Product Development And Marketing Agreement

EXHIBIT 10.3

PRODUCT DEVELOPMENT AND MARKETING AGREEMENT

This Product Development and Marketing Agreement (this "Agreement") is entered into as of July 8, 2002 by and between OSI Systems, Inc., a California corporation ("OSI"), and Imagis Technologies Inc., a British Columbia, Canada corporation ("Imagis"), with reference to the following facts:

A. OSI (through its wholly-owned subsidiaries) is in the business of developing, manufacturing, marketing and selling security products.

B. Imagis is in the business of developing, marketing and selling biometric systems, including facial recognition systems.

C. OSI desires that Imagis develop transportation security products based on its facial recognition system to work together with OSI's security products, and that OSI retain the exclusive right to manufacture, market and sell the Products. Imagis desires to undertake such product development, and to retain OSI to manufacture, market and sell the Products in the transportation security market.

Therefore, the parties agree as follows:

1 STRATEGIC ALLIANCE . It is the goal of the parties to form a strategic alliance to develop mutually agreed integrated airport and transportation security products using Imagis' facial recognition technologies and OSI's security products, with functionalities including identity verification and confirmation, together with physical passenger and luggage scanning (the resulting products referred to herein as the "Products").

2 PRODUCT DEVELOPMENT AND SUPPORT .

2.1. Imagis shall develop the Products, including versions of its facial recognition systems adapted for applications within the airport and transportation security markets, with all commercial diligence. Imagis will expend a minimum of $250,000 on such product development and the operation of an Airport Security Group who will sell the Products in conjunction with OSI Sales and Marketing into the OSI airport customer and prospect base.

2.2. Upon Imagis' reasonable request, OSI shall provide advice regarding the transportation security market, as needed to facilitate Imagis' product development.

2.3. Imagis shall comply with OSI's reasonable requests regarding the design of the Products, in order to facilitate efficient manufacturing of the Products and to maximize sales of the Products.

2.4. OSI shall have primary responsibility for introducing Imagis to OSI customers and prospects. Imagis shall have primary responsibility for demonstrating Product capabilities and marketing with regard to Product capabilities. Imagis will locate a software technician trained in the Products such that on-site support can normally be provided, if requested, within 24 hours of request. As an example, if the Product is ordered by the British Airport Authority for a major U.K. airport, Imagis will locate a technician in the U.K.

2.5. Imagis shall maintain documents tracking and confirming its expenditure of funds on the development of the Products calculated at standard cost rates. Imagis shall provide OSI with regular reports, no less frequently than monthly, of progress in its development of the Products, and the amount of funds Imagis has expended on such development. Upon OSI's reasonable request, Imagis shall provide OSI with access to the Products in development, and to the documents tracking and confirming its expenditures on such development, for reasonable inspection for the purpose of assessing development progress and confirming expenditures.

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3 IMAGIS' GRANT OF LICENSE. On the terms set forth herein, Imagis hereby grants OSI a license to manufacture, market, distribute, and otherwise commercially exploit the Products, subject to the following exclusivities:

3.1. During the term of this Agreement, OSI shall have the exclusive (even as to Imagis) right to manufacture, aggregate or integrate, subject to the terms of this Agreement, the hardware embodiments of the intellectual property, functionalities and applications developed by Imagis that are unique to the Products (shared with no other Imagis-developed system or product). Imagis, for itself and its licensees, agrees not to sell Products unless hardware components for such Products are purchased from OSI at a price (the "Hardware Price") equal to 154% of OSI's cost. Imagis shall not enter into any license of the right to sell Products unless the licensee thereof agrees to OSI's exclusivity rights hereunder.

3.2. During the term of this Agreement, OSI shall have the exclusive right to sell the Products in airport and transportation (including freight) security installations in which OSI is the prime bidder. However, Imagis shall be free to sell the Products in retrofit upgrades of existing installations.

3.3. During the term of this Agreement, Imagis shall not provide integrated facial recognition/metal detector gate systems to any entity other than OSI without OSI's prior written consent. OSI will not work with any other image recognition supplier other than Imagis without Imagis' prior written consent. However, if a customer notifies either OSI or Imagis that either OSI or Imagis' portion of the Products does not comply with the customer's specifications, the exclusivities provided hereby shall not prevent alternative sourcing for the non-complying portions.

4 PRODUCT MANUFACTURING, MARKETING AND DISTRIBUTION .

4.1. Manufacturing .

4.1.1. Promptly upon final development of any Products, and upon any reasonable request by OSI, Imagis shall provide OSI with all designs, plans, specifications, documentation, and other information necessary to manufacture the Products.

4.1.2. OSI shall manufacture the Products at a standard of quality at least equal to its quality standards for its other products, and in such quantities as are necessary and appropriate to meet projected market demand in a timely manner.

4.2. Product Markings . In addition to OSI's customary markings for its products, OSI shall include on the Products, at Imagis' reasonable request, an Imagis marking of like size and conspicuousness.

4.3. Marketing . OSI and Imagis shall jointly develop and maintain a marketing plan for the Products, including identification and development of marketing channels, materials, descriptions, sales projections, and like matters.

4.4. Sales and Distribution . OSI shall use reasonable commercial diligence to maximize aggregate long-term worldwide revenues from sales of the Products. Imagis shall cooperate in such sales and distribution efforts.

4.5. Service . Imagis and OSI shall cooperate in providing reasonable after-market service and support to buyers of the Products, including availability and pricing of advice and replacement parts. OSI shall be responsible for service and support for hardware portions of the Products, and Imagis shall be responsible for service and support for software portions of the Products.

5 ROYALTIES . Upon Sales of the Products, OSI shall pay Imagis a royalty on such sale, on the terms set forth in this Section 5 .

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5.1. Rate .

5.1.1. The list price for the facial recognition feature/upgrade will be agreed between the two parties. The amount of royalty payable by OSI to Imagis for each Product sold shall be calculated by subtracting the Hardware Price for such Product from the Net Price (as defined below), and multiplying the resulting difference by 0.7.

5.1.2. Definition of "Net Price". Net Price shall be calculated as receipts collected from the purchaser of a Product, less all of the following:


a. OSI sales commissions on Imagis added value;

b. Returns, credits and refunds;

c. Third party royalties (other than those provided hereunder);

d. Any non-recovered costs incurred in shipping Imagis added value; and

e. Taxes incurred in the sale other than income taxes.


5.2. Annual Support Agreements . OSI will recommend to each customer that they sign an Annual Support Agreement. OSI will retain 100% of hardware support revenues, while Imagis will retain 100% of support revenues on its added value.

5.3. Accounting .

5.3.1. Statements . Seller shall provide Payee with royalty statements within 30 days following the end of each calendar q ...