30, 2006 over the three-month period ended June 30, 2005 is due to interest on the loans payable. The amortization expense for 2006 is $450,875 compared to $412,731 in 2005. The increase is due to the amortization of intangibles acquired with the Sunaptic acquisition.



The increase in interest expense of $62,447 for the six months ended June 30, 2006 over the six months ended June 30, 2005 is due to interest on the loans payable. The amortization expense for 2006 is $1,073,370 compared to $794,740 for 2005. The 35% increase is due to the intangibles acquired with the Sunaptic acquisition.

Sales and Marketing

Sales and marketing expenses for the three-month period ended June 30, 2006 were $317,149 compared to $426,790 for 2005, which is a 26% reduction. These costs include stock-based compensation charges of $28,455 in 2006 and $46,839 in 2005. Excluding these charges, the sales and marketing expenses were $288,694 in 2006 verses $379,951 in 2005 which represents a 24% reduction. The decrease in costs is due to the reduction in the number of marketing





27



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staff.  Sales and marketing costs are expected to increase in future periods as the Company expands its efforts to increase revenues of both products and services.



Sales and marketing expenses for the six-month period ended June 30, 2006 were $898,229 and were 5% greater than in 2005 of $856,466. These costs include a stock-based compensation charge of $48,941 in 2006 and $65,212 in 2005. Excluding this charge, the sales and marketing costs were $849,288 in 2006 verses $791,254 in 2005, which represents a 7% increase. Visiphor hired additional sales staff on a short-term basis in the United States at the beginning of 2006 in an effort to address some specific sales opportunities. The marketing department reduced the number of employees in 2006.

Professional Services

Costs for the professional services group for the three-month period ended June 30, 2006 were $1,335,694, which is 269% greater than $361,504 in 2005. These costs include a stock-based compensation charge of $11,376 in 2006 and $58,166 in 2005. Excluding this charge, the professional services costs were $1,324,318 in 2006 and $303,338 for 2005 which is an increase of 337%. The increased costs were due to $1,037,916 in costs resulting from the addition of the consulting services division through the Sunaptic acquisition which is included in the professional services department.



Costs for the professional services group for the six-month period ended June 30, 2006 were $2,618,808 which is 5.5 times greater than costs for the professional services group of $476,941 in 2005. These costs include a stock-based compensation charge of $147,806 in 2006 and $62,451 in 2005. Excluding this charge, the professional services costs were $2,471,002 in 2006 and $414,490 in 2005, an increase of $2,056,512 or 500%. The increased costs include $2,145,725 due to the addition of the consulting services division through the Sunaptic acquisition. There was some staff reduction in the non-consulting area of professional services.



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

Technology Development

The technology development expenses for the three-month period ended June 30, 2006 were $487,676, which is 9% greater than the 2005 costs of $448,707. These costs include stock-based compensation charges of $87,695 in 2006 and $84,922 in 2005. Excluding these charges, the technology development expenses were $399,981 in 2006 verses $363,785 in 2005, which is an increase of 10%. This increase was primarily due to hiring additional staff and the associated costs required to maintain the Companys enhancement of existing products and to develop new products. Management expects that the increased revenues achieved as a result of the sale of products will more than offset the increased costs. Management believes that continuing to invest in technology advancements is crucial to the future success of Visiphor, and expects that costs will continue to increase in future periods. Included in technology development expenses for the six month period ended June 30, 2006 are net research and development costs of $73,000, consisting of incurred costs of $146,000 less a contribution of $73,000 from the National Research Council. The cost recoveries are expected to be approximately $225,000 by December 31, 2006.



The technology development expenses for the six-month period ended June 30, 2006 were $962,724, which is 14% higher than the 2005 costs of $842,010. These costs include a stock-based compensation charge of $122,427 in 2006 and $96,474 in 2005. Excluding this charge, the costs were $840,297 in 2006 verses $745,536 in 2005, which represents a 13% increase. Included in technology development expenses for the period ended June 30, 2006 are net research and development costs recovery of $98,500. The increase was primarily due to hiring additional staff and the associated costs required to maintain our enhancement of existing products and new product development.

Technical Services

The technical services department was eliminated in 2006 and the services provided have been reallocated to the professional services and technology development departments. The 2005 costs for the technical services group have been reallocated for comparative purposes.















28



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Restructuring Charge

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

Net Loss for the Period

The Company's net loss on a monthly basis for the second quarter is approximately $675,000.  As described above, management believes that excluding certain non-cash expenses and certain one-time unusual expenses can be helpful to investors in better understanding the Company's results of operations.  When excluding such expenses, the Company's loss on a cash-operating expense basis is approximately $440,000 per month for the second quarter. Due to operational efficiencies achieved during the second quarter, but not fully realized until July of 2006, the Companys monthly loss on a cash-operating basis is currently $150,000 per month.



Overall, the Company incurred a net loss for the three-month period ended June 30, 2006 of $2,024,680, or $0.05 per share, which is 30% higher than the net loss incurred during the three-months ended June 30, 2005 of $1,562,291 or $0.06 per share. Adjusting the loss to take into account the stock-based compensation of $249,113, the $450,875 in amortization, the loss becomes $1,324,692 for 2006. Adjusting the 2005 loss for the stock-based compensation of $391,667 and amortization of $412,731 discussed above, the loss becomes $757,893 for 2005, representing a 75% increase.



The Company incurred a net loss for the six-month period ended June 30, 2006 of $3,551,780 or $0.08 per share, which is 18% larger than the net loss incurred during the period ended June 30, 2005 of $3,016,481, or $0.12 per share. Adjusting the loss to take into account the non-cash items described above, the losses become $1,976,430 for 2006 and $1,727,482 for 2005, representing an 8% increase.



The Company has work in progress and contracted sales orders totalling $2.9 million that have not commenced installation and the revenue will not be recognised until future quarters. There can be no assurance, however, that such revenue will be collected or if any of such revenue from such work in progress and sales orders is collected that it will be significant or will be timely paid.



In the Company's most recent Form 10-KSB, management stated that it believed that the Company would be able to achieve break-even operations on a cash operating basis by the end of 2006.  While management continues to believe that it has sufficient sales and potential sales to achieve this goal, extended contract negotiations and installation delays due to customers not being ready to accept delivery of solutions may cause this to be delayed until the last quarter of 2006 as the recognition of the associated revenue may be delayed.

Summary of Quarterly Results

|                   |   |             |             |             |             |             |             |             |            
|------------------ | - | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | -----------
|                   |   | Q2-2006     | Q1-2006     | Q4-2005     | Q3-2005     | Q2-2005     | Q1-2005     | Q4-2004     | Q3  2004  
|                   |   |             |             |             |             |             |             |             |            
|Total Revenue      | $ | 1,488,828   | 2,315,083   | 1,076,312   | 1,008,581   | 920,620     | 324,628     | 327,016     | 102,814    
|Loss               |   | (2,024,680) | (1,527,100) | (1,890,400) | (1,724,775) | (1,562,291) | (1,454,190) | (1,270,180) | (1,346,203)
|Net loss per share |   | (0.05)      | (0.04)      | (0.05)      | (0.06)      | (0.06)      | (0.06)      | (0.08)      | (0.09)     



The Companys changes in its net losses per quarter fluctuate according to the volume of sales. As the Company currently has a small number of customers generating the majority of its revenues, there is no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. In the latter part of 2004 and in 2005, the Company hired additional staff to generate and meet the demands of the sales orders described above, causing a significant increase in expense levels. The Company has also significantly increased both its revenues and expenses due to the acquisition of Sunaptic; however, these items are only included since the date of the acquisition on November 18, 2005. The Company is not aware of any significant seasonality affecting its sales.



Liquidity and Capital Resources

The Companys aggregated cash on hand at the beginning of the three-month period ended June 30, 2006 was $174,678. During the period, the Company received additional funds of $641,480 in loans payable, repaid a loan of $110,000 received during the quarter, and paid deferred financing costs of $30,000.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,324,692, after adjustment for non-cash items and changes to other working capital accounts in the period,





29



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resulted in a negative cash flow from operations of $443,255, as compared to a negative cash flow from operations of $998,097 for the same period in 2005. The Company repaid capital leases of $16,498 and purchased capital assets of $10,448. Overall, the Companys cash position increased by $31,279 to $205,957 at June 30, 2006.



The Companys aggregated cash on hand at the beginning of the six-month period ended June 30, 2006 aggregated $790,091. During the period, the Company received additional net funds of $176,803 from a private placement, $941,480 in loans payable and repaid a $200,000 loan from 2005 and an $110,000 loan from 2006, and paid deferred financing costs of $30,000.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,976,430, 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 $1,275,611, as compared to a negative cash flow from operations of $1,788,221 for the same period in 2005. The Company also repaid capital leases of $31,735 and purchased capital assets of $55,071.  Overall, the Companys cash position decreased by $584,134 to $205,957 at June 30, 2006.



The Company continues to improve its operating cash flows and management believes that this will be positive by the end of 2006.



Private Placements in 2006



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



Subsequent Financings



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



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



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





30



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Contractual Obligations

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



|     |  |           |         |          |         |       |          
|---- |  | --------- | ------- | -------- | ------- | ----- | ---------
|Year |  | Equipment |         | Building |         | Total
|2006 |  | $         | 35,614  | $        | 159,563 | $     | 195,177  
|2007 |  |           | 80,400  |          | 286,905 |       | 367,305  
|2008 |  |           | 60,936  |          | 265,904 |       | 326,840  
|2009 |  |           | -       |          | 202,900 |       | 202,900  
|     |  | $         | 176,950 | $        | 915,272 | $     | 1,092,222



The Company leases its head office in Burnaby, B.C. under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Company also leases 5,938 square feet of office space in Victoria, B.C. with monthly rent of $5,109 which expires on September 30, 2006 and subleases 4,128 square feet of office space in Vancouver, B.C. with monthly rent of $7,000 which expires on September 29, 2008.



Off-Balance Sheet Arrangements

At June 30, 2006, the Company did not have any off-balance sheet arrangements.







31



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Item 3.  Controls and Procedures



Disclosure Controls



Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Operating Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report (the Evaluation Date).  Based upon that evaluation, the Chief Executive Officer and Chief Operating Officer and Chief Financial officer 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 the Companys periodic SEC filings.



Internal Control Over Financial Reporting



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. During the quarter ended December 31, 2005, the Companys independent auditors, Grant Thornton LLP, advised management and the audit committee of the Companys board of directors of matters that they considered to be material weaknesses in the Companys internal control.  The weaknesses were comprised of: insufficient systems and controls in place to evaluate the Companys internal control; insufficient segregation of duties; and inadequate preventive controls with too much reliance on detective and manual controls.  The Company continues to take steps to correct these weaknesses.



Other than continuing to address the weaknesses discussed above, during the quarter ended June 30, 2006, there were no significant changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



Notwithstanding the foregoing, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Companys disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company and its subsidiaries to disclose material information otherwise required to be set forth in the Companys periodic reports.









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PART II  OTHER INFORMATION



Item 1.  Legal Proceedings



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



Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds



None.



Item 3.  Defaults Upon Senior Securities



None.



Item 4.

Submission of Matters to a Vote of Security Holders

The Company held its Annual and Extraordinary Meeting of Shareholders at 1100  4710 Kingsway, Burnaby, British Columbia, V5H 4V2, on Monday, May 8, 2006, at 10:00 a.m. for the following purposes:



1.

To receive and consider the report of the directors of the Company.

2.

To receive and consider the audited financial statements of the Company for the period ended December 31, 2005 together with auditors reports thereon.

3.

To elect directors for the ensuing year.

4.

To appoint an auditor of the Company for the ensuing year and to authorize the directors to fix the auditors remuneration.

5.

To consider, and if thought advisable, to approve a share option plan (the 2006 Plan) to increase the number of shares issuable under the share option plan of the Company.

6.

To transact such other business as may properly come before the meeting or any adjournment thereof.

(b)

The directors who were elected and whose terms of office as a director continued after the meeting are Oliver Buck Revell, Roy Davidson Trivett, Clyde Farnsworth, Keith Kretschmer, Al Kassam, Norman Inkster, and Michael C. Volker.

(c)

There were 105 shareholders holding 15,301,451 common shares represented in person or by proxy at the meeting, representing 35.52% of the 43,075,588 issued and outstanding Common Shares, which constituted a quorum.



To approve all of the directors at the meeting, the number of votes for Revell, Oliver Buck were:

For:  9,660,407

Against: 0

Votes Cast (Non-Insiders) For: 63.33%

Against: 0.00%

Totals: 15,301,451   Withheld: 396,716  Absentions: Nil   Excluding Insiders: Nil Broker Non-Votes: Nil



To approve all of the directors at the meeting, the number of votes for Trivett, Roy were:

For:  9,660,651

Against: 0

Votes Cast (Non-Insiders) For: 63.33%

Against: 0.00%

Totals: 15,301,451   Withheld: 39,472  Absentions: Nil   Excluding Insiders: Nil

Broker Non-Votes: Nil



To approve all of the directors at the meeting, the number of votes for Farnsworth, Clyde were:

For: 8,259,394

Against: 1,399,101  Votes Cast (Non-Insiders) For: 54.15%

Against: 9.17%

Totals: 15,301,451   Withheld: 41,694 Absentions: Nil   Excluding Insiders: Nil

Broker Non-Votes: Nil



To approve all of the directors at the meeting, the number of votes for Kassam, Al were:

For: 8,260,461

Against: 1,399,123  Votes Cast (Non-Insiders) For: 54.16%

Against: 9.17%

Totals: 15,301,451   Withheld: 40,539 Absentions: Nil   Excluding Insiders: Nil

Broker Non-Votes: Nil



To approve all of the directors at the meeting, the number of votes for Inkster, Norman were:

For: 9,660,673

Against: 0  Votes Cast (Non-Insiders) For: 63.33%

Against: 0.00%

Totals: 15,301,451   Withheld: 39,450 Absentions: Nil   Excluding Insiders: Nil

Broker Non-Votes: Nil



To approve all of the directors at the meeting, the number of votes for  Kretschmer, Keith were:





33



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For: 9,657,362

Against: 0  Votes Cast (Non-Insiders) For: 63.32%

Against: 0.00%

Totals: 15,301,451   Withheld: 42,761 Absentions: Nil   Excluding Insiders: Nil

Broker Non-Votes: Nil



To approve all of the directors at the meeting, the number of votes for Volker, Michael were:

For: 9,657,362

Against: 0  Votes Cast (Non-Insiders) For: 63.32%

Against: 0.00%

Totals: 15,301,451   Withheld: 42,761 Absentions: Nil   Excluding Insiders: Nil

Broker Non-Votes: Nil



To pass an ordinary resolution of disinterested shareholders to approve the amendment to the Companys Stock Option Plan

For: 6,253,708

Against: 236,383  Votes Cast (Non-Insiders) For: 51.75%

Against: 1.96%

Totals:  15,301,451  Withheld: 7,631  Absentions: Nil

Excluding Insiders: 3,209,955 Broker Non-Votes: Nil



To pass an extra ordinary resolution of disinterested shareholders to approve the repricing of insiders share options

For: 6,253,148

Against: 234,581  Votes Cast (Non-Insiders) For: 51.75%

Against: 1.94%

Totals:  15,301,451  Withheld: 10,686  Absentions: Nil   Excluding Insiders: 3,210,262 Broker Non-Votes: Nil



To appoint and remunerate Grant Thornton, LLP, Chartered Accountants:

For: 9,689,115

Against: 2,619

Votes Cast (Non-Insiders) For: 63.39%

Against: 0.02%

Totals: 15,301,451 Withheld: 8,389 Absentions: Nil

Excluding Insiders: 7,333

Broker Non-Votes: Nil



Item 5. Other Information



None.





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Item 6.  Exhibits



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



| |            |                                                                                                                                                                                                                
| | ---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1(7)     | Share Purchase Agreement dated October 5, 2005, among Michael James Hilton, Thomas James Healy, Ronald E. Matthews, Jason Fyfe, Paul McHendry, Simon Chester, Adam Bowron, Sunaptic Solutions Inc. and Visiphor
| | 3.1(5)     | Articles of Continuance                                                                                                                                                                                        
| | 3.2(5)     | Bylaw No.1                                                                                                                                                                                                     
| | 4.1(1)     | Shareholder Agreement dated February 23, 1999 among the original shareholders and the Former Visiphor Shareholders                                                                                             
| | 10.1(2)    | Revolving Line of Credit dated February 21, 2003 between Visiphor and Altaf Nazerali                                                                                                                           
| | 10.2(2)    | Amended and Restated Loan Agreement: RevolvingLine of Credit dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                          
| | 10.3(2)    | General Security Agreement dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                                            
| | 10.4(2)    | Grid Promissory Note dated February 21, 2003 between Visiphor and Altaf Nazerali                                                                                                                               
| | 10.5(2)    | Grid Promissory Note Amended and Restated dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                             
| | 10.6(2)    | Source Code License Agreement dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                                         
| | 10.7(2)    | Source Code Escrow Agreement dated April 15, 2003 between Visiphor and Altaf Nazerali                                                                                                                          
| | 10.8(3)    | Debenture Agreement between Visiphor and 414826 B.C. Ltd dated May 30, 2003                                                                                                                                    
| | 10.9(4)    | Consulting Agreement dated July 15, 2003 between Visiphor and Roy Trivet                                                                                                                                       
| | 10.10(6)   | Visiphor Corporation Stock Option Plan                                                                                                                                                                         
| | 10.11(8)   | Sublease Agreement between Shaw Cablesystems Limited and Visiphor                                                                                                                                              
| | 10.12(8)   | Release of Claims Agreement between OSI Systems, Inc. and Visiphor dated September 14, 2005                                                                                                                    
| | 10.13(9)   | Placement Agent Agreement, effective as of November 7, 2005, between Visiphor and Certain Agents.                                                                                                              
| | 10.14(10)  | Lease Agreement between Bremmvic Holdings Limited and Visiphor dated September 14, 2005                                                                                                                        
| | 10.15(10)  | Sublease agreement between International Vision Direct and Visiphor dated November 1, 2004                                                                                                                     
| | 10.16(10)  | Consulting Agreement with Trivett Holdings and Visiphor dated January 1, 2005                                                                                                                                  
| | 10.17(10)  | Consulting Agreement with TelePartners and Visiphor dated January 1, 2005                                                                                                                                      
| | 10.18(10)  | Consulting Agreement with AG Kassam and Visiphor dated January 1, 2005                                                                                                                                         
| | 10.19(10)* | Employment Agreement with Colby James Smith and Visiphor dated January 1, 2005                                                                                                                                 
| | 10.20(10)  | Consulting Agreement with Oliver Buck Revell and Visiphor dated January 1, 2005                                                                                                                              
| | 10.21(11)  | Convertible Secured Debenture of Visiphor in favor of Quorum Secured Equity Trust in the Principal Sum of Cdn$1,600,00, due December 15, 2009                                                                  
| | 10.22(11)  | Performance Warrant to purchase up to 2,350,000 common shares of Visiphor at a price of Cdn$0.30 per common share                                                                                              
| | 10.23(11)  | Subscription Agreement dated July 12, 2006 addressed to Visiphor and executed by Quorum Secured Equity Trust                                                                                                   
| | 10.24(11)  | General Security Agreement dated July 12, 2006 in favor of Quorum Secured Equity Trust between Visiphor and Quorum Secured Equity Trust                                                                        
| | 10.25(11)  | Postponement and Subordination Agreement dated July 12, 2006 between Roy Trivett, Quorum Secured Equity Trust and Visiphor                                                                                     
| | 10.26(11)  | Postponement and Subordination Agreement dated July 12, 2006 between Keith Kretschmer, Quorum Secured Equity Trust and Visiphor                                                                                
| | 10.27(11)  | Promissory Note of Visiphor dated July 12, 2006 in the amount of Cdn$85,000 payable to Roy Trivett                                                                                                             
| | 10.28(11)  | Promissory Note of Visiphor dated July 12, 2006 in the amount of US$400,000 payable to Keith Kretschmer                                                                                                        
| | 10.29(11)  | General Assignment of Accounts Receivable by Visiphor to Roy Trivett dated July 12, 2006                                                                                                                       
| | 10.30(11)  | General Assignment of Accounts Receivable by Visiphor to Keith Kretschmer dated July 12, 2006                                                                                                                  
| | 31.1       | Section 302 Certification                                                                                                                                                                                      
| | 31.2       | Section 302 Certification                                                                                                                                                                                      
| | 32.1       | Section 906 Certification                                                                                                                                                                                      
| | 32.2       | Section 906 Certification                                                                                                                                                                                      
| | 99.1       | Risk Factors                                                                                                                                                                                                   
| | 99.2       | Form 51-9Form 51-901F as required by the British Columbia Securities Commission                                                                                                                                

_______________________



*Indicates a management contract or compensatory plan or arrangement.





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(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

Previously filed as part of Visiphors Current Report on Form 8-K filed on June 23, 2005.

(7)

Previously filed as part of Visiphors Current Report on Form 8-K filed on October 5, 2005.

(8)

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

(9)

Previously filed as part of Visiphors Current Report on Form 8-K filed on November 30, 2005.

(10)

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

(11)

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







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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.



VISIPHOR CORPORATION







Date: August 10, 2006

/s/ Wayne Smith

Wayne Smith

Chief Operating Officer and Chief Financial Officer

(principal financial and accounting officer and duly authorized officer)





37



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Exhibit 31.1

CERTIFICATION

I, Wayne Smith, certify that:



1.

I have reviewed this quarterly report on Form 10-QSB of Visiphor Corporation;



2.

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



3.

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



4.

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



(a)

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



(b)

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



(c)

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



5.

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



(a)

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



(b)

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



Date: August 10, 2006

/s/ Wayne Smith

Wayne Smith

Chief Operating Officer and Chief Financial Officer



(principal financial and accounting officer)









---

Exhibit 31.2



CERTIFICATION



I, Roy Trivett, certify that:



1.

I have reviewed this quarterly report on Form 10-QSB of Visiphor Corporation;



2.

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



3.

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



4.

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



(a)

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



(b)

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



(c)

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



5.

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



(a)

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



(b)

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



Date: August 10, 2006

/s/ Roy Trivett

Roy Trivett

Chief Executive Officer

(principal executive officer)









---

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 Quarterly Report of Visiphor Corporation (the Company) on Form 10-QSB for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Wayne Smith, Chief Operating Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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



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



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | /s/ Wayne SmithWayne Smith
Chief Operating Officer and Chief Financial Officer
(principal financial and accounting officer)
August 10, 2006









---

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 Quarterly Report of Visiphor Corporation (the Company) on Form 10-QSB for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Roy Trivett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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



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



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | /s/ Roy TrivettRoy Trivett
Chief Executive Officer
(principal executive officer)
August 10, 2006







---

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 risks described below occurs, the Companys business, results of operations and financial condition could be adversely affected.  In such cases, the price of the Companys common shares could decline, and you could lose all or part of your investment.

History of Losses; Ability to Continue as a Going Concern

The Company commenced operations in March 1998. The Company incurred net losses of $6,631,656 and $5,457,937 in the years ended December 31, 2005 and December 31, 2004, respectively and net losses of $7,355,691 and $4,261,729 in the periods ended June 30, 2006 and June 30, 2005 respectively.  The Company has never been profitable and there can be no assurance that, in the future, the Company will be profitable on a quarterly or annual basis.

The Report of the Independent Registered Chartered Accountants on the Companys December 31, 2005 Financial Statements includes an explanatory paragraph that indicates the financial statements are affected by conditions and events that cast substantial doubt on the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Need for Additional Financing

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



Potential Fluctuations in Quarterly Financial Results



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



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



New Product Development



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







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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 is to be made. Due in part to the significant impact that the application of the Companys products has on the operations of a business and the significant commitment of capital required by such a system, potential customers tend to be cautious in making acquisition decisions. As a result, the Companys products generally have a lengthy sales cycle ranging from six (6) to twelve (12) months. Consequently, if sales forecasts from a specific customer for a particular quarter are not realized in that quarter, the Company may not be able to generate revenue from alternative sources in time to compensate for the shortfall. The loss or delay of a large contract could have a material adverse effect on the Companys financial condition, operating results and cash flows.  Moreover, to the extent that significant contracts are entered into and required to be performed earlier than expected, the Companys future operating results may be adversely affected.



Dependence on 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 effect upon the Companys business, operating results and financial condition.



Dependence on Key Personnel



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



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



Additionally, the Company supplies products and services to customers through a third-party supplier acting as a project manager or systems integrator. In such circumstances, the Company has a sub-contract to supply its products and services to the customer through the prime contractor. In these circumstances, the Company is at risk that



2





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



Competition

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

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

Proprietary Technology

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

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

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

Exchange Rate Fluctuations

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



3





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Risk of Software Defects

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

Product Liability

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

The Company UK Partnership



On July 31, 2004, the Company entered into an agreement with Centrom Limited (Centrom) of the United Kingdom to form a jointly owned subsidiary, Imagis Technologies UK Limited (Imagis UK). Imagis UK, a subsidiary of Centrom, is the exclusive distributor of Visiphors software products in the UK and a non-exclusive distributor on a world-wide basis. Visiphor owns a 25% interest in Imagis UK in consideration of the grant of UK exclusivity, and Centrom has committed to provide £500,000 (approximately $1.25 million) over the next two years to support the initial start-up costs of Imagis UK in consideration of a 75% ownership. Centroms commitment is being met through a combination of cash and services, with the services portion being provided at Centroms cost without any mark-up. The Imagis UKs operations are in the start-up phase and there has been no significant gain or loss to date. The Company is not required to make any advances to Imagis UK and has not made any advances to date.



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



Acquisition of Sunaptic



As a result of the acquisition of Sunaptic, significant demands have been placed on the Companys managerial, operational and financial personnel and systems.  No assurance can be given that the Companys systems, procedures and controls will be adequate to support the expansion of its operations resulting from the acquisition.  Future operating results will be affected by the ability of the Companys officers and key employees to manage changing business conditions and acquisitions and to implement and improve operational and financial controls and reporting systems.



The acquisition also involves the integration of entities that previously operated independently.  No assurance can be given that the combined operations resulting from the acquisition will realize anticipated synergies or that other benefits expected from the acquisition will be realized.



The Companys current or prospective business partners, joint venture partners, service or equipment suppliers or customers may, in response to the acquisition, may delay or cancel purchasing decisions or decisions relating to joint ventures, contracts or other business alliances.  There can be no assurance that there will be no delay or cancellation by these parties, any of which could have a material adverse effect on the Companys business, operating results, financial condition or future prospects.  In addition, key employees of the Company may feel that the acquisition poses uncertainties that cause them to leave the Company, which could have a material adverse effect on the Companys business, operating results, financial condition or future prospects.



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



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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 June 30, 2006. While these shareholders do not hold a majority of the Companys outstanding common shares, they will be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and the approval of mergers, consolidations and sales of the Companys assets. This may prevent or discourage tender offers for the Companys common shares.

Additional Disclosure Requirements Imposed on Penny Stock Trades



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



Enforcement of Civil Liabilities



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



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Exhibit 99.2



BC FORM 51-102F1





QUARTERLY REPORT







ISSUER DETAILS:



|                         |                                                       
|------------------------ | ------------------------------------------------------
|Name of Issuer           | VISIPHOR CORPORATION                                  
|For Quarter Ended        | June 30, 2006                                         
|Date of Report           | August 10, 2006                                       
|Issuer Address           | 1100  4710 Kingsway
Burnaby, British Columbia
V5H 4M2
|Issuer Fax Number        | (604) 684-9314                                        
|Issuer Telephone Number  | (604) 684-2449                                        
|Contact Name             | Wayne Smith                                           
|Contact Position         | Chief Financial Officer                               
|Contact Telephone Number | (604) 684-2449                                        
|Contact Email Address    | wayne.smith@visiphor.com                              
|Web Site Address         | www.visiphor.com                                      







CERTIFICATE





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



|                                  |                                  |                               
|--------------------------------- | -------------------------------- | ------------------------------
|Clyde Farnsworth
Name of Director | /s/Clyde Farnsworth
Sign (typed) | 06/8/10
Date Signed (YY/MM/DD)
|                                  |                                  |                               
|Roy Trivett
Name of Director      | /s/ Roy Trivett
Sign (typed)     | 06/8/10
Date Signed (YY/MM/DD)









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Supplementary Information to the Financial Statements



Managements Discussion and Analysis

As at August 10, 2006



Forward-looking information



Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  In some cases, you can identify the forward-looking statements by Visiphor Corporations (Visiphor or the Company) use of the words such as may, will, should, could, expect, plan, estimate, predict, potential, continue, believe, anticipate, intend, expect, or the negative or other variations of these words, or other comparable words or phrases.  Forward-looking statements in this report include, but are not limited to, the Companys expectation that revenues will increase during 2006 when compared to those of 2005 and that such revenues will continue to increase as newly developed products and solutions continue to gain increasing customer acceptance; managements belief that increased revenues achieved as a result of the sale of products will more than offset increased technology development costs; the Companys ability to fund its operations in the future from its current cash, accounts receivable, work in progress the Companys expectation that it will have positive operating cash flows by the end of 2006 and contracted orders; new contracts to be entered into in the near future; the Companys future operating expense levels; and the Companys ability to achieve break-even operations on an operating cash flow basis during the remainder of 2006.



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



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



All dollar amounts in this Quarterly Report are expressed in Canadian dollars, unless otherwise indicated.

About Visiphor

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



Visiphor provides solutions for:



·

Enterprise Information Integration (EII);

·

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

·

Enterprise Application Integration (EAI).





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



The Company develops and markets software products that simplify, accelerate, and economize the process of connecting existing, disparate databases. The Companys technologies enable information owners to share data securely with internal line of business applications and external stakeholders and business partners using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image.This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.



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





Overview

The Companys Business

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

Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and time and materials contracts for the provision of specific services.  When a software product requires significant production, modification or customization 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. When software is sold under contractual arrangements that include multiple elements, the elements are accounted for separately if vendor specific objective evidence of fair value exists for all undelivered elements. Standalone services contracts revenues are recognized as the services are delivered.

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

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



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Critical Accounting Polices

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

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

Revenue recognition

(ii)

Software sales revenue:

The Company recognizes revenue consistent with the SEC Staff Accounting Bulletin No. 104 and Statement of Position 97-2, Software Revenue Recognition. In accordance with this statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured.  Cash received in advance of meeting the revenue recognition criteria is recorded as deferred revenue.



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

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

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

(iii)

Support and services revenue:

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

Intangible Assets:

Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost.  The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values.  The cost of internally developed intangible assets is capitalized only when technological feasibility has been established, the asset is clearly defined and costs can be reliably measured, management has both the intent and ability to produce or use the intangible asset, adequate technical and financial resources exist to complete the development, and management can demonstrate the existence of an external market or internal need for the completed product or asset. Costs incurred to enhance the service potential of an intangible asset are capitalized as a betterment when the above criteria are met. No amounts have been capitalized to date in connection with internally developed intangible assets



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



Asset

Term



Briyante technology

3 years

Patents

3 years

License

3 years

Customer relationships

3 years

Contract backlog

4 months





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



Goodwill



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

Use of estimates

The preparation of financial statements in accordance with accounting principles generally accepted in Canada requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements.  Actual amounts may differ from these estimates.  Areas of significant estimate include, but are not limited to: valuation of accounts receivable; estimated useful lives of equipment and intangible assets; valuation of acquired intangible assets; valuation of stock-based awards, and the valuation allowance of future income tax assets.

Stock-based compensation

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



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



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



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Results of Operations for the three and six-month periods ended June 30, 2006 as compared to the three and six-month periods ended June 30, 2005:

Management believes that presenting results of operations that exclude certain non-cash expenses and certain one-time unusual expenses in addition to results of operations that include these expenses can be helpful to investors in understanding the Company's results of operations. By excluding such items, the Company believes investors are provided with a more accurate period-to-period comparison and information regarding the cash expenditures in each expense category.  Non-cash expenses that are excluded in various places below include amortization amounts that the Company has incurred primarily as a result of its acquisition of certain intellectual property of Briyante and the intangibles acquired through the acquisition of Sunaptic, as well as stock-based compensation that does not require cash payments, and one-time unusual expenses.

Revenues

Visiphors total revenues for the three-month period ended June 30, 2006 were $1,488,828, which is 62% greater than the prior year level of $920,620. The year to date revenues increased 205% to $3,803,911 over the prior year level of $1,245,248. The increase is due to increased consulting services revenues as a result of the acquisition of Sunaptic in November of 2005 and increased services revenues from the installation of software products sold in prior periods. Revenues from the Companys software products were $84,039 for the current three-month period as compared to $733,726 for 2005, a decrease of 89%. Software revenues were $346,537 for the year compared to the prior years level of $965,084 a decrease of 64%. The decreased software revenues were due to delays in customer delivery acceptance schedules and are expected to increase in subsequent periods as the deliveries are completed.



Support and services revenues for the three-month period ended June 30, 2006 were 7 times greater at $1,291,916 compared to $185,465 for 2005. Support and services revenues year to date were over 11.5 times higher at $3,228,022 than the prior year level of $277,769. The increase consisted of $2,778,462 in consulting services revenue earned as a result of the acquisition of Sunaptic that took place on November 18, 2005, with the balance consisting of the delivery of services associated with software sales from prior periods.



As of August 10, 2006, Visiphor had work in process and contracted orders totalling approximately $2.9 million that are not recorded in the financial statements as at June 30, 2006. Consequently, Visiphor expects that revenues will increase in the subsequent quarters of 2006 when compared to revenues of 2005 and will continue to increase as the Companys current and newly developed products and solutions continue to gain increasing customer acceptance. There can be no assurance, however, that such future revenue will materialize or if such revenue does materialize that it will be significant.



Other revenues for the three-month period ended June 30, 2006 were $112,873, whereas other revenues of $1,429 were earned in the prior year. Other revenues year to date was $229,352 compared to $2,395 for 2005. The increase was primarily due to revenue earned in 2006 of $166,512 through a contract where a sub-contractor is providing the services, and $47,400 from the resale of third party software.  The costs associated with these revenues are included in cost of materials. The balance of the revenue in both years was earned through interest revenue.

Operating Expenses

Operating expenses totalled $3,513,508 for the three-month period ended June 30, 2006, which is 42% greater than the 2005 operating expenses of $2,482,911. The 2006 expenses include stock-based compensation of $249,113 due to the increase of Visiphors employee stock option plan and $450,875 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition and $59,666 in amortization of customer relationships relating to the Sunaptic acquisition. Excluding these non-cash charges, the operating expenses for the three months ended June 30, 2006 total $2,813,520. The 2005 expenses include stock-based compensation of $391,667 and amortization of $412,731, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these expenses, the operating expenses for 2005 were $1,678,513. Excluding the non-cash charges previously mentioned, the increase of $1,135,007 between 2006 and 2005 represents a 68% increase in operating expenses over the prior period. The increased costs were primarily due to $1,037,916 in additional costs from the addition of the consulting services division through the Sunaptic acquisition, which is included in the professional services department.



Operating expenses totalled $7,355,691 for the six-month period ended June 30, 2006, which is 73% greater than the 2005 operating expenses of $4,261,729. The 2006 expenses include stock-based compensation of $501,980 due to Visiphors employee stock option plan and $1,073,370 in amortization, which includes $645,426 in amortization costs for the intellectual property acquired in the Briyante acquisition and $292,738 in amortization of customer relationships relating to the Sunaptic acquisition. Excluding these non-cash charges, the one-time restructuring



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charge of $102,462 relating to the Sunaptic acquisition, the operating expenses for the six months ended June 30, 2006 total $5,677,879. The 2005 expenses include stock-based compensation of $494,261 and amortization of $794,740. Excluding these items, the operating expenses for the six months ended June 30, 2005 were $2,972,729. Excluding these non-cash charges, the difference of $2,705,150 between 2006 and 2005 represents a 91% increase in operating expenses over the prior year. The increased costs include $2,145,725 due to the addition of the consulting services division through the Sunaptic acquisition, which is included in the professional services department. Sales and marketing costs increased by $41,763 primarily due to an increase in sales and marketing staff.  Administration costs increased $119,000 due to the addition of an investor relations program that was initiated in the second quarter of 2005, and due to an overall increase in the Companys staff. There were costs of materials of $165,000 in 2006 relating to a sub-contractor providing services for a specific project that was completed in the second quarter of 2006 and the resale of third party software, bad debts of $62,000 relating to a support contract with one customer, and an increase in interest of $62,000 relating to the outstanding loans in 2006



Staff levels increased from 35 at January 1, 2005 to 100 at December 31, 2005. In January 2006, through the integration process with Sunaptic, the Company was able to streamline its operations and achieve operational efficiencies that allowed it to eliminate 16 employee positions. The Company recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions. The company continued to improve its operational efficiencies during the second quarter of 2006, including closing its Victoria, B.C. office and consolidating the Victoria operations into the Burnaby, B.C. head office.  The staff level at August 10, 2006 is 74 and the current operating cash expense level is approximately $700,000 per month or $8.5 million per year, and is expected to increase as additional resources are required to meet sales demands.

Administration

Administrative costs for the three-month period ended June 30, 2006 were $736,282, which is 11% lower than for 2005 of $826,173. These costs include stock-based compensation charges of $121,587 in 2006 and $201,740 in 2005. Excluding these charges, the administrative costs were $614,695 in 2006 versus $624,433 in 2005, which represents a 2% decrease. Administrative costs include staff salaries and related benefits and travel, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.



Administrative costs for the six months ended June 30, 2006 were $1,399,185, which is 9% higher than administrative costs for 2005 of $1,280,004. These costs include stock-based compensation charges of $182,806 in 2006 and $270,122 in 2005. Excluding these charges, the administrative costs were $1,216,379 in 2006 versus $1,009,882 in 2005, which represents a 20% increase.  The increase was primarily due to the addition of an investor relations program in the second quarter of 2005 that was expanded in 2006 and general operating expenses associated with an overall growth in the Companys staff. The current level of administrative cost is expected to remain the same for the balance of 2006.

Bad Debt

Bad debt for both the three and six-month periods ended June 30, 2006 was $62,000 and relates to a support contract defaulted upon by one customer. There was no bad debt expense in 2005.

Cost of Materials

Cost of materials for the three-month period ended June 30, 2006 were $77,005 and $nil in 2005. This cost was for sub-contracted services required for the security assessments for the King County RAIN project. The cost for the six months ended June 30, 2006 were $164,910 and $nil in 2005. This cost includes $121,000 for sub-contracted services required for the security assessments for the King County RAIN project which has been completed and $43,901 for software purchased for resale to a customer.

Interest and Amortization

The increase in interest expense of $39,833 for the three-month period ended June 30, 2006 over the three-month period ended June 30, 2005 is due to interest on the loans payable. The amortization expense for 2006 is $450,875 compared to $412,731 in 2005. The increase is due to the amortization of intangibles acquired with the Sunaptic acquisition.



The increase in interest expense of $62,447 for the six months ended June 30, 2006 over the six months ended June 30, 2005 is due to interest on the loans payable. The amortization expense for 2006 is $1,073,370 compared to $794,740 for 2005. The 35% increase is due to the intangibles acquired with the Sunaptic acquisition.

Sales and Marketing

Sales and marketing expenses for the three-month period ended June 30, 2006 were $317,149 compared to $426,790 for 2005, which is a 26% reduction. These costs include stock-based compensation charges of $28,455 in 2006 and



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$46,839 in 2005. Excluding these charges, the sales and marketing expenses were $288,694 in 2006 verses $379,951 in 2005 which represents a 24% reduction. The decrease in costs is due to the reduction in the number of marketing staff.  Sales and marketing costs are expected to increase in future periods as the Company expands its efforts to increase revenues of both products and services.



Sales and marketing expenses for the six-month period ended June 30, 2006 were $898,229 and were 5% greater than in 2005 of $856,466. These costs include a stock-based compensation charge of $48,941 in 2006 and $65,212 in 2005. Excluding this charge, the sales and marketing costs were $849,288 in 2006 verses $791,254 in 2005, which represents a 7% increase. Visiphor hired additional sales staff on a short-term basis in the United States at the beginning of 2006 in an effort to address some specific sales opportunities. The marketing department reduced the number of employees in 2006.

Professional Services

Costs for the professional services group for the three-month period ended June 30, 2006 were $1,335,694, which is 269% greater than $361,504 in 2005. These costs include a stock-based compensation charge of $11,376 in 2006 and $58,166 in 2005. Excluding this charge, the professional services costs were $1,324,318 in 2006 and $303,338 for 2005 which is an increase of 337%. The increased costs were due to $1,037,916 in costs resulting from the addition of the consulting services division through the Sunaptic acquisition which is included in the professional services department.



Costs for the professional services group for the six-month period ended June 30, 2006 were $2,618,808 which is 5.5 times greater than costs for the professional services group of $476,941 in 2005. These costs include a stock-based compensation charge of $147,806 in 2006 and $62,451 in 2005. Excluding this charge, the professional services costs were $2,471,002 in 2006 and $414,490 in 2005, an increase of $2,056,512 or 500%. The increased costs include $2,145,725 due to the addition of the consulting services division through the Sunaptic acquisition. There was some staff reduction in the non-consulting area of professional services.



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

Technology Development

The technology development expenses for the three-month period ended June 30, 2006 were $487,676, which is 9% greater than the 2005 costs of $448,707. These costs include stock-based compensation charges of $87,695 in 2006 and $84,922 in 2005. Excluding these charges, the technology development expenses were $399,981 in 2006 verses $363,785 in 2005, which is an increase of 10%. This increase was primarily due to hiring additional staff and the associated costs required to maintain the Companys enhancement of existing products and to develop new products. Management expects that the increased revenues achieved as a result of the sale of products will more than offset the increased costs. Management believes that continuing to invest in technology advancements is crucial to the future success of Visiphor, and expects that costs will continue to increase in future periods. Included in technology development expenses for the six month period ended June 30, 2006 are net research and development costs of $73,000, consisting of incurred costs of $146,000 less a contribution of $73,000 from the National Research Council. The cost recoveries are expected to be approximately $225,000 by December 31, 2006.



The technology development expenses for the six-month period ended June 30, 2006 were $962,724, which is 14% higher than the 2005 costs of $842,010. These costs include a stock-based compensation charge of $122,427 in 2006 and $96,474 in 2005. Excluding this charge, the costs were $840,297 in 2006 verses $745,536 in 2005, which represents a 13% increase. Included in technology development expenses for the period ended June 30, 2006 are net research and development costs recovery of $98,500. The increase was primarily due to hiring additional staff and the associated costs required to maintain our enhancement of existing products and new product development.

Technical Services

The technical services department was eliminated in 2006 and the services provided have been reallocated to the professional services and technology development departments. The 2005 costs for the technical services group have been reallocated for comparative purposes.







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Restructuring Charge

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

Net Loss for the Period

The Company's net loss on a monthly basis for the second quarter is approximately $675,000.  As described above, management believes that excluding certain non-cash expenses and certain one-time unusual expenses can be helpful to investors in better understanding the Company's results of operations.  When excluding such expenses, the Company's loss on a cash-operating expense basis is approximately $440,000 per month for the second quarter. Due to operational efficiencies achieved during the second quarter, but not fully realized until July of 2006, the Companys monthly loss on a cash-operating basis is currently $150,000 per month.



Overall, the Company incurred a net loss for the three-month period ended June 30, 2006 of $2,024,680, or $0.05 per share, which is 30% higher than the net loss incurred during the three-months ended June 30, 2005 of $1,562,291 or $0.06 per share. Adjusting the loss to take into account the stock-based compensation of $249,113, the $450,875 in amortization, the loss becomes $1,324,692 for 2006. Adjusting the 2005 loss for the stock-based compensation of $391,667 and amortization of $412,731 discussed above, the loss becomes $757,893 for 2005, representing a 75% increase.



The Company incurred a net loss for the six-month period ended June 30, 2006 of $3,551,780 or $0.08 per share, which is 18% larger than the net loss incurred during the period ended June 30, 2005 of $3,016,481, or $0.12 per share. Adjusting the loss to take into account the non-cash items described above, the losses become $1,976,430 for 2006 and $1,727,482 for 2005, representing an 8% increase.



The Company has work in progress and contracted sales orders totalling $2.9 million that have not commenced installation and the revenue will not be recognised until future quarters. There can be no assurance, however, that such revenue will be collected or if any of such revenue from such work in progress and sales orders is collected that it will be significant or will be timely paid.



In the Company's most recent Form 10-KSB, management stated that it believed that the Company would be able to achieve break-even operations on a cash operating basis by the end of 2006.  While management continues to believe that it has sufficient sales and potential sales to achieve this goal, extended contract negotiations and installation delays due to customers not being ready to accept delivery of solutions may cause this to be delayed until the last quarter of 2006 as the recognition of the associated revenue may be delayed.

Summary of Quarterly Results

|                   |   |             |             |             |             |             |             |             |            
|------------------ | - | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | -----------
|                   |   | Q2-2006     | Q1-2006     | Q4-2005     | Q3-2005     | Q2-2005     | Q1-2005     | Q4-2004     | Q3  2004  
|                   |   |             |             |             |             |             |             |             |            
|Total Revenue      | $ | 1,488,828   | 2,315,083   | 1,076,312   | 1,008,581   | 920,620     | 324,628     | 327,016     | 102,814    
|Loss               |   | (2,024,680) | (1,527,100) | (1,890,400) | (1,724,775) | (1,562,291) | (1,454,190) | (1,270,180) | (1,346,203)
|Net loss per share |   | (0.05)      | (0.04)      | (0.05)      | (0.06)      | (0.06)      | (0.06)      | (0.08)      | (0.09)     



The Companys changes in its net losses per quarter fluctuate according to the volume of sales. As the Company currently has a small number of customers generating the majority of its revenues, there is no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. In the latter part of 2004 and in 2005, the Company hired additional staff to generate and meet the demands of the sales orders described above, causing a significant increase in expense levels. The Company has also significantly increased both its revenues and expenses due to the acquisition of Sunaptic; however, these items are only included since the date of the acquisition on November 18, 2005. The Company is not aware of any significant seasonality affecting its sales.



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Liquidity and Capital Resources

The Companys aggregated cash on hand at the beginning of the three-month period ended June 30, 2006 was $174,678. During the period, the Company received additional funds of $641,480 in loans payable, repaid a loan of $110,000 received during the quarter, and paid deferred financing costs of $30,000.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,324,692, 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 $443,255, as compared to a negative cash flow from operations of $998,097 for the same period in 2005. The Company repaid capital leases of $16,498 and purchased capital assets of $10,448. Overall, the Companys cash position increased by $31,279 to $205,957 at June 30, 2006.



The Companys aggregated cash on hand at the beginning of the six-month period ended June 30, 2006 aggregated $790,091. During the period, the Company received additional net funds of $176,803 from a private placement, $941,480 in loans payable and repaid a $200,000 loan from 2005 and an $110,000 loan from 2006, and paid deferred financing costs of $30,000.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,976,430, 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 $1,275,611, as compared to a negative cash flow from operations of $1,788,221 for the same period in 2005. The Company also repaid capital leases of $31,735 and purchased capital assets of $55,071.  Overall, the Companys cash position decreased by $584,134 to $205,957 at June 30, 2006.



The Company continues to improve its operating cash flows and management believes that this will be positive by the end of 2006.



Private Placements in 2006



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



Subsequent Financings



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



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



Management believes that the revenues from the Companys futures sales combined with current accounts receivable, work in progress, and contracted orders will be sufficient to fund its consolidated operations. The Company believes it currently has cash, accounts receivable, and work in progress and contracted orders that, if completed, will generate cash sufficient to fund its operations through 2006. If the accounts receivable are not collected, certain of the contracts are not completed, or the expected sales are not received, the Company may need



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to raise additional funds through private placements of its securities or seek other forms of financing during the 2006 financial year. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all. Failure to obtain adequate financing if necessary could result in significant delays in development of new products and a substantial curtailment of the Companys operations. If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.



Contractual Obligations

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



|     |  |           |         |          |         |       |          
|---- |  | --------- | ------- | -------- | ------- | ----- | ---------
|Year |  | Equipment |         | Building |         | Total
|2006 |  | $         | 35,614  | $        | 159,563 | $     | 195,177  
|2007 |  |           | 80,400  |          | 286,905 |       | 367,305  
|2008 |  |           | 60,936  |          | 265,904 |       | 326,840  
|2009 |  |           | -       |          | 202,900 |       | 202,900  
|     |  | $         | 176,950 | $        | 915,272 | $     | 1,092,222



The Company leases its head office in Burnaby, B.C. under a sublease of 10,938 square feet which expires December 30, 2009. The monthly rent is $16,908. The Company also leases 5,938 square feet of office space in Victoria, B.C. with monthly rent of $5,109 which expires on September 30, 2006 and subleases 4,128 square feet of office space in Vancouver, B.C. with monthly rent of $7,000 which expires on September 29, 2008.



Off-Balance Sheet Arrangements

At June 30, 2006, the Company did not have any off-balance sheet arrangements.



Related-party transactions not disclosed elsewhere are as follows:



At June 30, 2006, accounts payable and accrued liabilities included $553,448 (at December 31, 2005 - $400,539) owed by the Company to directors, officers and companies controlled by directors and officers of the Company. These amounts are unsecured, non-interest bearing and payable on demand and consist of unpaid fees and expenses.















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Other Management Discussion & Analysis Requirements



i.

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



ii.

Share Capital at August 10, 2006

(a)

Authorized:

100,000,000 common shares without par value

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

(b)

Issued



|                                           |                    |            |            |          
|------------------------------------------ | ------------------ | ---------- | ---------- | ---------
|                                           | Number of shares   |            | Amount    
|Balance, December 31, 2004                 | 20,795,281         | $          | 26,230,920
|Issued during year for cash:               |                    |            |           
|                                           | Private Placements | 16,320,819 |            | 6,847,840
|                                           | Options exercised  | 211,895    |            | 86,630   
|                                           | Warrants exercised | 2,887,665  |            | 1,218,576
|Issued for acquisition of subsidiary       | 1,066,666          |            | 469,333   
|Special Warrants exercised                 | 1,007,151          |            | 781,801   
|Issuance of shares as share issuance costs | 186,111            |            | 79,000    
|Fair value of options exercised            | -                  |            | 60,458    
|Share issuance costs                       | -                  |            | (861,835) 
|                                           |                    |            |           
|Balance, December 31, 2005                 | 42,475,588         |            | 34,912,723
|                                           |                    |            |           
|Issued during the period for cash:         |                    |            |           
|                                           | Private Placements | 600,000    |            | 270,000  
|Share issuance costs                       | -                  |            | (212,777) 
|                                           |                    |            |           
|Balance, August 10, 2006                   | 43,075,588         | $          | 34,969,946





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Share Capital  contd:

(c)

Warrants:

At December 31, 2005, and August 10, 2006, the following warrants were outstanding:



|                  |           |           |           |                 |                |                  
|----------------- | --------- | --------- | --------- | --------------- | -------------- | -----------------
|December 31, 2005 | Granted   | Exercised | Expired   | August 10, 2006 | Exercise price | Expiry date      
|3,882,875         | -         | -         | 3,882,875 | -               | $0.75          | April 28, 2006   
|226,584           | -         | -         | 226,584   | -               | $0.75          | April 29, 2006   
|86,700            | -         | -         | 86,700    | -               | $0.75          | May 20, 2006     
|2,380,000         | -         | -         | 2,380,000 | -               | $0.55          | May 24, 2006     
|187,500           | -         | -         | -         | 187,500         | $0.50          | November 29, 2006
|4,481,522         | -         | -         | -         | 4,481,522       | $0.50          | November 29, 2006
|1,786,999         | -         | -         | -         | 1,786,999       | $0.50          | November 30, 2006
|125,000           | -         | -         | -         | 125,000         | $0.50          | December 13, 2006
|946,166           | -         | -         | -         | 946,166         | $0.55          | December 31, 2006
|2,557,785         | -         | -         | -         | 2,557,785       | $0.55          | January 11, 2007 
|-                 | 300,000   | -         | -         | 300,000         | $0.50          | March 2, 2007    
|-                 | 2,350,000 | -         | -         | 2,350,000       | $0.45          | July 12, 2008    
|16,661,131        | 2,650,000 | -         | 6,576,159 | 12,734,972      |                |                  



(d)

Options:



The Company has a stock option plan that was most recently approved at the Companys annual general meeting of shareholders on May 8, 2006.  Under the terms of the plan, the Company may reserve up to 8,615,118 common shares for issuance under the plan.  The Company has granted stock options under the plan to certain employees, directors, advisors and consultants.  These options are granted for services provided to the Company.  All existing options granted prior to November 25, 2003 expire five years from the date of grant.  All options granted subsequent to November 25, 2003, expire three years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options, along with the Companys outstanding shares, were consolidated on a 1 new option for 4.5 old basis. During the year ended December 31, 2004, all options outstanding as at December 31, 2003 were repriced to $0.78. For options that were granted prior to the adoption of the fair value based method, the fair value of the award was remeasured at the date of modification, and the full amount of that fair value has been recorded as compensation cost to the extent that vesting has occurred on or before June 30, 2006.



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



On April 10, 2006, the Company re-priced 1,191,562 common share purchase options granted to employees to $0.45 per share from various prices ranging from $0.47 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged. On May 8, 2006, the Company also received shareholder approval and re-priced 2,535,001 common share purchase options granted to directors and officers to $0.45 per share from various prices ranging from $0.55 to $0.79 per share. The vesting provisions and expiry dates of the re-priced options remain unchanged.



As all repriced options were previously accounted for using the fair value method, modification accounting principles apply.  Under modification accounting, the incremental fair value of the benefit attributed to the repricing is measured as the difference between the fair value of the repriced award on the date of the repricing and the fair value of the old award determined on the same date.  This incremental fair value was determined to be $145,474 of which $75,760 was recognized on the date of the repricing in connection with



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options that were already vested at that date. The balance of the incremental fair value will be recognized over the remaining vesting period of the repriced options.



A summary of the status of the Companys stock options at August 10, 2006 and December 31, 2005 (giving retroactive effect to the 2003 share consolidation), and changes during the periods ended on those dates are presented below:



|                                 |                   |                   |                  |        |           |           |                |     
|-------------------------------- | ----------------- | ----------------- | ---------------- | ------ | --------- | --------- | -------------- | ----
|                                 | August 10, 2006   | December 31, 2005
|                                 | Weighted average  |                   | Weighted average
|                                 | Shares            |                   | Exercise Price   |        | Shares    |           | Exercise Price
|Outstanding, beginning of period | 5,415,500         | $                 | 0.67             |        | 3,092,334 | $         | 0.61          
|                                 | Repriced to $0.45 | -                 |                  | (0.18) |           | -         |                | -   
|                                 | Granted           | 1,676,500         |                  | 0.41   |           | 2,848,396 |                | 0.72
|                                 | Exercised         | -                 |                  | -      |           | (211,895) |                | 0.41
|                                 | Cancelled         | (603,333)         |                  | 0.58   |           | (313,335) |                | 0.61
|Outstanding, end of period       | 6,488,667         | $                 | 0.43             |        | 5,415,500 | $         | 0.67          



The following table summarizes information about stock options outstanding at August 10, 2006:



|               |                                    |                                     |      |                                 |                                     |           |                                 |       |  |  |  |  |  |  |  | 
|-------------- | ---------------------------------- | ----------------------------------- | ---- | ------------------------------- | ----------------------------------- | --------- | ------------------------------- | ----- |  |  |  |  |  |  |  | 
|               |                                    | Options Outstanding                 |      | Options exercisable            
|Exercise price | Number
outstanding
August 10, 2006 | Weighted remaining contractual life |      | Weighted average exercise price | Number exercisable, August 10, 2006 |           | Weighted average exercise price
|               |                                    |                                     |      |                                 |                                     |           |                                 |      
|               | $0.17                              | 10,000                              | 2.89 |                                 | $0.17                               | 3,334     |                                 | $0.17
|               | $0.19                              | 15,000                              | 2.87 |                                 | $0.19                               | 5,000     |                                 | $0.19
|               | $0.20                              | 20,000                              | 2.99 |                                 | $0.20                               | 6,667     |                                 | $0.20
|               | $0.21                              | 42,000                              | 2.85 |                                 | $0.21                               | 14,000    |                                 | $0.21
|               | $0.25                              | 60,000                              | 2.81 |                                 | $0.25                               | 20,000    |                                 | $0.25
|               | $0.26                              | 50,000                              | 2.79 |                                 | $0.26                               | 16,667    |                                 | $0.26
|               | $0.29                              | 27,000                              | 2.52 |                                 | $0.29                               | 9,001     |                                 | $0.29
|               | $0.31                              | 75,000                              | 2.64 |                                 | $0.31                               | 25,000    |                                 | $0.31
|               | $0.33                              | 81,666                              | 1.57 |                                 | $0.33                               | 31,666    |                                 | $0.33
|               | $0.34                              | 38,333                              | 2.07 |                                 | $0.34                               | 15,001    |                                 | $0.34
|               | $0.35                              | 40,333                              | 1.73 |                                 | $0.35                               | 17,666    |                                 | $0.35
|               | $0.36                              | 10,072                              | 1.52 |                                 | $0.36                               | 5,778     |                                 | $0.36
|               | $0.39                              | 112,000                             | 1.71 |                                 | $0.39                               | 72,334    |                                 | $0.39
|               | $0.40                              | 844,700                             | 1.03 |                                 | $0.40                               | 538,521   |                                 | $0.40
|               | $0.41                              | 10,000                              | 0.87 |                                 | $0.41                               | 10,000    |                                 | $0.41
|               | $0.43                              | 25,500                              | 2.19 |                                 | $0.43                               | 8,834     |                                 | $0.43
|               | $0.44                              | 15,000                              | 2.25 |                                 | $0.44                               | 5,000     |                                 | $0.44
|               | $0.45                              | 5,012,063                           | 1.60 |                                 | $0.45                               | 3,328,250 |                                 | $0.45
|              
|               |                                    | 6,488,667                           | 1.59 |                                 | $0.43                               | 4,132,719 |                                 | $0.44



The weighted average fair value of employee stock options granted during the period ended August 10, 2006 was $0.41 per share purchase option. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 59%; risk free interest rate - 5%; option term - 3 years; and dividend yield  nil.  The total compensation expense of $542,303 has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.



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(e)

Agents options



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



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



A summary of the status of the Companys Agents Options at August 10, 2006 and December 31, 2005 and changes during the periods ended on those dates is presented below:

|                                 |                  |                   |                  |   |         |         |                |     
|-------------------------------- | ---------------- | ----------------- | ---------------- | - | ------- | ------- | -------------- | ----
|                                 | August 10, 2006  | December 31, 2005
|                                 | Weighted average |                   | Weighted average
|                                 | Shares           |                   | Exercise Price   |   | Shares  |         | Exercise Price
|Outstanding, beginning of period | 907,557          | $                 | 0.45             |   | -       | $       | -             
|                                 | Granted          | -                 |                  | - |         | 907,557 |                | 0.45
|                                 | Exercised        | -                 |                  | - |         | -       |                | -   
|                                 | Cancelled        | -                 |                  | - |         | -       |                | -   
|Outstanding, end of period       | 907,557          | $                 | 0.45             |   | 907,557 | $       | 0.45          



The following table summarizes information about agents stock options outstanding at August 10, 2006:



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



The weighted average fair value of agents stock options granted during the year ended December 31, 2005 was $0.16 per share purchase option. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 66%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil.  The total value of $142,001 has been allocated to share issuance costs and credited to contributed surplus.

Contributed surplus



|                                        |   |           |        | 
|--------------------------------------- | - | --------- | ------ | 
|                                        |   |           | Amount
|Balance, December 31, 2004              | $ | 1,648,402
|Value of options expensed               |   | 858,209  
|Value of options exercised              |   | (60,458) 
|Value of brokers options               |   | 142,001  
|Value of warrants issued as commissions |   | 51,548   
|                                        |   |           |        | 
|Balance, December 31, 2005              |   | 2,639,702
|                                        |   |           |        | 
|Value of options expensed               |   | 542,303  
|                                        |   |           |        | 
|Balance, August 10, 2006                | $ | 3,182,005







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