PNI Digital Media - Solutions for the Digital Lifestyle

PhotoChannel Continues Record Revenue Growth

Transactional revenues increase 142% and Membership fees increase 488%, quarter over quarter, Q3 2004 to Q3 2005.

VANCOUVER, BC - August 29, 2005 - PhotoChannel Networks Inc. (TSX - V: PNI; OTCBB: PHCHF) ("PhotoChannel" or the "Company"), one of North America's leading digital imaging technology providers, today reported its third quarter fiscal 2005 financial statements for the nine month period ended June 30, 2005.

For the nine months ended June 30, 2005 the Company recorded record revenue of $1,560,131, up 161% over the corresponding period of 2004. This record revenue continues to be driven by increases in network transactional and membership fees, which increased by 142% and 488%, respectively, from third quarter of 2004.

"PhotoChannel is pleased to report its strongest revenue quarter in its history" stated Peter Fitzgerald, President and CEO of PhotoChannel. "During the quarter which is historically a slow quarter in the photofinishing industry, the Company recorded record quarterly revenue of $564,775, exceeding its previous record quarter (Q2 - 2005) of $554,742 even after the end of a 63 store test with Costco US in April 2005."

PhotoChannel is now focusing its sales efforts on the US market. Usage in the Canadian marketplace, where PhotoChannel provides the dominant online solution for photofinishers, continues to accelerate rapidly.
During the quarter, the Company also saw certain of its large retail partners continue an aggressive marketing campaign of their online service. The Company believes this will continue as its retail partners work to maintain and increase market share.

Business Highlights For Q3 - FY05 PhotoChannel reports:

- " Record revenues for the quarter of $564,775 and for the nine months ended June 30, 2005 of $1,560,131, up 161% over the corresponding period of 2004. This record revenue continues to be driven by increases in installation, network and transactional fees, which increased by 136%, 488%, and 142% respectively, from the third quarter of 2004.

- " That it signed a new contract with Wal-Mart Canada Corp. to provide and operate the Wal-Mart and SAM'S CLUB online photo services. On May 31, 2005, SAM'S CLUB Canada (www.samsclubphotocentre.ca) launched its new Online Digital Image Printing Service with direct-to-store printing.

- " Thomas Nielsen has joined its Board of Directors. Currently, Mr. Nielsen holds a position as director of engineering for Adobe's creative professional business unit -- responsible for the product development of Adobe's print and Web design products. Prior to Adobe, he spent six years at Microsoft, where among many other duties, he led the Windows printing and imaging and Windows digital document teams. Mr. Nielsen has a strong passion for technology and customer solutions -- specifically in the areas of digital imaging, electronic documents and multimedia -- extending into mobile and wireless technologies.

- "That it has received gross proceeds of $1,500,000 in connection with its non-brokered private placement of 18,750,000 units. " That it had deployed over 172 of Wal-Mart Canada's 255 locations across the country, offering direct-to-store printing. The Company's data indicates that when in-store labs are connected directly (as apposed to the order being sent to a central fulfillment site and delivered back to the store), the number of orders to these stores increase due to the added customer convenience. As of August 29, 2005 there were over 215 Wal-Mart Canada locations installed.

RESULTS OF OPERATIONS

	Nine month ended June 30, 2005	Nine month ended June 30, 2004

Revenue	$ 1,560,131	$ 596,983
Loss from operations	(2,121,700)	(2,084,537)
Net loss	(2,117,266)	(2,008,932)

Basic and diluted net loss per share $ (0.01) $ (0.01)

Network revenue increased 161% to $1,560,131 for the period ending June 30, 2005 compared to the same period last year. The increase was attributable to three factors: organic growth in usage of the network from customers of the Company's photofinishing retailers; the Company's retailers commencing to print in-store; and the addition of additional customers. The three primary increases occurred in installation, membership, and transaction fees, which increased 136%, 488%, and 142%, respectively, for the period ending June 30, 2005. Although revenue for the third quarter ended June 30, 2005 was up from the second quarter ended March 31, 2005, it was negatively impacted by the end of a 63 store test with Costco USA, which ended early during the third quarter, but which had positively contributed to revenue in both of the Company's first and second quarters of fiscal 2005.

The Company's costs of operations for the nine month period ended June 30, 2005 were $3,681,831, up 37% when compared to the same period of 2004. This increase was primarily attributable to an increase in research and development (as the Company completes its new Network platform), the cost of Network delivery due to a significant increase in the number of transactions processed and an increase in general and administration.

General and administration expenses for nine months ended June 30, 2005 increased by $254,144 to $1,172,794, an increase of 28% from the comparable period last year. This increase was primarily due to an increase in salaries and consulting, but was partially offset by a decrease in interest charges.

Salaries increase by $195,942 to $505,875, an increase of 63%, primarily due to a one time charge in the amount of $178,027.22. Consulting increased by $112,360 to $331,070, an increase of 43% due to an increase in the number of consultants utilized.

Sales and marketing expenses for the nine months ended June 30, 2005 increased by $75,759 to $496,529, an increase of 18% from the comparable period of 2004. This increase was due to our expansion into the US market and a related increase in staffing.
Network delivery expenses for the nine months ended June 30, 2005 increased by $391,453 to $647,981, an increase of 153% from the comparable period of 2004. This increase was primarily due to an increase of $225,609 related to the installation of lab systems required for direct to in-store printing, as well as increases due to the growth in transaction processed related to bandwidth and customer service.

Research and development expenses for the nine months ended June 30, 2005 increased by $190,153 to $1,162,479, an increase of 20% from the comparable period of 2004. This increase was primarily due to an increase of staffing and consultants to develop the next generation, multi-media Digital Content distribution platform. Upon completion of our next generation platform, the Company believes that these current costs can be reduced by as much as 20% going forward.

Amortization expense for the nine months ended June 30, 2005 increased by $88,802 to $202,048, an increase of 78% from the comparable period of 2004. This increase was due to acquisition of equipment during late fiscal 2004 and the first three quarters of fiscal 2005 related to an increase in infrastructure, staffing and the construction of the Company's next generation platform.

The Company recorded a nine month net loss attributable to common shareholders of $2,117,266 or $0.01 per share compared to $2,008,932 or $0.01 per share in the same period last year. This increase of 5% was primarily due to increases in general and administrative, Network delivery and research and development expenses and was significantly offset by an increase in revenues.

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