U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

(Mark One)

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

For the quarterly period ended March 31, 2007

or

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

For the transition period from __________ to __________

Commission File Number 000-30948

QI SYSTEMS INC.

(Exact name of registrant as specified in its charter)

Delaware	20-5126146
(State or other jurisdiction of incorporate of organization)	(IRS Employer Identification Number)

609 Cheek Sparger Road, Suite 300; Colleyville, TX 76034

(Address of principal executive offices) (Zip Code)

(817) 485-8111

(Registrant’s telephone number, including area code)

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 registrant 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares outstanding as of May 18, 2007
Common Stock, par value $0.001 per share	49,727,486

Transitional Small Business Disclosure Format (check one);

Yes o  No x

QI SYSTEMS INC.

FORM 10-QSB

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

TABLE OF CONTENTS

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
Interim Consolidated Balance Sheets as of March 31, 2007 and June 30, 2006		4
Interim Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2007 and 2006		5
Interim Consolidated Statements of Cash Flows for the Three and Nine months Ended March 31, 2007 and 2006		6
Interim Consolidated Statements of Stockholders' Equity (Deficiency)		8
Notes to Interim Consolidated Financial Statements		9
Item 2.	Management's Discussion and Analysis or Plan of Operation	17
Item 3.	Controls and Procedures	21
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Securities and Use of Proceeds	21
Item 6.	Exhibits	22
SIGNATURES		22

2

QI SYSTEMS INC.

A Delaware Company

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For Three and Nine Months Ended March 31, 2007 and 2006

(Expressed in US dollars)

3

QI SYSTEMS INC.

Interim Consolidated Balance Sheets

March 31, 2007 and June 30, 2006

(Expressed in US Dollars)

(Unaudited)

	March 31, 2007			June 30, 2006
	$			$
Assets
Current
Cash and cash equivalents		41,156			73,559
Receivables		139,943			31,963
Prepaid expenses		8,009			227,566
Inventory - Note 4		374,240			149,902
		563,348			482,990
Deposit		1,000			1,000
Equipment		29,502			32,680
		593,850			516,670
Liabilities
Current
Payables and accruals		441,880			350,954
Shareholder loans - Note 6		282,500			2,575
Deposits received		117,527			20,059
Unearned revenue		59,027			10,734
		900,934			384,322
Long term shareholder loans - Note 6		158,512			-
		1,059,446			384,322
Stockholders’ Equity (Deficiency)
Capital stock - Note 7
Authorized: 100,000,000 common stock, $0.001 par value
Issued: 47,123,201 common stock (June 30, 2006: 42,095,756)		47,123			42,096
Additional paid in capital		15,148,904			14,613,929
Shares subscribed		145,500			-
Accumulated Deficit		(15,759,586	)		(14,508,086	)
Cumulative translation adjustment		(47,537	)		(15,591	)
		(465,596	)		132,348
		593,850			516,670

The accompanying notes are an integral part of these financial statements.

4

QI SYSTEMS INC.

Interim Consolidated Statements of Operations

for the three and nine months ended March 31, 2007 and 2006

(Expressed in US Dollars)

(Unaudited)

	Three months ended March 31,						Nine months ended March 31,
	2007			2006			2007			2006
	$			$			$			$
Revenue		188,891			256,487			449,612			379,453
Cost of goods sold		99,020			85,518			241,789			138,982
		89,871			170,969			207,823			240,471
Expenses
Administration		190,556			162,146			511,240			531,353
Amortization		2,517			1,683			6,990			4,028
Development costs		51,901			45,025			110,951			125,460
Financing costs and interest		14,036			594			87,781			2,005
Interest on long term debt - Note 6		2,098			-			154,699			-
Investor relations		14,944			138,699			282,059			406,766
Sales and marketing		93,887			28,984			207,776			97,662
Professional fees		20,457			104,457			80,095			181,871
Stock-based compensation		8,568			468			18,418			49,731
		398,964			482,056			1,460,009			1,398,876
Operating loss		(309,093	)		(311,087	)		(1,252,186	)		(1,158,405	)
Interest income		-			3,952			686			3,952
Gain on settlement of debt		-			(8,094	)		-			34,584
Net loss		(309,093	)		(315,229	)		(1,251,500	)		(1,119,869	)
Other comprehensive income:
Foreign currency translation adjustment		(6,229	)		100,040			31,946			133,321
Comprehensive loss		(315,322	)		(215,189	)		(1,219,554	)		(986,548	)
Net Loss per share - basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.03	)
Weighted average number of shares outstanding		46,000,662			40,326,571			44,293,936			36,234,494

The accompanying notes are an integral part of these financial statements.

5

QI SYSTEMS INC.

Interim Consolidated Statements of Cash Flows

for the nine months ended March 31, 2007 and 2006

(Expressed in US Dollars)

(Unaudited)

	Nine months ended March 31,
	2007			2006
	$			$
Cash Flows related to Operating Activities
Net loss for the period		(1,251,500	)		(1,119,869	)
Adjustments to reconcile net loss used in operations
Stock-based compensation		18,418			49,731
Employment Incentive paid with shares		9,147			37,500
Investor relations expense		227,453			331,083
Finance fee		82,281			-
Gain on settlement of debt		-			(34,584	)
Amortization		6,990			4,028
Interest Expense		146,188			-
Inventory write-down		12,251			-
Changes in non-cash working capital items
Receivables		(107,980	)		(244,580	)
Share subscriptions receivable		-			(3,453	)
Prepaid expenses		(7,324	)		12,629
Inventory		(236,455	)		(1,729	)
Payables and accruals		104,547			(420,566	)
Deposits received		97,468			(16,320	)
Unearned revenue		48,293			-
		(850,223	)		(1,406,130	)
Cash Flows related to Investing Activity Investment in equipment		(3,812	)		(28,144	)

…/cont’d

The accompanying notes are an integral part of these financial statements.

6

Continued

QI SYSTEMS INC.

Interim Consolidated Statements of Cash Flows

for the nine months ended March 31, 2007 and 2006

(Expressed in US Dollars)

(Unaudited)

	Nine months ended March 31,
	2007			2006
	$			$
Cash Flows related to Financing Activities
Proceeds from (repayment of) shareholder loans		438,437			(20,109	)
Proceeds from share issuances, net of issue costs		255,000			1,008,203
Proceeds from exercise of stock options and warrants		7,500			254,202
Proceed from share capital subscribed		145,500			100,000
		846,437			1,342,296
Effect of foreign currency translation on cash		(24,805	)		133,321
Net increase (decrease) in cash		(32,403	)		41,343
Cash, beginning		73,559			59,950
Cash and cash equivalents, ending		41,156			101,293

Non-cash transactions - Note 10

The accompanying notes are an integral part of these financial statements.

7

QI SYSTEMS INC.

Interim Consolidated Statements of Stockholders' Equity (Deficiency)

for the year ended June 30, 2006 and for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

 

							Additional			Share						Cumulative			Stockholders’
	Common Shares						Paid-in			Capital			Accumulated			Translation			Equity
	Number			Par Value*			Capital*			Subscribed			Deficit			Adjustment			(Deficiency)
Balance, June 30, 2005		24,230,053		$	24,230		$	11,962,199		$	692,333		$	(12,718,653	)	$	(86,916	)	$	(126,807	)
Issued pursuant to private placements
for cash		12,620,500			12,620			1,609,430			(270,300	)		-			-			1,351,750
for settlement of debts		241,667			242			36,008			-			-			-			36,250
Issued pursuant to a debt settlement agreement		100,000			100			30,900			-			-			-			31,000
Issued for services		4,292,500			4,293			758,520			(444,063	)		-			-			318,750
Share issue costs		150,000			150			(95,854	)		22,030			-			-			(73,674	)
Stock-based compensation		-			-			58,047			-			-			-			58,047
Exercise of options for cash		32,250			32			4,806			-			-			-			4,838
Exercise of warrants
for cash		966,665			967			192,366			-			-			-			193,333
for settlement of debts		212,121			212			56,757			-			-			-			56,969
Escrow shares cancelled		(750,000	)		(750	)		750			-			-			-			-
Foreign currency translation adjustment		-			-			-			-			-			71,325			71,325
Net loss		-			-			-			-			(1,789,433	)		-			(1,789,433	)
Balance, June 30, 2006		42,095,756			42,096			14,613,929			-			(14,508,086	)		(15,591	)		132,348
Issued pursuant to private placements																				-
for cash		3,642,857			3,643			251,357			145,500			-			-			400,500
for settlement of debts		194,588			194			13,427			-			-			-			13,621
Issued for Services		210,000			210			12,390												12,600
Beneficial conversion feature - Note 5		-			-			150,000			-			-			-			150,000
Stock based compensation		-			-			18,181												18,181
Exercise of stock options for cash		50,000			50			7,450			-			-			-			7,500
Pursuant to loan agreements		930,000			930			82,170			-			-			-			83,100
Foreign currency translation adjustment		-			-			-			-			-			(31,946	)		(31,946	)
Net loss		-			-			-			-			(1,251,500	)		-			(1,251,500	)
Balance, March 31, 2007		47,123,201		$	47,123		$	15,148,904		$	145,500		$	(15,759,586	)	$	(47,537	)	$	(465,596	)

*The par value of common shares has been retroactively restated to reflect a change from no par value to a par value of $0.001 effective July 1, 2006.

The accompanying notes are an integral part of these financial statements.

8

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 1 Interim Reporting

QI Systems Inc. (“QI” or “the Company”) was incorporated in 1978 under the British Columbia Company Act. Effective July 1, 2006, the Company changed its jurisdiction of incorporation to the State of Delaware, USA. The Company manufactures, designs and sells readers that allow the use of cash-card payment systems for self-serve applications such as vending, gaming, laundromat machines, transit fare collection systems and newspaper vending machines.

The accompanying unaudited interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these consolidated financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended June 30, 2006.

The results of operations for the nine months ended March 31, 2007 are not indicative of the results that may be expected for the full year.

Note 2 Continuance of Operations

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next twelve months. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At March 31, 2007, the Company had not yet achieved profitable operations, has accumulated losses of $15,759,586 since its inception, has a working capital deficit of $337,586 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances; however there is no assurance of additional funding being available.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

9

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 3 Additional Significant Accounting Policy

Beneficial Conversion Feature

When the Company issues convertible debt securities with a non-detachable conversion feature that provides for a rate of conversion that is below market value on the commitment date, it is known as a beneficial conversion feature (“BCF”). Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, the conversion feature of the security that has characteristics of an equity instrument is measured at its intrinsic value at the commitment date and is recorded as additional paid in capital. A portion of the proceeds of the security issued is allocated to the conversion feature equal to its intrinsic value to a maximum of the proceeds received. The resulting discount of the debt instrument is amortized into income as interest expense over the conversion feature’s vesting period.

Note 4 Inventory

At March 31, 2007, inventory is presented net of a provision for obsolete stock of $12,117 (June 30, 2006: $Nil) and consists of parts and materials of $159,396 (June 30, 2006: $149,902) and work-in-progress of $226,961 (June 30, 2006: $Nil).

Note 5 Related Party Transactions - Note 6

During the nine months ended March 31, 2007, the Company entered into five separate loan agreements with two shareholders of the Company and a related party to one of the shareholders (Note 6). A portion of the proceeds from the loan with the related party to one of the shareholders was used to pay off two earlier loans from the same shareholder.

Included in accounts payable at March 31, 2007 is $34,002 (June 30, 2006: $66,765) due to a company with a common director of the Company.

10

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 6 Shareholder Loans

The following borrowing transactions occurred during the nine months ended March 31, 2007:

By a loan agreement dated August 4, 2006, the Company was loaned $50,000 by a shareholder of the Company. This loan is unsecured and non-interest bearing. The agreement provides that if the loan is not repaid within 60 days, interest will accrue at a monthly rate of 2% of the principal unpaid balance. As a funding fee for the loan, the Company agreed to issue the shareholder 30,000 shares of the Company's common stock. The shares were issued in October 2006. This loan was subsequently paid off as part of a new loan agreement dated December 18, 2006. Interest accrued on this loan was forgiven.

By an agreement dated August 31, 2006, the Company was loaned $100,000 by the above noted shareholder. This loan is secured and non-interest bearing. The loan is secured by the Company’s inventory, equipment, trademarks, trade names, contract rights and leasehold interests. The agreement provides that if the loan is not repaid within 90 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, the Company agreed to issue the shareholder 250,000 shares of the Company's common stock. The shares were issued in October 2006.This loan was subsequently paid off as part of a new loan agreement dated December 18, 2006. Interest accrued on this loan was forgiven.

By an agreement dated September 5, 2006, the Company was loaned $150,000 by a shareholder of the Company. The subordinated loan has a term of five years; bears interest at 10% per annum and is convertible into common stock of the Company at $0.07 per share. In addition, for each share of common stock issued upon conversion, a warrant to purchase additional shares of common stock of the Company will be issued at an exercise price of $0.20 per share for two years from the date the loan is converted. An amount of $150,000 was recognized during the three months ended September 30, 2006 as the fair value of the beneficial conversion feature of this loan. This amount has been included in interest on long-term debt. During the nine months ended March 31, 2007, interest of $8,511 was accrued.

By an agreement dated December 18, 2006, the Company was loaned $250,000 by a company affiliated with a shareholder. The loan is secured by the Company’s inventory, equipment, trademarks, trade names, contract rights and leasehold interest. The agreement provides that if the loan is not repaid within 90 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, the Company issued 500,000 restricted shares of its common stock. As a condition of the loan, the Company agreed to pay off the August 4, 2006 loan for $50,000 and the August 31, 2006 loan for $100,000 from the same shareholder. During the nine months ended March 31, 2007, accrued interest of $2,500 was recorded.

By an agreement dated February 28, 2007, the Company was loaned $30,000 by a company affiliated with a shareholder. The loan is secured by the Company’s inventory, equipment, trademarks, trade names, contract rights and leasehold interest. The agreement provides that if the loan is not repaid within 60 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, the Company issued 150,000 shares of its common stock. No interest was accrued or payable as of March 31, 2007.

11

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 7 Share Capital - Notes 6 and 9

Share Issuance:

Pursuant to four loan agreements entered into during the nine months ended March 31, 2007 with a shareholder of the Company and a related party to the shareholder, the Company issued 30,000 shares valued at $0.17 per share issued in October 2006; 250,000 shares valued at $0.15 per share issued in October 2006; 500,000 shares valued at $0.06 per share issued in December 2006 and 150,000 shares valued at $0.07 per share issued in March 2007.

A director of the Company exercised 50,000 share purchase options at $0.15 per share for total proceeds of $7,500. The shares were issued in October 2006.

On October 3, 2006, the Company completed a private placement of 2,408,874 Units at $0.07 per Unit for gross proceeds of $168,621. $13,621 of the proceeds were paid by the settlement of debts outstanding at that time. Each Unit is comprised of one share of common stock of the Company and one share purchase warrant. Each warrant entitles the holder to purchase one share of common stock of the Company at $0.20 per share. The warrants expire on October 3, 2008.

On December 22, 2006, the Company issued 50,000 shares of its common stock at $0.06 to an employee of the Company as part of his employment arrangement.

On December 22, 2006, the Company issued 100,000 shares of its common stock at $0.06 to a consultant to the Company as part of his service agreement.

On December 22, 2006, the Company issued 60,000 shares of its common stock at $0.06 to a related party of an investor relations consultant for services rendered on the Company’s behalf.

On March 3, 2007, the Company completed a private placement of 1,428,571 Units at $0.07 per Unit for gross proceeds of $100,000. Each Unit is comprised of one share of common stock of the Company and one share purchase warrant. Each warrant entitles the holder to purchase one share of common stock of the Company at $0.20 per share. The warrants expire on March 3, 2009.

Commitments:

Share capital subscribed:

As at March 31, 2007, proceeds of $145,500 representing 2,078,571 Units at $0.07 per Unit had been received by the Company as subscriptions for a private placement to be completed in April 2007. Each Unit is comprised of one share of common stock of the Company and one share purchase warrant. Each warrant entitles the holder to purchase one share of common stock of the Company at $0.20 per share; expiring on April 30, 2009. Subsequent to March 31, 2007 an additional $36,800 was received for a further 525,714 Units for the same private placement and the Company issued a total of 2,604,285 Units.

12

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 7 Share Capital - Notes 6 and 9 (continued)

Commitments: (continued)

Warrants:

On October 3, 2006, pursuant to a private placement, the Company issued 2,408,874 warrants exercisable at $0.20 per share which expire on October 3, 2008.

On March 3, 2007, pursuant to a private placement, the Company issued 1,428,571 warrants exercisable at $0.20 per share which expire on March 3, 2009.

A summary of the status of the Company's warrant activity as of March 31, 2007 and June 30, 2006 and changes during the period ending on those dates is presented below:

	March 31, 2007					June 30, 2006
	Number of options			Weighted Average Exercise Price		Number of options			Weighted Average Exercise Price
Outstanding, beginning  of period		14,225,803		$	0.29		6,625,574		$	0.28
Issued		3,837,445		$	0.20		12,862,167		$	0.29
Exercised		-			-		(1,178,786	)	$	0.21
Expired		(8,184,136	)	$	0.26		(4,084,152	)	$	0.30
Outstanding, end of  period		9,879,112		$	0.28		14,225,803		$	0.29

Share purchase warrants outstanding to acquire an equal number of common shares as of March 31, 2007 and June 30, 2006 are as follows:

Number of Warrants				Exercise		Expiry
March 31, 2007		June 30, 2006		Price		Date
	-		6,820,500	$	0.25		October 30, 2006
	-		1,363,636	$	0.30		November 17, 2006
	4,641,667		4,641,667	$	0.30		September 01, 2007
	1,400,000		1,400,000	$	0.40		June 20, 2008
	2,408,874		-	$	0.20		October 3, 2008
	1,428,571		-	$	0.20		March 3, 2009
	9,879,112		14,225,803

13

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 7 Share Capital - Notes 6 and 9 (continued)

Commitments: (continued)

Stock Options:

The Company issues stock options as approved by the board of directors to employees, consultants and directors. Options are issued at the fair market price at the time of grant and may be granted for periods of up to five years. The vesting schedule for each grant is determined by the board of directors.

On December 20, 2006 the board of directors granted 2,000,000 options to its directors, employees and certain contractors. The option price is $0.06 per share and will vest quarterly over the next two years. The options will expire on December 20, 2011.

On December 20, 2006, the board of directors repriced 384,000 options issued on December 31, 2002 from an exercised price of $0.50 per share to $0.06 per share. These options remain fully vested and will expire on December 31, 2007.

A summary of the status of the Company's stock option plan as of March 31, 2007 and June 30, 2006 and changes during the period ending on that dates is presented below:

	March 31, 2007					June 30, 2006
	Number of options			Weighted Average Exercise Price		Number of options			Weighted Average Exercise Price
Outstanding, beginning  of period		1,050,000			0.12		1,780,500			0.43
Issued		2,000,000			0.06		-			-
Exercised		(50,000	)		0.15		(32,250	)		0.15
Expired		-			-		(167,000	)		1.79
Forfeited		-			-		(531,250	)		0.38
Outstanding, end of  period		3,000,000			0.08		1,050,000			0.12	(A)

(A) Reflects restatement of 384,000 options originally priced at $0.50 per share, repriced to $0.06 per share in December 2006.

14

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 7 Share Capital - Notes 6 and 9 (continued)

Commitments: (continued)

Stock Options: (continued)

			Options
Options Outstanding			Exercisable
		Weighted
		Average
	Number	Remaining	Number
	Outstanding at	Contractual	Exercisable at
	March 31,	Life	March 31,
Exercise Price	2007	(Years)	2007
0.15	616,000	2.76	616,000
0.06	2,384,000	4.09	634,000
	3,000,000	3.81	1,250,000

The options expire December 31, 2007 as to 384,000 options at $0.06 per share; December 31, 2009 as to 616,000 options at $0.15 per share and December 20, 2011 as to 2,000,000 options at $0.06 per share.

Note 8 Segmented Information

The Company operates in one business segment: the development, manufacture and installation of unattended smartcard applications.

For the nine months ended March 31, 2007, revenues by country are as follows:

	2007
	$
Canada		337,440
United States		82,221
Other		29,951
		449,612

As at March 31, 2007, the net book value of capital assets located in Canada and the United States are $8,252 and $21,250, respectively.

During the nine months ended March 31, 2007, one customer accounted for 69% of revenues.

15

QI SYSTEMS INC.

Notes to the Interim Consolidated Financial Statements

for the nine months ended March 31, 2007

(Expressed in US Dollars)

(Unaudited)

Note 9 Commitments and Contingencies - Note 7

Obligations under the operating leases on office premises are:

	$
Remaining for fiscal period:
2007		16,821
2008		25,618
2009		16,412
		58,851

The Company signed an employment agreement dated December 19, 2005 with the president of the Company whereby the president will receive an initial salary of $17,500 per month plus $1,000 per month in benefits. In addition, the president is entitled to receive bonuses not to exceed 200% of his salary based on the achievement of certain financial targets. The term of the contract is indefinite.

The Company signed an employment agreement dated March 1, 2006 with an officer of the Company whereby the officer will receive an initial salary of $13,000 per month plus benefits. In addition, the officer is entitled to receive bonuses not to exceed 150% of his salary based on the achievement of certain financial targets. The term of the contract is indefinite.

On December 5, 2006, the Company signed a service agreement with a consultant to the Company. Pursuant to the agreement, the consultant received 100,000 shares of the Company’s common stock at the start of his assignment and will receive a monthly fee of $8,333 for a period of six months and an additional 100,000 shares of the Company’s common stock after completing six months of service.

A notice of claim has been filed in the Provincial Court of British Columbia against the Company whereby the claimant is claiming $25,000 in damages plus costs from misrepresentation. Management of the Company believes the claim is without merit and is unlikely to succeed.

Note 10 Non-cash Transactions

Investing and financing activities that do not have an impact on current cash flows are excluded from the statements of cash flows.

During the nine months ended March 31, 2007, the Company issued 930,000 common shares valued at $83,100 as a funding fee pursuant to three shareholder loan agreements. The Company also issued 210,000 common shares valued at $12,600 for services. These transactions have been excluded from the statement of cash flows.

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

Forward Looking Statements

We are including the following cautionary statement in this Form 10-QSB for any forward-looking statements made by, or on behalf of, us. Certain statements contained herein and other materials we file with the Securities and Exchange Commission are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Forward looking statements are accompanied by words such as “may”, “will”, “could”, “should”, “anticipate”, “believe”, “budgeted”, “expect”, “intend”, “plan”, “project”, “potential”, “estimate”, or “future” or variations thereof or similar statements. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties, but we cannot assure you that management's expectations, beliefs or projections will result or be achieved or accomplished.

Our Business

We operate as a designer, developer and marketer of hardware and software for smart cards. We are a leading supplier of smart card systems for various vertical markets including vending machines, parking meters, gaming, photocopiers, laundry machines and water operators. Our products have been installed in Canada, the United States of America, Venezuela, the United Kingdom and Norway.

Results of Operations

Three Months Ended March 31, 2007 and 2005

Revenues during the three months ended March 31, 2007 were $188,891, primarily derived from the sale of smart cards and ancillary products to our client base, fundamentally within the parking and newspaper vending industries. Sales of our products in the third quarter of fiscal 2007 were essentially flat compared to the preceding quarter. Sales continue to be concentrated in a few clients. Sales in the third quarter of fiscal 2007 decreased by $67,596, or 26%, over sales in the comparative fiscal 2006 period. The decrease in sales is the result of a large order shipped to our largest parking customer in the prior year’s quarter. Although there were similar large orders received from this customer in the current year, the shipments were made over successive quarters and therefore shipments in the current quarter were not as large as the prior year’s.

We incurred a net loss of $309,093 in the quarter ended March 31, 2007 and have incurred losses in past periods. Losses were funded by the receipt of share capital and the exercise of stock purchase warrants. We expect to be able to fund working capital requirements in future periods with cash flow from operations and the issuance of equity.

Cost of sales during the period was $99,020, which represents 52% of sales, an increase from total cost of sales of $85,518, or 33% of sales, in the comparative quarter. Gross margins were $89,871 or 48% of sales (comparative quarter: 67% of sales).

Our expenses in the quarter are categorized as administration, amortization, development costs, financing costs and interest, investor relations, sales and marketing and professional fees.

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During the third quarter of fiscal 2007, administration expenses were $190,556 (comparative period: $162,146), which include the following three major expenses: salaries and benefits paid to employees performing administrative duties, foreign exchange expense (most of which is unrealized and refers to adjustments of monetary items at quarter end) and rent expense.

Development costs in the quarter ended March 31, 2007 were $51,901 (comparative period: $45,025), of which the most significant expense was for salaries and benefits paid to employees involved in the development of our products. We anticipate that development costs will increase in fiscal 2007 to accommodate our projected increased commercial activity.

Financing costs of $14,036 during the three months ended March 31, 2007 included $10,500 relating to the fair value of shares issued to a shareholder as funding fees for a loan made to us.

During the quarter ended March 31, 2007, we incurred investor relations expenses of $14,944, (comparative period $138,699). The current quarter’s expenses are lower than the comparative period as we have not engaged any significant investor relations program during the period. Prior years’ expense was attributed primarily to the amortization of the cost attributed to shares committed for issuance to investor relations providers. Other costs are for consulting fees provided to us relating to investor relations services.

Sales and marketing expense in the quarter ended March 31, 2007 totalled $93,887 (comparative period: $28,984), which consists fundamentally of salaries, commissions earned and benefits. The increase over the prior year’s expense is attributable to the hiring of our vice president of business development in the fourth quarter of the prior year. There was no comparable expense in the third quarter of the prior year.

Professional fees of $20,457 during the quarter (comparative quarter $104,457) were for audit and legal fees incurred in connection with regulatory and compliance work. The decrease of professional fees from the prior year’s quarter was caused by the completion of the change in domicile at the end of last year. The prior year’s quarter was the most active stage of the change in domicile and therefore the legal and accounting fees were the highest during that quarter. It is expected that fiscal 2007 professional fees will be lower than those in the prior year due to the completion of our change in domicile at the end of fiscal 2006.

We recorded an operating loss of $309,093 in the quarter ended March 31, 2007, compared to an operating loss of $311,087 in the three months ended March 31, 2006. In the quarter ended March 31, 2007, we posted a net loss of $309,093, or $0.01 per share, compared to a net loss of $315,229, or $0.01 per share, in the comparative period.

During the quarter, we did not invest in capital equipment, compared to $8,276 invested in the comparative quarter of fiscal 2006. We will face the need to incur capital expenditures in fiscal 2007 to upgrade certain hardware used by our employees to perform their development duties.

At March 31, 2007, our cash position was $41,156, with a working capital deficit of $337,586.

Nine Months Ended March 31, 2007 and 2005

Revenues during the nine months ended March 31, 2007 were $449,612, primarily derived from the sale of smart cards and ancillary products to our client base, fundamentally within the parking and newspaper vending industries. Sales continue to be concentrated in a few clients. Sales in the first nine months of fiscal 2007 increased by $70,159, or 19%, from sales in the comparative fiscal 2006 period. The increase in sales is the result of demand changes from our most significant clients in the parking and newspaper vending industries.

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Cost of sales during the period was $241,789, which represents 54% of sales, an increase from a total cost of sales of $138,982, or 37% of sales, in the comparative six-month period. Gross margins were $207,823 or 46% of sales (comparative six month period quarter: 63% of sales).

During the first nine months of fiscal 2007, administration expenses were $511,240 (comparative period: $531,353), which include the following three major expenses: salaries and benefits paid to employees performing administrative duties, foreign exchange expense (most of which is unrealized and refers to adjustments of monetary items at each quarter end) and rent expense.

Development costs in the nine months ended March 31, 2007 were $110,951 (comparative period: $125,460), of which the most significant expense was for salaries and benefits paid to employees involved in the development of our products. We anticipate that development costs will increase in fiscal 2007 to accommodate our projected increased commercial activity.

Financing costs of $87,781 during the nine months ended March 31, 2007 included $83,100 relating to the fair market value of shares issued to a shareholder as funding fees for loans made to us. During the comparative nine-month period, we had no formal debt and our financing costs were only $2,005.

Interest expense on long term debt of $154,699 in the nine months ended March 31, 2007 included $143,741 of beneficial conversion expense relating to a loan agreement with one of our shareholders.

During the nine months ended March 31, 2007, we incurred investor relations expenses of $282,059 (comparative period $406,766), most of which refers to the non-cash amortization of the cost attributed to shares committed for issuance to investor relations providers. Other costs are for consulting fees provided to us relating to investor relations services.

Sales and marketing expense in the nine months ended March 31, 2007 totalled $207,776 (comparative period: $97,662), consisting fundamentally of salaries, commissions earned and benefits. The increase is attributable to salary and commissions earned by our vice president of business development who was not an employee in the comparable nine month period.

Professional fees of $80,095 during the nine months ended March 31, 2007 decreased from the prior year’s expense of $181,871. Current expenses are primarily for audit and legal fees incurred in connection with normal and customary regulatory and compliance work. It is expected that future professional fees will continue to be lower than those in the prior year due to the completion of our change in domicile at the end of fiscal 2006.

We recorded an operating loss of $1,252,186 in the nine months ended March 31, 2007, compared to an operating loss of $1,158,405 in the nine months ended March 31, 2006. In the nine months ended March 31, 2007, we posted a net loss of $1,251,500, or $0.03 per share, compared to a net loss of $1,119,869 or $0.03 per share in the comparative period.

During the nine months ended March 31, 2007, we invested in $3,813 of capital equipment compared to $28,144 in the comparative nine months of fiscal 2006. We will face the need to incur capital expenditures in fiscal 2007 to upgrade certain hardware used by our employees to perform their development duties.

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Summary of Quarterly Results

	Qtr ended			Qtr ended			Qtr ended			Qtr ended
	March 31, 2007			Dec. 31, 2006			Sept. 30, 2006			June 30, 2006
Total revenues	$	188,891		$	187,676		$	73,045		$	26,715
(Net loss)	$	(309,093	)	$	(361,806	)	$	(580,601	)	$	(669,563	)
(Loss) per share, basic and diluted	$	(0.01	)		(0.01	)		(0.01	)		(0.02	)

	Qtr ended			Qtr ended			Qtr ended			Qtr ended
	March 31, 2006			Dec. 31, 2005			Sept. 30, 2005			June 30, 2005
Total revenues	$	256,487		$	72,767		$	50,199		$	22,382
(Net loss)	$	(315,229	)	$	(391,252	)	$	(413,389	)	$	(549,745	)
(Loss) per share, basic and diluted		(0.01	)		(0.01	)		(0.01	)		(0.02	)

Liquidity and Capital Resources

We have incurred operating losses in the reporting period and in past periods. Our ability to continue operating as a going concern is contingent on our ability to rely on equity or debt financing to cover operating deficits until such time as our operations become cash neutral or cash positive.

In December 2006, we became obligated to repay a secured, non-interest bearing loan in the amount of $250,000 to a company affiliated with a shareholder. The agreement, pursuant to which the loan was made, provides that if the loan is not repaid within 90 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, we issued 500,000 restricted shares of our common stock. As a condition of the loan, we agreed to pay off the August 5, 2006 loan for $50,000 and the August 31, 2006 loan for $100,000 from the same shareholder. Interest accrued on these two loans was forgiven.

By an agreement dated February 28, 2007, we were loaned $30,000 by a company affiliated with a shareholder. The loan is secured by our inventory, equipment, trademarks, trade names, contract rights and leasehold interest. The agreement provides that if the loan is not repaid within 60 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, we issued 150,000 restricted shares of our common stock. No interest was accrued or payable as of March 31, 2007.

On October 3, 2006, we completed a private placement of 2,408,873 units at $0.07 per unit for total proceeds of $168,621. Each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.20 per share until October 3, 2008.

In March 2007, we completed a private placement of 1,428,571 units at seven cents ($0.07) per unit for gross proceeds of $100,000. Each unit is comprised of one restricted share of our common stock and one share purchase warrant. Each warrant entitles the holder to purchase one share of our common stock at $0.20 per share. The warrants expire in March 2009.

As of March 31, 2007, we had received proceeds of $145,500 representing 2,078,571 Units at $0.07 per Unit as subscription for a private placement. Subsequent to March 31, 2007, an additional $36,800 has been received or committed for 525,714 Units for the same private placement. Each Unit is comprised of one share of our common stock and one share purchase warrant. Each warrant entitles the holder to purchase one share of our common stock at $0.20 per share, expiring two years from date of issuance.

As disclosed in Results of Operations, we posted a net loss in the nine months ended March 31, 2007 of $1,251,500. Losses in subsequent periods will be reduced or eliminated if we are able to secure sales streams that are still not fully in place at the date of this report. Even if we achieve decreasing quarterly losses in subsequent periods, we still may face the need to raise additional funding in the capital markets or through further short or long-term debt in the near future, until we can achieve positive cash flows from operations.

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We are not currently committed to further capital expenditures for the purchase of property, plant and equipment.

Item 3. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures as of March 31, 2007. Based on this evaluation, they concluded that the disclosure controls and procedures effectively ensure that the information required to be disclosed in our filings and submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in internal controls.

There were no changes in our internal controls over financial reporting, known to the principal executive and principal financial officer that occurred during the period of this report, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

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

On March 3, 2007, we completed a private placement of 1,428,571 units (the "Units") at seven cents ($0.07) per unit for gross proceeds of $100,000. Each unit is comprised of one restricted share of our common stock and one share purchase warrant. Each warrant entitles the holder to purchase one share of our common stock at $0.20 per share until March 2009.

As of March 31, 2007, we had received proceeds of $145,500 representing 2,078,571 Units at $0.07 per Unit as subscription for a private placement to be completed in April 2007. Subsequent to March 31, 2007, and additional $36,800 has been received or committed for 525,714 Units for the same private placement. Each Unit is comprised of one share of our common stock and one share purchase warrant. Each warrant entitles the holder to purchase one share of our common stock at $0.20 per share, expiring two years from date of issuance. On April 30, 2007, this placement was closed and 2,604,285 Units were issued to the participants, including 40,000 Units to our management.

All of the above offerings and sales were deemed to be exempt under Regulation D of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors and transfer was restricted by us in accordance with the requirements of the Securities Act of 1933, as amended. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

Item 6. Exhibits

The following are exhibits to this report:

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Exhibit No.	Description
10.1	Form of Subscription Agreement, filed as an exhibit to our current report on Form 8-K, filed with the Securities and Exchange Commission on October 4, 2006 and incorporated by reference herein.
*31.1	Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
*31.2	Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
*32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith

SIGNATURES

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

	QI SYSTEMS INC.
	(Registrant)
Date: May 18, 2007	By: /s/ Steven R. Garman
	Steven R. Garman
	President and Chief Executive Officer
Date: May 18, 2007	By: /s/ Robert I. McLean Jr.
	Robert I. McLean Jr.
	Chief Financial Officer (Chief Accounting Officer) and Chief Operating Officer

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