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

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FORM 10-QSB

_______________

(Mark One)

x

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

For the quarterly period ended March 31, 2006

OR

¨

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

For the transition period from                              to                              

Commission file Number: 000-30090

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VISIPHOR CORPORATION

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

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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 May 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 March 31, 2006

INDEX

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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 resulting from current accounts receivable, work in progress and new 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.

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PART 1 – FINANCIAL INFORMATION

Item 1.   Financial Statements

The Company’s financial statements for the three-month period ended March 31, 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 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)

March 31, 2006 (Unaudited) and December 31, 2005

				March 31, 2006		December 31, 2005
Assets
Current assets:
	Cash and cash equivalents		$	174,678	$	790,091
	Accounts receivable			1,705,291		1,242,392
	Accrued revenue receivable			412,458		278,336
	Prepaid expenses and deposit			286,621		294,270
				2,579,048		2,605,089
Equipment, net (note 3)				523,993		529,735
Goodwill (note 4)				1,684,462		1,684,462
Other intangible assets (note 6)				1,512,287		2,076,406
			$	6,299,790	$	6,895,692
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable and accrued liabilities (note 11)		$	1,955,768	$	1,676,280
	Loans payable (note 7)			500,000		400,000
	Deferred revenue			433,157		303,892
	Capital lease obligations (note 8)			67,754		62,981
				2,956,679		2,443,153
Long-term liabilities:
	Capital lease obligations (note 8)			111,095		123,093
Shareholders’ equity:
	Share capital (note 9)			35,157,026		34,912,723
	Share subscriptions (note 9)			-		67,500
	Contributed surplus (note 10)			2,892,569		2,639,702
	Deficit			(34,817,579)		(33,290,479)
				3,232,016		4,329,446
			$	6,299,790	$	6,895,692
Operations and going concern (note 1)
Commitments (note 14)
Subsequent event (note 15)

See accompanying notes to consolidated financial statements.

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VISIPHOR CORPORATION

Consolidated Statements of Operations and Deficit

(Expressed in Canadian dollars)

(Unaudited)

For the three-month periods ended March 31, 2006 and 2005

					2006		2005
Revenue:
	Software sales			$	262,498	$	231,358
	Support and services				1,936,105		92,304
	Other				116,479		966
					2,315,082		324,628
Expenses:
	Administration				662,903		453,831
	Amortization				622,495		382,009
	Cost of materials				87,905		-
	Interest				27,176		4,562
	Sales and marketing				581,079		429,676
	Professional services				1,283,114		115,437
	Technology development (note 11)				475,048		393,303
	Restructuring charge (note 12)				102,462		-
					3,842,182		1,778,818
Loss for the period					(1,527,100)		(1,454,190)
Deficit, beginning of period					(33,290,479)		(26,658,823)
Deficit, end of period				$	(34,817,579)	$	(28,113,013)
Loss per share – basic and diluted				$	(0.04)	$	(0.06)
Weighted average number of shares outstanding					42,675,588		23,335,534
See accompanying notes to consolidated financial statements.

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VISIPHOR CORPORATION

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

(Unaudited)

For the three-month periods ended March 31, 2006 and 2005

				2006		2005
Cash provided by (used for):
Operations:
	Loss for the period		$	(1,527,100)	$	(1,454,190)
	Items not involving cash:
		Amortization		622,495		382,009
		Stock-based compensation		252,867		102,592
	Changes in non-cash operating working capital:
		Accounts receivable		(462,898)		(210,115)
		Accrued revenue receivable		(134,122)		(107,473)
		Prepaid expenses and deposit		7,649		26,675
		Accounts payable and accrued liabilities		279,488		(52,926)
		Deferred revenue		129,265		523,303
				(832,356)		(790,125)
Investments:
	Purchase of equipment			(44,623)		(23,589)
Financing:
	Issuance of common shares for cash			202,500		860,225
	Share issuance costs			(25,697)		(72,771)
	Proceeds of loans payable			300,000		-
	Repayment of loan payable			(200,000)		-
	Capital lease repayments			(15,237)		(10,416)
				261,566		777,038
Decrease in cash				(615,413)		(36,676)
Cash and cash equivalents, beginning of the period				790,091		123,148
Cash and cash equivalents, end of the period			$	174,678	$	86,472

See accompanying notes to consolidated financial statements.

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VISIPHOR CORPORATION

Consolidated Statements of Cash Flows, Continued

(Expressed in Canadian dollars)

(Unaudited)

For the three-month periods ended March 31, 2006 and 2005

			2006		2005
Supplementary information and disclosures:
	Interest paid	$	13,696	$	4,562
Non-cash investing and financing transactions not included in cash flows:
	Equipment acquired under capital lease		8,012		22,910
	Issuance of common shares for share subscriptions received in prior period		67,500		-
See accompanying notes to consolidated financial statements.

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VISIPHOR CORPORATION

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

Period ended March 31, 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 March 31, 2006, the Company incurred a loss from operations of $1,527,100 and a deficiency in operating cash flow of $832,356. In addition, the Company has incurred significant operating losses and net utilization of cash in operations in all prior periods. At March 31, 2006, the Company had a working capital deficiency of $377,631. Accordingly, the Company will require continued financial support from its shareholders and creditors until it is able to generate sufficient cash flow from operations on a sustained basis. Failure to obtain 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 March 31, 2006, the consolidated statements of operations and deficit for the three months ended March 31, 2006 and March 31, 2005, and the consolidated statements of cash flows for the three months ended March 31, 2006 and March 31, 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 18, 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.

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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:

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, 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:

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.

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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.

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2.

Significant accounting policies cont’d:

(i)

Stock-based compensation:

The Company has a stock-based compensation plan, which is described in note 9.  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)

Comparative figures:

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

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3.

Equipment:

Equipment under capital lease:

Included in computer hardware is $196,209 (December 31, 2005: $188,197) of cost and accumulated amortization of $104,281 (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 $19,050 (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 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:

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4.

Acquisition of Subsidiary cont’d:

5.

Investment

On July 31, 2004 the Company entered into an agreement with a United Kingdom (“UK”) Company to form a jointly owned company, Imagis Technologies UK Limited (“Imagis UK”). Imagis UK 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 6). 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.

6.

Other assets:

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7.

Loans Payable

Loans payable are payable on demand, unsecured and bear interest at the rate of 20% per annum.

8.

Capital lease obligations:

9.

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

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9.  Share Capital  cont’d:

 (c)

Warrants:

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

(d)

Options:

The Company has a stock option plan that was most recently approved at the Company’s annual general meeting of shareholders on June 17, 2005.  Under the terms of the plan, the Company may reserve up to 5,889,756 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 3 years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options, along with the Company’s outstanding shares, were consolidated on a 1 new option for 4.5 old basis. During the 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 March 31, 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.

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

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9.

Share Capital  cont’d:

(d)

Options cont’d:

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

The weighted average fair value of employee stock options granted during the period ended March 31, 2006 was $0.44 (2005-$0.37) 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% (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 $252,867 (2005-$102,592) has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.

(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.

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9.

Share Capital  cont’d:

(e)

Options cont’d:

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

The following table summarizes information about agents’ stock options outstanding at March 31, 2006:

The weighted average fair value of agents’ stock options granted during the year ended December 31, 2005 $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.

10.

Contributed surplus

11.

Technology development

Included in technology development expenses are net research and development costs of $25,000, consisting of incurred costs of $50,000 less a contribution of $25,000 from the National Research Council.

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12.

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 company Sunaptic Solutions Incorporated.

 

13.

Related-party transactions not disclosed elsewhere are as follows:

At March 31, 2006, accounts payable and accrued liabilities included $464,823 (at December 31, 2005 -$422,537) 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.

 

 

14.

Commitments:

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

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

 

15.

Subsequent Event

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. The Company also received regulatory approval to re-price 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, subject to shareholder approval. The vesting provisions and expiry dates of the re-priced options remain unchanged. The re-pricing of the options granted to directors and officers will be voted on at the Company’s annual general meeting, which is scheduled for May 8, 2006.

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.

 

16.

Financial instruments and risk management:

(a)

Fair values:

The fair value of the Company’s financial instruments, represented by cash, accounts receivable, accounts payable and accrued liabilities, 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.

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16.

Financial instruments and risk management con’t:

(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.

 

 

17.

Segmented information:

The Company operates in two segments, being the development and sale of software applications and solutions and related services and the provision of 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.

                                          

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17.

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:

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

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

18.

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 9, 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.  

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.

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18.

United States generally accepted accounting principles cont’d:

(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 deficit, net loss, loss per share and future income taxes under United States accounting principles are as follows:

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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 of 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 can provide services to organizations ranging from business process management support, development of an integration strategic plan, through to the design, development and implementation of a complete data sharing and integration solution for any combination of internal applications integration, business partner integration, process automation or workflow.

Overview

The Company’s Business

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

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

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

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

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be no assurance, however, that such trends will continue or will result in increased sales of the Company’s products and services.

Critical Accounting Polices

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

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

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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:

 

 

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

Use of estimates

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

Stock-based compensation

The Company has a stock-based compensation plan, which is described in Note 9 of the Notes to the Consolidated Financial Statements.  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.

Results of Operations for the three-month period ended March 31, 2006 compared to March 31, 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 March 31, 2006 were $2,315,082, which is over seven times the prior year level of $324,628. The increase is primarily due to increased consulting services revenues as a

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result of the acquisition of Sunaptic in November of 2005. Revenues from the Company’s software products increased to $262,498 for the current three-month period as compared to $231,358 for 2005, an increase of 13%.

Support and services revenues were 20 times higher at $1,936,105 for the three-month period ended March 31, 2006 than in 2005 of $92,304. The increase consisted of $1,607,682 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 new software sales.

As of April 30, 2006, Visiphor had work in process and contracted orders totalling $1.5 million that are not recorded in the financial statements as at March 31, 2006. Consequently, Visiphor expects that revenues will increase in the subsequent quarters of 2006 when compared to that 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 March 31, 2006 were $116,479, whereas other revenues of $966 were earned in the prior year. The increase was primarily due to revenue earned in 2006 of $58,894 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 $3,842,182 for the three-month period ended March 31, 2006, which is 116% greater than the 2005 operating expenses of $1,778,818. The 2006 expenses include stock-based compensation of $252,867 due to the increase of Visiphor’s employee stock option plan and $602,495 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition and $233,072 in amortization of contract backlogs and customer relationships relating to the Sunaptic acquisition. Excluding these non-cash charges and the one-time restructuring charge of $102,462 the 2006 operating expenses total $2,864,358. The 2005 expenses include stock-based compensation of $102,592 and amortization of $382,009. Excluding these expenses, the operating expenses for 2005 were $1,294,217. The increase of $1,570,141 between 2006 and 2005 represents a 121% increase in operating expenses over the prior period. The increased costs include $1,106,893 due to the addition of the consulting services division through the Sunaptic acquisition which is included in the professional services department. Administration costs increased due to the addition of an investor relations department. Increased costs in all other areas were due to overall increased staffing levels and activity.

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 staff level at May 10, 2006 is 88. The elimination of these positions represented a reduction in expenses in excess of $1 million on an annualized basis. The Company has recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions. The current operating cash expense level is approximately $11 million per year, and may increase if additional resources are required to meet sales demands.

Administration

Administrative costs for the three-month period ended March 31, 2006 were $662,903, which is 46% higher than for 2005 of $453,831. These costs include stock-based compensation charges of $61,219 in 2006 and $68,382 in 2005. Excluding these charges, the administrative costs were $601,684 in 2006 versus $385,449 in 2005, which represents a 56% increase. This increase was due to adding an investor relations department and other additional staff and the related operating costs. 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 future periods will be dependent upon the levels of activity in the Company.

Cost of Materials

Cost of materials for the three-month period ended March 31, 2006 were $87,905 and $nil in 2005. This cost includes $44,004 for sub-contracted services required for the security assessments for the King County RAIN project and $43,901 for software purchased for resale to a customer.

Interest and Amortization

The interest expense for the three-month period ended March 31, 2006 is $27,176 which is 6 times greater than for 2005 of $4,562. The increase is primarily due to interest of $15,561 on loans payable. The increase in amortization

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expense to $622,495 from $382,009 consists primarily of $233,072 due to the increased amortization expense associated with the amortization of intangibles acquired with the Sunaptic acquisition.

Sales and Marketing

Sales and marketing expenses for the three-month period ended March 31, 2006 were $581,079 which is 35% greater than for 2005 of $429,676. These costs include stock-based compensation charges of $20,486 in 2006 and $18,373 in 2005. Excluding these charges, the sales and marketing expenses were $560,593 in 2006 verses $411,303 in 2005 which represents a 36% increase. The increase in costs is due to an increase in the number of sales 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.

Professional Services

Costs for the professional services group for the three-month period ended March 31, 2006 were $1,283,114 which is 11 times greater than costs for the professional services group in 2005 of $115,437. These costs include a stock-based compensation charge of $136,430 in 2006 and $4,285 in 2005. Excluding this charge, the professional services costs were $1,146,684 in 2006 and $111,152 for 2005. Professional Services is a 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 March 31, 2006 were $475,048, which is 21% greater than the 2005 costs of $393,303. These costs include stock-based compensation charges of $34,732 in 2006 and $11,552 in 2005. Excluding these charges, the technology development expenses were $440,316 in 2006 verses $381,751 in 2005, which is an increase of 15%. 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 period ended March 31, 2006 are net research and development costs of $25,000, consisting of incurred costs of $50,000 less a contribution of $25,000 from the National Research Council. There were comparable costs or recoveries in the period ended March 31, 2005.

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.

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 current net loss on a monthly basis is approximately $509,000.  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 current rate of loss on a cash operating expense basis is approximately $183,000 per month.

Overall, the Company incurred a net loss for the three-month period ended March 31, 2006 of $1,527,100 or $0.04 per share, which is 5% higher than the net loss incurred during the three-months ended March 31, 2005 of $1,454,190 or $0.06 per share. Adjusting the loss to take into account the stock-based compensation of $252,867, the $602,495 in amortization and the one-time restructuring charge of $102,462 described above, the loss becomes $549,276 for 2006. Adjusting the 2005 loss for the stock-based compensation of $102,592 and amortization of $382,009 discussed above, the loss becomes $969,589 for 2005, representing a 43% decrease.

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The Company has work in progress and contracted sales orders totalling $1.5 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 the second quarter 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 second half of 2006 as the recognition of the associated revenue may be delayed.

Summary of Quarterly Results

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 acquisition, 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 March 31, 2006 was $790,091. During the period, the Company received additional net funds of $176,803 from a private placement and $300,000 in loans payable and repaid a $200,000 loan from 2005.

The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,527,100, 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 $832,356. The Company repaid capital leases of $15,237 and purchased capital assets of $44,622. Overall, the Company’s cash position decreased by $615,413 to $174,678 at March 31, 2006.

Private Placements in 2006

On March 2, 2006, the Company completed a private placement consisting of 600,000 units at $0.45 per unit. Each unit consisted of one common share and one-half of one transferable common share purchase warrant.  Each whole warrant entitles the holder to acquire one additional common share at an exercise price of $0.50 until March 2, 2007. The common shares and warrants are subject to a four-month hold period that expires on July 2, 2006. Finders’ fees of $23,625 were paid in cash. 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.

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 September 30, 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 Visiphor’s operations. If the Company’s operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.

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Contractual Obligations

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

The lease for the Company’s head office expired on June 30, 2005 and new premises were obtained under a sublease. The terms of the sublease are for 10,938 square feet for the period of August 1, 2005 to December 30, 2009. The monthly rent is $16,908.

Off-Balance Sheet Arrangements

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

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 and as a result of observations made by Grant Thornton LLP as described below, 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 quartered ended December 31, 2005, the Company’s independent auditors, Grant Thornton LLP, advised management and the audit committee of our board of directors of matters that they considered to be material weaknesses in the Company’s internal controls.  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 March 31, 2006, there were no significant changes in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

On March 3, 2006, the Company completed a private placement consisting of 600,000 units (the “Units”) at a price of $0.45 per Unit, for gross proceeds of $270,000.  Each Unit is comprised of one common share and one-half of one transferable common share purchase warrant (each whole warrant, a “Warrant”), each Warrant entitling the holder to purchase one additional common share at the price of $0.50 per share on or before March 2, 2007.  The securities are subject to a four-month hold period that expires on July 2, 2006.  The net proceeds to the Company, less cash finders’ fees of $23,625, were $246,375.

The Units were issued to persons located outside the United States who were not “U.S. persons”, as such term is defined in Regulation S (“Regulation S”) promulgated under the Securities Act in reliance upon the exclusion from registration available under Regulation S.

Item 3.  Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

 

None

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
	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

(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.

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SIGNATURES

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

VISIPHOR CORPORATION

 

Date: May 10, 2006

/s/ Wayne Smith

Wayne Smith

Chief Operating Officer and Chief Financial Officer

(Principal Financial and Accounting Officer and Duly Authorized Officer)

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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: May 10, 2006

/s/ Wayne Smith

Wayne Smith

Chief Operating Officer and Chief Financial Officer

        (Principal Financial and Accounting Officer)

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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: May 10, 2006

/s/ Roy Trivett

Roy Trivett

Chief Executive Officer

        (Principal Executive Officer)

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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 March 31, 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 Smith Wayne Smith Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) May 10, 2006

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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 March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roy Trivett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

	/s/ Roy Trivett Roy Trivett Chief Executive Officer (Principal Executive Officer) May 10, 2006

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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 $1,527,100 and $1,454,190 in the periods ended March 31, 2006 and March 31, 2005 respectively.  The Company has never been profitable and there can be no assurance that, in the future, the Company will be profitable on a quarterly or annual basis.

The Report of the Independent Registered Chartered Accountants on the Company’s December 31, 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 September 30, 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 Visiphor’s operations. If the Company’s operations are substantially curtailed, it may have difficulty fulfilling its current and future contractual obligations.  

Potential Fluctuations in Quarterly Financial Results

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

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

New Product Development

The Company expects that a significant portion of its future revenue will be derived from the sale of newly introduced products and from enhancement of existing products. The Company’s success will depend, in part, upon its ability to enhance its current products and to install such products in end-user applications on a timely and cost-effective basis. In addition, the Company must develop new products that meet changing market conditions, including changing customer needs, new competitive product offerings and enhanced technology. There can be no assurance that the Company will be successful in developing and marketing - on a timely and cost-effective basis - new products and enhancements that respond to such changing market conditions. If the Company is unable to anticipate or adequately respond on a timely or cost-effective basis to changing market conditions, to develop new software products and enhancements to existing products, to correct errors on a timely basis or to complete products currently under development, or if such new products or enhancements do not achieve market acceptance, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected. In

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

Lengthy Sales Cycles

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

Dependence on 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 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

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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.

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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 Company 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 The Company 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 March 31, 2006. While these shareholders do not hold a majority of the Company’s outstanding common shares, they will be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and the approval of mergers, consolidations and sales of the Company’s assets. This may prevent or discourage tender offers for the Company’s common shares.

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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BC FORM 51-102F1

QUARTERLY REPORT

ISSUER DETAILS:

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.

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Supplementary Information to the Financial Statements

Management’s Discussion and Analysis

As at May 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 resulting from current accounts receivable, work in progress and new 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 of 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 can provide services to organizations ranging from business process management support, development of an integration strategic plan, through to the design, development and implementation of a complete data sharing and integration solution for any combination of internal applications integration, business partner integration, process automation or workflow.

Overview

The Company’s Business

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

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

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

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 conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.

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

Revenue recognition

(ii)

Software sales revenue:

The Company recognizes revenue consistent with the SEC Staff Accounting Bulletin No. 104 and Statement of Position 97-2, “Software Revenue Recognition”. In accordance with this statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales

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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

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:

 

 

 

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

Use of estimates

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

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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 9 of the Notes to the Consolidated Financial Statements.  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.

Results of Operations for the three-month period ended March 31, 2006 compared to March 31, 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 March 31, 2006 were $2,315,082, which is over seven times the prior year level of $324,628. The increase is primarily due to increased consulting services revenues as a result of the acquisition of Sunaptic in November of 2005. Revenues from the Company’s software products increased to $262,498 for the current three-month period as compared to $231,358 for 2005, an increase of 13%.

Support and services revenues were 20 times higher at $1,936,105 for the three-month period ended March 31, 2006 than in 2005 of $92,304. The increase consisted of $1,607,682 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 new software sales.

As of April 30, 2006, Visiphor had work in process and contracted orders totalling $1.5 million that are not recorded in the financial statements as at March 31, 2006. Consequently, Visiphor expects that revenues will increase in the subsequent quarters of 2006 when compared to that 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 March 31, 2006 were $116,479, whereas other revenues of $966 were earned in the prior year. The increase was primarily due to revenue earned in 2006 of $58,894 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 $3,842,182 for the three-month period ended March 31, 2006, which is 116% greater than the 2005 operating expenses of $1,778,818. The 2006 expenses include stock-based compensation of $252,867

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due to the increase of Visiphor’s employee stock option plan and $602,495 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition and $233,072 in amortization of contract backlogs and customer relationships relating to the Sunaptic acquisition. Excluding these non-cash charges and the one-time restructuring charge of $102,462 the 2006 operating expenses total $2,864,358. The 2005 expenses include stock-based compensation of $102,592 and amortization of $382,009. Excluding these expenses, the operating expenses for 2005 were $1,294,217. The increase of $1,570,141 between 2006 and 2005 represents a 121% increase in operating expenses over the prior period. The increased costs include $1,106,893 due to the addition of the consulting services division through the Sunaptic acquisition which is included in the professional services department. Administration costs increased due to the addition of an investor relations department. Increased costs in all other areas were due to overall increased staffing levels and activity.

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 staff level at May 10, 2006 is 88. The elimination of these positions represented a reduction in expenses in excess of $1 million on an annualized basis. The Company has recorded a restructuring charge of $102,462 during the first quarter of 2006 for severance costs associated with the staff reductions. The current operating cash expense level is approximately $11 million per year, and may increase if additional resources are required to meet sales demands.

Administration

Administrative costs for the three-month period ended March 31, 2006 were $662,903, which is 46% higher than for 2005 of $453,831. These costs include stock-based compensation charges of $61,219 in 2006 and $68,382 in 2005. Excluding these charges, the administrative costs were $601,684 in 2006 versus $385,449 in 2005, which represents a 56% increase. This increase was due to adding an investor relations department and other additional staff and the related operating costs. 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 future periods will be dependent upon the levels of activity in the Company.

Cost of Materials

Cost of materials for the three-month period ended March 31, 2006 were $87,905 and $nil in 2005. This cost includes $44,004 for sub-contracted services required for the security assessments for the King County RAIN project and $43,901 for software purchased for resale to a customer.

Interest and Amortization

The interest expense for the three-month period ended March 31, 2006 is $27,176 which is 6 times greater than for 2005 of $4,562. The increase is primarily due to interest of $15,561 on loans payable. The increase in amortization expense to $622,495 from $382,009 consists primarily of $233,072 due to the increased amortization expense associated with the amortization of intangibles acquired with the Sunaptic acquisition.

Sales and Marketing

Sales and marketing expenses for the three-month period ended March 31, 2006 were $581,079 which is 35% greater than for 2005 of $429,676. These costs include stock-based compensation charges of $20,486 in 2006 and $18,373 in 2005. Excluding these charges, the sales and marketing expenses were $560,593 in 2006 verses $411,303 in 2005 which represents a 36% increase. The increase in costs is due to an increase in the number of sales 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.

Professional Services

Costs for the professional services group for the three-month period ended March 31, 2006 were $1,283,114 which is 11 times greater than costs for the professional services group in 2005 of $115,437. These costs include a stock-based compensation charge of $136,430 in 2006 and $4,285 in 2005. Excluding this charge, the professional services costs were $1,146,684 in 2006 and $111,152 for 2005. Professional Services is a 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 March 31, 2006 were $475,048, which is 21% greater than the 2005 costs of $393,303. These costs include stock-based compensation charges of $34,732 in

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2006 and $11,552 in 2005. Excluding these charges, the technology development expenses were $440,316 in 2006 verses $381,751 in 2005, which is an increase of 15%. 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 period ended March 31, 2006 are net research and development costs of $25,000, consisting of incurred costs of $50,000 less a contribution of $25,000 from the National Research Council. There were comparable costs or recoveries in the period ended March 31, 2005.

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.

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 current net loss on a monthly basis is approximately $509,000.  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 current rate of loss on a cash operating expense basis is approximately $183,000 per month.

Overall, the Company incurred a net loss for the three-month period ended March 31, 2006 of $1,527,100 or $0.04 per share, which is 5% higher than the net loss incurred during the three-months ended March 31, 2005 of $1,454,190 or $0.06 per share. Adjusting the loss to take into account the stock-based compensation of $252,867, the $602,495 in amortization and the one-time restructuring charge of $102,462 described above, the loss becomes $549,276 for 2006. Adjusting the 2005 loss for the stock-based compensation of $102,592 and amortization of $382,009 discussed above, the loss becomes $969,589 for 2005, representing a 43% decrease.

The Company has work in progress and contracted sales orders totalling $1.5 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 the second quarter 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 second half of 2006 as the recognition of the associated revenue may be delayed.

Summary of Quarterly Results

 

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 acquisition, 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 March 31, 2006 was $790,091. During the period, the Company received additional net funds of $176,803 from a private placement and $300,000 in loans payable and repaid a $200,000 loan from 2005.

The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,527,100, 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 $832,356. The Company repaid capital leases of $15,237 and purchased capital assets of $44,622. Overall, the Company’s cash position decreased by $615,413 to $174,678 at March 31, 2006.

Private Placements in 2006

On March 2, 2006, the Company completed a private placement consisting of 600,000 units at $0.45 per unit. Each unit consisted of one common share and one-half of one transferable common share purchase warrant.  Each whole warrant entitles the holder to acquire one additional common share at an exercise price of $0.50 until March 2, 2007. The common shares and warrants are subject to a four-month hold period that expires on July 2, 2006. Finders’ fees of $23,625 were paid in cash. 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.

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 September 30, 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 Visiphor’s operations. If the Company’s operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.

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Contractual Obligations

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

The lease for the Company’s head office expired on June 30, 2005 and new premises were obtained under a sublease. The terms of the sublease are for 10,938 square feet for the period of August 1, 2005 to December 30, 2009. The monthly rent is $16,908.

Off-Balance Sheet Arrangements

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

Related-party transactions not disclosed elsewhere are as follows:

At March 31, 2006, accounts payable and accrued liabilities included $464,823 (at December 31, 2005 -$422,537) 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.

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 May 10, 2005

(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

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(c)

Issued

 

 (c)

Warrants:

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

 

(d)

Options:

The Company has a stock option plan that was most recently approved at the Company’s annual general meeting of shareholders on June 17, 2005.  Under the terms of the plan, the Company may reserve up to 5,889,756 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 3 years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options, along with the Company’s outstanding shares, were consolidated on a 1 new option for 4.5 old

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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 March 31, 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. The Company also received regulatory approval to re-price 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, subject to shareholder approval. The vesting provisions and expiry dates of the re-priced options remain unchanged. The re-pricing of the options granted to directors and officers will be voted on at the Company’s annual general meeting, which is scheduled for May 10, 2006.

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.

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

 

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

The weighted average fair value of employee stock options granted during the period ended May 10, 2006 was $0.44 (2005-$0.37) 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% (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 $328,627 (2005-$102,592) has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.

(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 May 10, 2006 and December 31, 2005 and changes during the periods ended on those dates is presented below:

 

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The following table summarizes information about agents’ stock options outstanding at March 31, 2006:

The weighted average fair value of agents’ stock options granted during the year ended December 31, 2005 $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

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