UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB /A

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934



FOR THE FISCAL YEAR ENDED MARCH 31, 2005



OR



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934



FOR THE TRANSITION PERIOD FROM _______________



Commission File Number: 000-31691

ZIM CORPORATION

(Exact name of Registrant as specified in our charter)

|Canada(State or other jurisdiction ofincorporation or organization)                           | N/A(I.R.S. Employer Identification Number)
|--------------------------------------------------------------------------------------------- | ------------------------------------------
|20 Colonnade Road, Suite 200, Ottawa, Ontario, Canada(Address of Principal Executive Offices) | K2E 7M6(Zip Code)                         





Issuers telephone number, including area code: (613) 727-1397



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:





|Title of Each Class         | Name of Each Exchange
On Which Registered
|--------------------------- | -----------------------------------------
|Common shares, no par value | Over the Counter Bulletin Board          



Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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__



Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.



The registrant's revenues for our most recent fiscal year were $10,027,452. The aggregate market value of voting stock held by non-affiliates is $4,430,450 based on 27,518,324 shares at June 8, 2005 held by non-affiliates.  The registrant does not have any authorized or issued and outstanding non-voting stock.  The closing price on the Over the Counter Bulletin Board on June 8, 2005 was $0.161.



The number of common shares of the registrant outstanding as of June 8, 2005 was 59,561,569.





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EXPLANATORY NOTE



This Amendment No. 1 to our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2005 filed with the Commission on June 21, 2005 is being filed solely to: (i) amend Part I, Item 1; (ii) amend Part II, Item 6; (iii) revise footnote 17 to the financial statements; and (iv) file a new Exhibit 10.10. Included herewith are the certifications filed as Exhibits 31.1, 31.2, 32.1 and 32.2, which have been re-executed as of the date of this amendment.  No other change has been made to the original Annual Report on Form 10-KSB.









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TABLE OF CONTENTS



|PART I                                                             |  |   
|------------------------------------------------------------------ |  | --
|                                                                   |  |   
|Item 1. Description of Business                                    |  | 5 
|                                                                   |  |   
|PART II                                                            |  |   
|                                                                   |  |   
|Item 6. Management's Discussion and Analysis or Plan of Operation. |  | 15
|Item 7. Financial Statements                                       |  |   
|                                                                   |  |   
|PART IV                                                            |  |   
|                                                                   |  |   
|Item 13. Exhibits                                                  |  | 60
|                                                                   |  |   
|SIGNATURES                                                         |  | 61
|                                                                   |  |   
|INDEX TO EXHIBITS                                                  |  | 62





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This Annual Report on Form 10-KSB /A contains forward-looking statements within the meaning of Section 21D of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933 regarding our business, financial condition, results of operations and prospects that are based on our current expectations, estimates and projections. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the registrant. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance, and are inherently subject to risks and uncertainties that are difficult to predict. As a result, actual outcomes and results may differ materially from the outcomes and results
discussed in or anticipated by the forward-looking statements. All such statements are therefore qualified in their entirety by reference to the factors specifically addressed in the section entitled "Risk Factors" as well as those discussed elsewhere in this Annual Report on Form 10-KSB /A . We operate in a very competitive and rapidly changing environment. New risks can arise and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements speak only as of the date of the Companys Annual Report on Form 10-KSB for the year ended March 31, 2005 . We undertake no obligation to revise or
update publicly any forward-looking statements in order to reflect any event or circumstance that may arise after the date of the Annual Report on Form 10-KSB, other than as required by law.



























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PART I



ITEM 1. DESCRIPTION OF BUSINESS.



COMPANY OVERVIEW



ZIM Corporation ("ZIM" or the "Company") is a global provider of mobile messaging and data services. In addition, the Company has designed and developed consumer and enterprise applications for the SMS (Short Message Service) channel. Prior to entering the SMS or mobile messaging industry, ZIM was recognized as the developer and provider of the Zim Integrated Development Environment software, which continues to be used by companies in the design, development, and management of information databases.



BUSINESS DEVELOPMENT



ZIM was formed under the laws of Canada on October 17, 2002 in order to purchase ZIM Technologies International Inc. ("ZIM Technologies"), which was formed in 1997 to acquire the software technology now called the Zim Integrated Development Environment (the "Zim IDE software"). On February 10, 2004, ZIM purchased UK-based SMS service firms EPL Communications Limited and E-Promotions Limited (together referred to as "EPL"). ZIM is also the sole shareholder of ZIM Technologies do Brazil Ltda., a company incorporated in Brazil that distributes the Zim IDE Software, and PCI Merge, Inc., a Florida based holding company with no operations. Until March 31, 2004, ZIM was the sole shareholder of ZIM Technologies, a Canadian federal corporation and the chief operating company of the ZIM group of companies. On April 1, 2004, ZIM Corporation and ZIM Technologies amalgamated into ZIM Corporation.



BUSINESS OF THE COMPANY



Historically, we have been known as a developer and provider of the Zim IDE software. Zim IDE software is currently used by companies in the design, development, and management of information databases and mission critical applications. The technology for the Zim IDE software was developed at Bell Northern Research in Ottawa, Ontario in the 1980s and acquired by ZIM in 1996. The software is now licensed to customers through direct sales as well as through an established network of value added resellers ("VARs") and distributors.



Beginning in 2001, we expanded our business strategy to include the design and development of a line of mobile data software products. We designed these mobile data software products to take advantage of the existing wireless data network infrastructure known as SMS. SMS, mobile messaging, or text messaging as it is also known, enables users to communicate person to person and application to person through cellular handsets and other SMS-enabled devices. The use of SMS is already considered an accepted form of communication throughout Europe and Asia and the market is now expanding in North America.



We began marketing our main SMS product, referred to as "SMS Office" in the summer of 2003. Although we were successful in establishing several relationships with mobile operators , the product did not receive significant market acceptance from end users. We continue to support these products but our main focus has shifted to our SMS aggregation service offering and to our chat applications.



Since the acquisition of EPL, we have focused on providing aggregation services to mobile content providers. Aggregators transmit a broad variety of messaging, content, and applications worldwide. ZIM is now providing an operator-grade, high-volume delivery infrastructure that is scalable, with detailed reporting available to our mobile content customers. Our goal is to continue to expand our network, allowing our customers to send their messages and campaigns internationally, with reliance that the messages are being successfully delivered.



We believe that a number of significant factors will accelerate the growth of the market for our aggregation services. These factors include:



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| | SMS is a popular channel because it is low cost to the user, secure, available at all times, discreet, efficient, and urgent.
|- | -----------------------------------------------------------------------------------------------------------------------------



| | SMS delivers higher carrier margin compared to other data channels ($350/MB for data vs. $0.70/MB for voice).
|- | -------------------------------------------------------------------------------------------------------------



| | In the Asia-Pacific region, 10-15% of youths' disposable income is spent on mobile products.
|- | --------------------------------------------------------------------------------------------



| | It is estimated that 10 billion SMS messages will be sent annually by the end of the decade.
|- | --------------------------------------------------------------------------------------------





We further believe that there continue to be multiple revenue opportunities available through SMS. We are positioning ZIM to be a leader in the industry with both our service and product offering. We believe ZIM's offering appeals to consumers, mobile content providers and to mobile operators.



OUR SMS PRODUCTS AND SERVICES



SERVICES



BULK SMS



Our bulk SMS Gateway is used for SMS delivery to mobile users. Our bulk SMS service provides direct, reliable mobile operator connections, as well as web based tools to help build effective MT SMS campaigns. Bulk SMS is used for SMS marketing campaigns, SMS alerts, updaters and more.



Within our bulk offering we have two types of customers.  One customer registers for our service using our internet web-site.  These customers pay for a set number of messages using their credit cards. Similar to premium messaging services, we send mobile content from a customer through our gateway to the mobile operators and then to the end user.

Our other customers purchase larger amounts of messages and work directly with our sales team.



Similar to premium messaging services, we send mobile content from a customer through our gateway to the mobile operators and then to the end user.



In the case of bulk messaging services, customers send out blocks of messages to their end users.  For bulk messages, our customer, the company sending the messages pays for the message, not the end-user.  Our customers key consideration in this case is cost.  Direct connections to mobile operators for bulk messages are more reliable and stable but also more expensive than connections through other aggregators that may have special relationships with international mobile operators.  As a result, success in bulk messaging comes from the ability to develop relationships with other aggregators that have least-cost routes.  The cost and reliability of these routes change continually.  As such, the goal in our strategic relationships is to be aware of the best routes, and to ensure that we have sufficient traffic to guarantee the least cost prices.



PREMIUM SMS



Premium SMS services open up a variety of possibilities for mobile content providers, application or service developers and marketers looking to monetize their mobile applications, services or payment solutions. Premium SMS works through the use of Short Codes (short, easy to remember phone numbers) and a corresponding tariff, typically between 25(cent) and $5, that is assigned to each number. The end users (consumers or mobile subscribers) are reverse billed for these tariffs when they receive a Premium SMS message. The tariff charge automatically appears on the end user's monthly bill or is deducted from their pre paid card.





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Premium SMS has proven to be the most effective way of charging end users for mobile service as it is user friendly, and it outperforms other micro-payment solutions. Mobile payments are being used for everything from parking passes to vending machine purchases to online subscriptions and are quickly gaining popularity with mobile users internationally.



Within our premium service, we have strategic relationships with other aggregators and mobile operators.  We do not have relationships with the end users.



In general, the transaction flow is as follows:



| | An end-user subscribes to receive certain mobile content such as a horoscope from a mobile content provider, usually through the internet.
|- | ------------------------------------------------------------------------------------------------------------------------------------------



| | The mobile content provider contracts with ZIM to send messages containing the content from the mobile content providers internet portal to mobile operators with which ZIM has connections.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The mobile operators receive the messages from ZIM and then forward them to the end users.
|- | ------------------------------------------------------------------------------------------



| | The mobile operator bills and collects from the end user a tariff or fee for the content.
|- | -----------------------------------------------------------------------------------------



| | The mobile operator retains a portion of the fee and forwards the balance to ZIM.  ZIM then pays the mobile content provider a share of the revenue.  In certain circumstances, ZIM will pre-pay the mobile content provider when collection is reasonably assured.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Mobile Operators



In order to offer the mobile content providers the farthest reach, and competitive pricing, we contract with various mobile operators directly to send messages.  In the UK we have direct connections with mobile operators such as Vodafone, T-mobile, Orange and O2.  In Canada we have direct connections with Rogers, Telus, Microcell, and Bell.



Other Aggregators



Since the lead time for ZIM to develop direct connections with mobile operators is substantial, and our customers wish to expand their content distribution to new geographical areas as quickly as possible, we have expanded our connections by developing relationships with other aggregators in various countries.  By establishing these relationships, we are able to quickly connect to different countries.  Not only does this increase our coverage and service offering, but often these aggregators then look to us send their messages to operators that we are directly connected to.



When we are using other aggregators to expand our connections, the revenue we receive is reduced as a portion of the overall fee is also shared with the other aggregator.



To date we have strategic relationships with other aggregators in Brazil, the United States, Norway, Sweden, Denmark, Ireland, Spain, Germany and the UK.  Two of the significant providers of SMS services, mBlox Inc. and Mobile 365 Inc. both of which have international reach, are strategic partners of ZIM.    Due to the competitive nature of the industry, we are not substantially dependent on any of our relationships with mobile operators or other aggregators.



VIRTUAL MOBILE



Virtual Mobile is an inbound SMS solution that allocates a mobile number to an SMS server. With Virtual Mobile, users send SMS messages to this defined mobile number and the information is captured by the SMS application. Virtual Mobile is a solution used for SMS-enabled interactive applications, services and advertising promotions in cluding:



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|o | Interactive broadcasting - text in votes for TV and radio contests;       
|- | --------------------------------------------------------------------------
|  |                                                                           
|o | Entertainment and information services - interactive SMS games, SMS chat, 
|  | SMS finder, and on-demand financial, travel, sports, news information; and
|  |                                                                           
|o | Mobile advertising - Print media and packaging, SMS coupons, competitions 
|  | and games, billboards and big screen advertising.                         



Customers sign up for our virtual mobile service using the internet and pay a monthly fee.



LOCATION BASED SERVICES ("LBS")



LBS use mobile phone towers and innovative software to provide clients with accurate, real-time positioning of mobile devices. LBS clients can use this information to provide mobile users with information on nearby points of interest, current traffic or weather conditions, or to provide routing and tracking information to a central command centre.



LBS customers also sign up for this service using our internet web site.   The monthly fee includes messaging credits and is approximately $380 per account.



MULTI MEDIA MESSAGING SERVICES ("MMS")



MMS is a technology that allows end users to create, send, and receive text messages that also include an image, audio, and/or video clip. MMS messages are sent from one mobile phone to another, or to an email address. ZIM has a gateway that allows these messages to be sent with multiple connections to operators internationally.



To date there have been no significant MMS transactions.



PRODUCTS



ZIM SMS OFFICE - STANDARD EDITION



ZIM SMS Office links two-way SMS text messaging and e-mail with the coordination of Microsoft(R) ("Microsoft") Outlook and Microsoft Excel to create a mobile office software tool. It is designed to extend and enhance a Microsoft Office suite by providing Outlook functionality to SMS-enabled cellular phones through one-way and two-way SMS text messaging capabilities. Users stay connected to the Microsoft Outlook office environment by using a cellular phone to receive, reply, forward and send e-mail messages, request "more" or "all" of e-mail messages, and receive daily calendar items and reminders. Users can send SMS text messages to their contacts from the desktop and receive the responses as e-mail. Filters and preferences can also be set to enhance productivity.



ZIM SMS MAIL



ZIM SMS Mail is a two-way mobile e-mail extension software tool designed to leverage SMS text messaging to keep cellular phone users connected to their e-mail while on the go. ZIM SMS Mail is desktop software that links almost any e-mail account to SMS-enabled cellular phones. When mail that meets the personal filter criteria of the user arrives in the e-mail Inbox, it is automatically pushed to the user's cellular phone using one-way and two-way SMS text messaging through the SMS channel.



ZIM 2-WAY SMS PAGING



ZIM 2-Way SMS Paging is a pager replacement system that uses SMS on a cellular phone to create a two-way communication network. Using a web-based administrative interface and standard cellular phones, customers can easily and quickly implement a modern and cost-effective two-way communication system for employees currently using pagers as part of the enterprise communication process. To ensure maximum reach and effectiveness, the product goes beyond SMS and incorporates e-mail message sending options.



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This product includes many features to ensure real and measurable results including: web-based message posting through an administrative control panel, easy to use contacts and group controls and escalation hierarchy, real-time message delivery status reporting and record logs for audit trail and results analysis.



ZIM SMS CHAT



ZIM SMS Chat is the next generation of `Instant Messaging' that expands on the real time, two-way chat experience and allows users to send instant SMS text messages from the computer directly to mobile users.



We currently offer our chat product through Rogers Communication Inc.  End users register for the product through Rogers.  ZIM receives revenue when messages are sent using the product.  To date traffic has not been significant.



DATABASE SOFTWARE



ZIM IDE SOFTWARE



As mentioned above, we have historically been a developer and provider of the Zim IDE software, which is used by companies in the design, development, and management of information databases. We now license the Zim IDE software products to thousands of customers through direct sales, and through an established network of VARs and distributors.



The Zim IDE software provides an integrated development environment for Microsoft Windows and UNIX computer operating systems. An integrated development environment is a set of programs that runs from a single user interface for use in the creation and management of corporate databases.



The Zim IDE software was designed to handle complex data management in a more efficient manner than the database technologies historically provided. The distinctive characteristic of the Zim IDE software is the fact that our object dictionary contains more than just a table of data. Instead, all relationships and data information are concurrently stored in the object dictionary, making it easier to manage and retrieve information. Furthermore, Zim IDE software uses data sets rather than record-by-record access to manage information. This technique further simplifies the management of data.



The Zim IDE software has been used to develop database applications that have been deployed in a wide range of industries, including finance, marketing, human resources, information and records management. Applications built with the Zim IDE also fully access most other major databases such as Oracle and SQL Server.



We have established strategic relationships with various value added re-sellers (VAR) who are using our Zim IDE software for a variety of applications.  We have established no new significant relationships in the past fiscal year and management does not expect to develop any further relationships.  We currently have two full time sales people dedicated to supporting existing relationships and one vice president who spends a portion of his time assisting with the maintenance of these relationships.



COMPETITION



ZIM operates primarily in the SMS aggregation industry. The aggregation industry is highly competitive and rapidly changing due to the nature of the growing market. We have many competitors in the industry including, Wireless Information Network PLC (WIN) , MBlox and Mobile365. These competitors may have certain competitive advantages over us, including but not limited to:



|o | substantially greater financial and technical resources;
|- | --------------------------------------------------------





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|  |                                                                     
|- | --------------------------------------------------------------------
|o | more extensive and well developed marketing and sales networks;     
|  |                                                                     
|o | greater global brand recognition among mobile content providers; and
|  |                                                                     
|o | larger customer bases.                                              



We compete with these companies primarily for volume of traffic and strategic relationships.



Our existing competitors may in the future achieve greater market acceptance and gain additional market share. It is also possible that new competitors may emerge and acquire significant market share. We believe the rapid increase in the use of SMS as a means of communication will draw more attention from multinational players to the SMS market. Please refer to "Risk Factors" for a more detailed discussion of the risks we face from our competitors.



Our competitive advantage in the SMS aggregation environment is our ability to connect to international operators through a variety of strategic relationships with other aggregators and mobile operators. We have developed strategic relationships with a range of content and service partners in order to serve our customers more effectively and to extend our services to an international audience.



In addition, our competitive advantage is based on the strength of our technical infrastructure.



CUSTOMERS



As of March 31, 2005, we had over 100 customers in over 10 countries in our Zim Ide and SMS applications.  Within our SMS application segment, we have two customers that each generated over 10% of our revenue for the year ended March 31, 2005.  We consider our existing level of business to be substantially dependent on one of these customers, which provided 38% of the years revenue.  These customers are both mobile content providers that primarily generated premium message revenue.



TECHNOLOGY INFRASTRUCTURE



ZIM's operating infrastructure is designed to serve and deliver tens of millions of text messages each week to hundreds of cell phone operators worldwide. The system uses a scalable and redundant infrastructure located on servers at various co-location hosting sites in the UK and in Canada. The Company believes that these hosting partners provide operating advantages, including an enhanced ability to protect its systems from power loss, break-ins and other potential external causes of service interruption. They provide continuous customer service, multiple connections to the Internet and a continuous power supply to its systems. In addition, ZIM conducts online monitoring of all its systems for accessibility, load, system resources, network-server intrusion and timeliness of content.



This infrastructure allows ZIM to be a high performance SMS Gateway connecting large Internet communities to approximately two billion cell phones worldwide through the various mobile operators.



ZIM's servers run on Linux and Windows platforms using Postgres and proprietary SMPP servers. SMPP is a short message peer-to-peer protocol for exchanging SMS messages between SMS peer entities such as short message service centres. It is used to allow third parties to submit messages, often in bulk.  ZIM's database system is an advanced entity-relationship database, which also operates on Windows and Linux platforms.







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PATENTS AND INTELLECTUAL PROPERTY PROTECTION



Our success depends in part on our ability to protect our intellectual property rights. To protect our proprietary information, we use a combination of intellectual property laws, employee and third-party nondisclosure agreements, and licensing arrangements, including confidentiality provisions.



We currently have no issued patents or patent applications pending in Canada. Despite our efforts, we may not successfully protect our proprietary rights from misappropriation. Litigation may be necessary to defend and protect our proprietary rights.



EMPLOYEES



As at March 31, 2005, we had 27 full-time employees, with 12 employees in selling, general and administration and 15 employees in technical areas including technical support and research and development. We consider our relations with our employees to be excellent, and none of our employees are covered by a collective bargaining agreement.



Of these employees, 23 are based in Ottawa, Canada, one in London, England and three are in Sao Paolo, Brazil. Subsequent to March 31, 2005, ZIM eliminated the position in England.



RISK FACTORS



This Annual Report on Form 10-KSB /A contains forward-looking statements. When considering the forward-looking statements made in this Report, you should consider the risks set forth directly below, and other cautionary statements throughout this Report.



BECAUSE OUR OPERATING HISTORY IS LIMITED AND THE REVENUE AND INCOME POTENTIAL OF OUR BUSINESS AND MARKETS ARE UNPROVEN, WE CANNOT PREDICT WHETHER WE WILL MEET INTERNAL OR EXTERNAL EXPECTATIONS OF FUTURE PERFORMANCE.



We believe that our future success depends on our ability to significantly increase revenue from our operations, of which we have a limited history. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in an early stage of development. These risks include our ability to:



| | Offer competitive pricing for our services;
|- | -------------------------------------------
| | Offer new and innovative products;         

| | Maintain our current relationships and develop new strategic relationships with other  aggregators and mobile operators;
|- | ------------------------------------------------------------------------------------------------------------------------

| | Attract and retain qualified employees; and                                  | 
|- | ---------------------------------------------------------------------------- | 
| | Upgrade our technology infrastructure to manage increased messaging demands.





WE HAVE CONTRACTED WITH THIRD PARTIES TO PROVIDE SERVICES FOR OUR NETWORK AND WE MAY LOSE USERS AND REVENUE IF THESE ARRANGEMENTS ARE TERMINATED.



We have arrangements with a number of third parties to provide services to our customer base. Although no single third party service provider is critical to our operations, if these parties fail to develop and maintain high-quality and successful technical platforms , or if a large number of our existing relationships are terminated, we could lose customers and our services may become less reliable. We have recently experienced fee increases from some of our service providers, mobile operators or other aggregators . If this trend continues, our gross profit from messaging services may be adversely affected.



ZIM MAY EXPERIENCE DIFFICULTIES ACCURATELY FORECASTING ITS OPERATING RESULTS, THEREBY MAKING OUR BUSINESS OPERATIONS MORE DIFFICULT TO SUSTAIN.





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Due to our limited operating history in the SMS market and the uncertainty regarding the market acceptance for our new line of SMS products, ZIM may not be able to accurately forecast its future operating results. If net profits from our SMS services fall materially short of estimated expenses, our business operations will become more difficult to sustain since we will then have to reduce our spending and/or raise additional capital over and above any current capital raising plans. It may not be possible for ZIM to accomplish either task in a timely manner, or at all, in which event ZIM would have to curtail or suspend certain or all of our business operations. Any action to such effect is likely to have a material adverse effect on our business relationships, financial results, financial condition and prospects.



OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.



We may experience significant fluctuations in our quarterly operating results due to a variety of factors, many of which are outside of our control. Factors that may cause our quarterly operating results to fluctuate include: our ability to retain existing customers, attract new customers at a steady rate and maintain user satisfaction; technical difficulties or system downtime; the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure; and industry regulation. As a result of these and other factors, you should not place undue reliance on our quarter-to-quarter comparisons of our operating results as indicators of likely future performance.



WE MAY NOT BE ABLE TO ADAPT QUICKLY ENOUGH TO TECHNOLOGICAL CHANGE AND CHANGING CUSTOMER REQUIREMENTS, THEREBY LOSING SALES.



If we are unable to adapt to the rapid changes in technology and customer needs that are inherent to the SMS industry, ZIM may lose sales and fail to grow. In order to meet these rapid changes, we will have to effectively integrate new wireless and data technologies, continue to develop our technologies and technical expertise and respond to changing customer needs.



THE LOSS OF THE SERVICES OF ZIM'S DR. MICHAEL COWPLAND AND OTHER KEY PERSONNEL COULD NEGATIVELY AFFECT OUR BUSINESS.



The loss of the services of Dr. Michael Cowpland and other key personnel could affect our performance in a material and adverse way. ZIM currently depends heavily on the services of Dr. Cowpland as well as his ability to, and past practice of, funding its cash requirements from time to time. For example, Dr. Cowpland, and a holding company owned by the spouse of Dr. Cowpland, have provided financing of approximately $5.5 million to ZIM.



In December 2003, the Ontario Securities Commission ordered, among other things, that Dr. Cowpland be prohibited from acting as a director for any reporting issuer in the Province of Ontario, Canada until December 2005. Although ZIM is not a reporting issuer in Ontario, Canada, and has no current plans to become a reporting issuer in Ontario, Canada, this prohibition could materially affect ZIM should it decide to seek a listing of our securities in Ontario, Canada before December 2005.



THERE IS SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.



Our ability to continue as a going concern is subject to substantial doubt given our current financial condition and requirements for additional funding. If ZIM is unable to continue as a going concern, investors in our common shares will likely lose their entire investment. We have indicated in our financial statements that there is substantial doubt about our ability to continue as a going concern. In addition the report of the independent registered public accounting firm to our audited consolidated financial statements for the year ended March 31, 2005 included an explanatory paragraph which indicates that there is substantial doubt about our ability to continue as a going concern. There can be no assurance that ZIM will be successful in raising additional funding as required.



IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS IN A TIMELY MANNER OR ON ACCEPTABLE TERMS, WE MAY HAVE TO CURTAIL OR SUSPEND CERTAIN OF OUR BUSINESS OPERATIONS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS RELATIONSHIPS, FINANCIAL RESULTS, FINANCIAL CONDITION AND PROSPECTS.



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If we are unable to obtain additional funds in a timely manner or on acceptable terms, we may have to curtail or suspend certain of our business operations which could have a material adverse effect on our business relationships, financial results, financial condition and prospects. We anticipate that our cash at March 31, 2005 of $737,888, along with cash generated from operations, will be sufficient to meet our present operating and capital expenditures for at least the next three months, but that we will require substantially more funds at that time to continue and expand our business operations.



ZIM EXPECTS TO INCUR OPERATING LOSSES FOR A MINIMUM OF THE NEXT TWELVE MONTHS. SUCH LOSSES WILL DIRECTLY AFFECT OUR REQUIREMENTS FOR ADDITIONAL FUNDS AND ABILITY TO CONTINUE AS A GOING CONCERN.



Our anticipated requirements for additional funds are based, in large part, upon our expectation that we will incur operating losses for the next twelve months. The extent to which these anticipated losses are actually incurred will directly affect our need for additional capital and ability to continue as a going concern. If the shortfall between the revenues generated by ZIM and our operating expenses for the next twelve months is greater than the operating losses which are already expected, our need to secure additional funds is likely to increase accordingly and further adversely affect our ability to continue as a going concern. Moreover, we cannot assure that actual operating losses will not exceed management's current expectations. These anticipated operating losses are due in part to anticipated costs in the marketing of our new line of mobile data software and related research and development expenditures a going concern.
 Moreover, we cannot assure that actual operating losses will not exceed management's current expectations. These anticipated operating losses are due in part to anticipated costs in the marketing of our new line of mobile data software and related research and development expenditures.

IN MAY 2003 A SHAREHOLDER DISTRIBUTED SHARES OF OUR COMMON SHARES IN A MANNER THAT MAY GIVE HOLDERS OF THOSE SHARES RESCISSION RIGHTS UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS, AND COULD EXPOSE US TO PENALTIES, FINES OR OTHER LITIGATION.



In May 2003, one of our shareholders distributed shares of our common stock that it held to approximately 70 persons. It is possible that this distribution was not effected in compliance with United States federal and state securities laws. If the distribution was an offer and sale of securities and it was not exempt from the registration requirements of United States federal or state securities laws, then those who received our shares in the distribution have rights to bring claims against us for rescission or damages. Since the distribution did not involve any issuance of securities for cash, it is uncertain how rescission would be valued or damages would be determined. It is possible that the value would be measured as the decline in the value of our stock since that date, or as the decline in value compared with the consideration given (if any), or some alternative method. We cannot offer any assurance
that the extent of our exposure to damages would be limited to these amounts, or calculated according to these assumptions. We would contest any such claim, but any such litigation would be costly to defend and could harm our results of operations, financial condition and liquidity. Investors who have acquired shares since that distribution might claim they were misled in their investment decision, which would further increase our exposure to litigation costs and potential damages. In addition, we may be subject to penalties or fines relating to these issues. Any of these potential events could harm our results of operations, financial condition and liquidity.



WHILE WE BELIEVE THAT WE WILL HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN PLACE FOR MARCH 31, 2007, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING COMPANIES TO EVALUATE CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.



While we believe that we will have adequate internal control procedures in place for March 31, 2007, we are still exposed to potential risks from recent legislation requiring companies to evaluate internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we are evaluating our internal control systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. Throughout this process, we will incur additional expenses and use of management's time. In addition, if we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by
regulatory authorities, such as the Securities Exchange Commission ("SEC"). Any such action could adversely affect our financial results and the market price of our shares.



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regulatory authorities, such as the Securities Exchange Commission ("SEC"). Any such action could adversely affect our financial results and the market price of our shares.



IF WE ARE UNABLE TO MANAGE THE INTEGRATION OF OUR ACQUIRED BUSINESSES, OUR FINANCIAL CONDITION AND OPERATING RESULTS MAY BE ADVERSELY AFFECTED.



A failure to effectively manage the integration of any acquisitions we may decide to make, may adversely affect our business and financial condition. Any acquisition that we make will place significant demand on management, technical and other resources.



WE HAVE AFFLIIATED SHAREHOLDERS WHO CAN SUBSTANTIALLY INFLUENCE THE OUTCOME OF ALL MATTERS VOTED UPON BY OUR SHAREHOLDERS AND WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.



The beneficial ownership of the Chief Executive Officer and related parties is approximately 64%. As a result, they are able to substantially influence all matters requiring the approval of our shareholders, including the election of directors and the approval of significant corporate transactions such as acquisitions. This concentration of ownership could delay, defer or prevent a change in control or otherwise impede a merger or other business combination that the Board of Directors or other shareholders may view favorably.



ZIM MAY NOT BE ABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS OR MAY BE ACCUSED OF INFRINGING INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.



If ZIM is not successful in adequately protecting its technology through patent, trademark, copyright and other protections, our competitors could develop competing products based on our intellectual property and thereby damage our business and results of operations. In addition, there has been substantial litigation regarding intellectual property rights involving technology companies. As a result, ZIM may be subject to litigation regarding the intellectual property rights of third parties. Any such litigation, regardless of its validity, may be time-consuming and costly to defend, may divert management's attention away from the operation of our business and could subject us to significant liabilities.



NEW ACCOUNTING PRONOUNCEMENTS MAY REQUIRE US TO CHANGE THE WAY IN WHICH WE ACCOUNT FOR OUR OPERATIONAL OR BUSINESS ACTIVITIES.



The Financial Accounting Standards Board ("FASB") and other bodies that have jurisdiction over the form and content of our accounts are constantly discussing proposals designed to ensure that companies best display relevant and transparent information relating to their respective businesses. The effect of the pronouncements of FASB and other bodies may have the effect of requiring us to account for revenues and/or expenses in a different manner than the manner in which we have had experience. For example, beginning with fiscal years starting after June 15, 2005, a new FASB pronouncement will require us to expense the fair value of stock options issued to employees. As a result, we will likely report increased expenses in our income statement and a reduction of our net income and earnings per share. The impact on our current financial statements of applying a fair value method of accounting for stock options is
disclosed in Note 2 of the Notes to the Consolidated Financial Statements.



REPORTS TO SECURITY HOLDERS



We file annual and quarterly reports with the SEC. In addition, we file additional reports for matters such as material developments or changes within the Company, changes in beneficial ownership of officers and directors, or significant shareholders. These filings are a matter of public record and any person may read and copy any materials filed with the SEC at the SEC's public reference room at 560 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and other information statements, and other information regarding issuers that file electronically at http://www.sec.gov. In addition, our periodic reports and Section 16 filings are accessible through our internet web site at www.zim.biz.



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PART II



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.



This Management's Discussion and Analysis or Plan of Operation contains forward-looking statements within the meaning of Section 21D of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933 regarding our business, financial condition, results of operations and prospects that are based on our current expectations, estimates and projections. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the registrant. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance, and are inherently subject to risks and uncertainties that are difficult to predict. As a result, actual outcomes and results may differ materially from
the outcomes and results discussed in or anticipated by the forward-looking statements. All such statements are therefore qualified in their entirety by reference to the factors specifically addressed in the section entitled "Risk Factors" as well as those discussed elsewhere in this Annual Report on Form 10-KSB /A . We operate in a very competitive and rapidly changing environment. New risks can arise and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements speak only as of the date of this Annual Report on Form 10-KSB /A . We undertake no obligation to revise or update publicly any
forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-KSB /A , other than as required by law.



EXECUTIVE SUMMARY



Beginning in 2001, we expanded our business strategy to include the design and development of a line of mobile data software products based on SMS or text messaging technology. To date, we have not yet realized significant revenues from these SMS applications. Commencing in February 2004 with our acquisition of EPL, we began providing SMS aggregation services. Revenues from these SMS aggregation services have become a significant contributor to our total revenues. Management expects that revenues from our SMS aggregation services will continue to be the dominant contributor for the fiscal year beginning on April 1, 2005.



In addition to the sales of our SMS aggregation services, the sales of Zim IDE Software continued at the same levels as prior periods with an increase in subsequent maintenance contracts. We expect to see decreases in our revenues for this segment of our operations in the future.



Highlights for the year include:





        Integration of EPL operations;
        Implementation of a 24-7 support team;
        Development of strategic relationships to allow us to connect with 46 international mobile operators;
        Implementation of ZIM Chat; and
        Release of Zim 8.



We believe that our operational performance and the development of strategic international relationships throughout fiscal 2005 have established a solid base for continued growth in fiscal 2006.







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OVERVIEW



Historically we have been known as a developer and provider of the Zim Integrated Development Environment, or the Zim IDE software. Zim IDE software is currently used by companies in the design, development, and management of information databases and mission critical applications. The technology for Zim IDE software was developed at Bell Northern Research in Ottawa, Ontario in the
1980s and acquired by ZIM in 1996. The software is now licensed to thousands of customers through direct sales as well as an established network of VARs and distributors.



Beginning in 2001, we expanded our business strategy to include the design and development of a line of mobile data software products, known as SMS Office. ZIM designed these mobile data software products to take advantage of the existing wireless data network infrastructure known as SMS. SMS enables users to communicate person to person and application to person through cellular handsets and other SMS-enabled devices. SMS Office was well received by international mobile operators, resulting in contracts with several mobile operators, but did not receive market acceptance from end users. ZIM worked with the mobile operators to implement and launch SMS Office throughout the year. Subsequent to the launch of SMS Office, we have not experienced significant revenues. Management does not foresee any change in this trend, and as a result, we are no longer investing in sales or marketing initiatives relating to the
SMS Office products.



Another product, ZIM Chat, is being resold by mobile operators to their subscribers under the mobile operator's own brand. Rogers AT&T Wireless, a Canadian telecommunications company, launched ZIM Chat, allowing real time chats between computer users and Rogers AT&T Wireless customers. The product, labeled Rogers Desktop TXT, brings instant messaging to wireless phones by enabling users to communicate easily from a computer with mobile contacts in real time using two-way text messaging.



In February 2004, ZIM completed the purchase of EPL. This acquisition allowed ZIM to expand into the global SMS market for premium, bulk, location-based and interactive two-way SMS delivery and to become an SMS aggregator. Aggregators transmit a broad variety of messaging, content, and applications worldwide. ZIM is now providing an operator-grade, high-volume delivery infrastructure that is scalable, with detailed reporting available to our mobile content customers. Our goal is to continue to expand our network, allowing our customers to send their messages and campaigns internationally, with reliance that the messages are being successfully delivered.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, which requires management to make certain estimates and apply judgments that affect reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on historical experience, current trends, and other factors that management believes to be important at the time the consolidated financial statements are prepared. On an ongoing basis, management reviews our accounting policies and how they are applied and disclosed in our consolidated financial statements. While management believes that the historical experience, current trends and other factors considered support the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the
United States, actual results could differ from our estimates, and such differences could be material.



The following supplemental information on our critical accounting policies, while fully described in Note 2 to the consolidated financial statements, contain significant judgments and estimates as described below.







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VALUATION ALLOWANCES



We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Judgments regarding realization of deferred tax assets and the ultimate outcome of tax-related contingencies represent key items involved in the determination of tax expense and related balance sheet accounts. We have currently recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Should we determine that a reduction in the valuation allowance is appropriate, an adjustment to our deferred tax assets would increase income in the period such determination was made.



LONG-LIVED ASSET IMPAIRMENT



The Company evaluates the carrying value of long-lived assets for impairment whenever indicators exist. Examples of these indicators include current period losses combined with a history of losses, or a projection of continuing losses, or a significant decrease in the market price of a long-lived asset group. If an indicator exists, the asset group held and used is tested for recoverability by comparing the carrying value to the sum of expected future cash flows directly attributable to the asset group. If the asset group is not recoverable through cash flows or if the asset group is to be disposed of, an impairment loss is recognized for the difference between the carrying value and the fair value of the asset group. A high degree of judgment is required in developing estimates related to these evaluations and various factors are considered, including projected revenues and cost and market conditions.



We have recorded an impairment of long-lived assets of $232,270 for the UK technology platform. We do not anticipate recovering any funds from this asset. See further details of this impairment in the analysis of the expenses and in Note 5 to the ZIM Corporation Consolidated Financial Statements.



GOODWILL IMPAIRMENT



Goodwill represents the excess of cost over the fair value of the net identifiable assets acquired in a business combination accounted for under the purchase method. As a result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangibles" ("FAS 142"), that was effective for the Corporation as of the beginning of fiscal year 2003, goodwill and other intangible assets with an indefinite useful life are tested for impairment at least annually. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist to determine if the recorded goodwill is impaired.



The annual evaluation of goodwill associated with ZTI do Brasil Ltda. performed during the fourth quarter of 2005 resulted in a non-cash impairment charge of approximately $530,000. See further details of this impairment in the analysis of the expenses and in Note 7 to the ZIM Corporation Consolidated Financial Statements.



There was no impairment in the goodwill associated with the acquisition of EPL as we expect to derive our future revenues from SMS aggregation services internationally.



IMPAIRMENT OF INTANGIBLE ASSETS



During the fourth quarter of 2005, we recorded an impairment loss related to certain identifiable intangibles acquired in the February 2004 acquisition of EPL, specifically the core technology and customer list. The loss was calculated in accordance with SFAS 142 and totaled approximately $967,000.



See further details of this impairment in the analysis of the expenses and in Note 6 to the ZIM Corporation Consolidated Financial Statements.





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REVENUE RECOGNITION



Revenues are mainly derived from SMS messaging services, SMS fee-based services, and proprietary software products and licenses.




Bulk messaging





Bulk messaging revenue is derived by selling our customers a set of messages.  Smaller customers may purchase approximately 5,000 credits from our internet site.  These customers pay by credit card and there is no refund of credits if they are unused.  As a result, revenue is recognized at time of payment.





Other customers purchase larger allotments of messages.  These customers contract with ZIM for service levels, prices and payment terms.  Under these contracts, revenue is recognized when our customer uses their credits, sends their message and revenue is considered collectible.





All costs associated with sending these messages are included in costs of revenue.





Premium messaging




SMS premium messaging services revenues are derived principally from providing mobile content providers  connections to mobile operators and allowing their end users to expand on their SMS capabilities and other services. These services include news and other content subscriptions. Revenues from SMS messaging services are charged to our customers based on their end users' usage. Such revenues are recognized by ZIM in the period in which the service is performed, provided that no significant Company obligations remain, the collection of the receivables is reasonably assured and the amounts can be accurately estimated.



We contract with mobile content providers and third party mobile operators for billing and transmission services related to the mobile value-added services. We record the gross amount we bill to our customers for our mobile value-added services as revenues and the fees charged or retained by the third party content providers and operators as costs of revenues. We considered EITF 99-19 in determining whether we should recognize such revenues at gross or net of the revenue shared with mobile content providers for billing and transmission services. We believe that based on our arrangement with third parties, as stipulated in our agreements with them, the gross approach is appropriate as we are the primary obligor to the user with respect to the mobile value-added services.



To date, we rely on the billing statements from third party mobile operators to record revenues. These statements are agreed to internally generated statements. Due to the time lag of receiving billing statements from third-party mobile operators, revenues may have to be estimated based on our internal records of billings and transmissions for the month, adjusting for prior period confirmation rates with mobile operators and prior period discrepancies between internally estimated revenues and actual revenues confirmed by mobile operators. We apply confirmation rates based on the average of the recent actual historical rates. To date, there has been no significant adjustment to any estimates. To the extent that such revenues cannot be accurately estimated, we rely on the billing statements from the mobile operators to record revenues.




Other SMS services and products




Fee-based services, including LSB, virtual mobile and SMS Mail , allow our users to subscribe for services on our web sites. Revenues from these services are recognized in the period in which the service is performed, provided that no significant Company obligations remain, collection of the receivables is reasonably assured and the amounts can be accurately estimated.




SMS Chat and SMS Office are offered to end users by the mobile operators.  We recognize revenue from these products when messages are sent by the end user and the message is acknowledged as successful from the mobile operator.






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Other services mainly include paging services and marketing campaigns. Revenues are recognized in the period in which the service is performed, provided that no significant Company obligations remain, collection of the receivables is reasonably assured and the amounts can be accurately estimated.




Zim IDE




Revenues from the sale of software products are recognized primarily on the delivery of software products to end users, resellers, distributors, retail merchants and original equipment manufacturers ("OEM"). We deliver our software products under software licenses. Revenues from sales of software products are recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, shipment is made and collectibility is reasonably assured. We recognize revenues in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as amended by SOP 98-4 and SOP 98-9.



OUTLOOK FOR 2006



We believe that SMS will continue to grow as an accepted means of communication. We believe that the driving forces of our revenue growth in fiscal 2006 will continue to include our ability to provide our SMS aggregation services at competitive rates, the improved stability of our technology and our ability to offer international connections to our customers. To capitalize on the existing market opportunity, we will continue to focus on our ability to attract new customers, our ability to expand our international connections and the reliability of our technology.



INTERNAL CONTROLS AND CORPORATE GOVERNANCE



Management is responsible for establishing and maintaining adequate internal controls over financial reporting and for the timeliness and reliability of the information disclosed. At the end of our fiscal period ended March 31, 2004, our Independent Registered Public Accounting Firm provided our Audit Committee with a letter outlining material weaknesses encountered during the course of the audit. Their primary concern was the adequacy of review of supporting schedules that result in adjusting journal entries being entered into the accounting systems that were inaccurate or disclosures in the notes to the financial statements that were incorrect. These inaccuracies were not detected by the control procedures of management reviewing the schedules and supporting documentation, resulting in errors appearing on the financial statements and subsequent detection in the audit. Their other area of concern was the
segregation of duties among the administrative staff. This issue was partly alleviated by the hiring of a controller in March 2004. During fiscal 2005, we directed our efforts towards implementing additional review procedures, including reviews of all journal entries and detailed reviews of monthly financial information. We also implemented a Sarbanes-Oxley Committee as well as software to document, review and test the design and effectiveness of internal controls, and have begun documenting our internal controls. During the next fiscal year, our efforts will be directed at completing the documentation, and reviewing and testing the design and effectiveness of our internal controls. Our goal is to establish internal controls that are effective in accordance with the requirements of Section 404 of Sarbanes-Oxley for our fiscal year ended March 31, 2007. In order to meet this target, we plan to implement, in fiscal 2006, additional automated processes in order to replace some of our
reliance on manual spreadsheets. Continuous improvement and monitoring of our business processes will likely identify other possible changes related to internal controls. All of these efforts will ensure that we are effectively utilizing our available resources and that the processes in place are efficient and scalable in order to support our future growth.



RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2005 COMPARED TO THE TEN MONTHS ENDED MARCH 31, 2004



The following discussion includes information from the audited consolidated statements of operations for the year ended March 31, 2005 and the audited consolidated statements of operations for the ten months ended March 31, 2004. The information for the year ended March 31, 2005 in management's opinion, has been prepared on a basis consistent with the audited consolidated financial statements for the ten months



19



ended March 31, 2004 and includes all adjustments necessary for a fair presentation of information presented. These operating results are not necessarily indicative of results for any future period. You should not rely on them to predict our future performance.



All financial information is prepared in accordance with generally accepted accounting principles ("GAAP") in the United States and is stated in US dollars.



REVENUES






Year ended March 31, 2005
        As a %
        Ten months ended          March 31, 2004
        As a %$
        
        $Bulk SMS
        1,000,271
        10%
        57,221
        3%Premium SMS
        7,333,625
        73%
        484,072
        23%Other SMS services
        266,420
        3%
        205,330
        10%SMS products
        162,949
        2%
        3,702
        0%8,763,265
        87%
        750,325
        36%Software
        338,143
        3%
        536,123
        25%Maintenance and consulting
        926,044
        9%
        820,651
        39%1,264,187
        13%
        1,356,774
        64%10,027,452
        100%
        2,107,099
        100%



Total revenues for the year ended March 31, 2005 were $10,027,452 as compared to $2,107,099 for the ten months ended March 31, 2004. The increase in revenues is entirely attributable to our SMS offerings.



Had the acquisition of EPL occurred on June 1, 2003, the proforma SMS revenue for the ten months ended March 31, 2004 would have been $1,911,773. This increase in our SMS revenues is a result of our ability to enter new relationships with mobile content providers and other aggregators. EPL's offering was focused on the four main SMS services being LBS, Virtual Mobile, bulk and premium. Subsequent to the acquisition, ZIM focused on the bulk and premium offerings and attracted new customers through competitive pricing and service. Commencing in second quarter of 2005, ZIM also began offering 24-7 technical support for its customers. This support improved the quality of our service offering, creating higher customer loyalty.



REVENUE ANALYSIS BY SERVICE/PRODUCT OFFERING



BULK MESSAGING



Our bulk SMS messaging revenue increased from $57,221 for the ten months ended March 31, 2004 to $1,000,271 for the fiscal year ended March 31, 2005. Bulk SMS messaging gives our customers the ability to send out a single message concurrently to a wide distribution list. New significant customers pre-pay for a set number of messages. We recognize revenue on these messages once the messages are sent to the end user.



Smaller customers may purchase bulk messaging credits from our on-line portals, referred to as "Text-Out" or "Text-Force". Revenue is realized on these customers at the time of payment as no obligations remain for ZIM and payment has been made.



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Management expects to see our bulk SMS revenues grow in fiscal 2006.



PREMIUM MESSAGING



Our premium SMS messaging revenue increased from $484,072 for the ten months ended March 31, 2004 to $7,333,625 for the fiscal year ended March 31, 2005. Premium SMS messaging works through the use of short codes (short, easy to remember phone numbers) and a corresponding tariff, typically between 25(cent) and $5, that is assigned to each number. End users are charged on their monthly bill or from their pre-paid balance, once they receive the message. The tariff is then shared between the mobile operator, ZIM and the mobile content provider. Revenue is realized once no obligations remain, collection of the receivables is reasonably assured and the amounts can be accurately estimated.



Management expects to see continued growth in this area as premium SMS messaging is now being used for more content and for higher tariffs. The industry is growing quickly as end users are now downloading games, music, ring tones, horoscopes, alerts and others.



OTHER SMS SERVICES



Our other SMS services revenue increased from $205,330 for the ten months ended March 31, 2004 to $266,420 for the fiscal year ended March 31, 2005. Included in other SMS services are 2-way SMS services to replace pagers, miscellaneous marketing campaigns, LBS and Virtual Mobile revenues.



Management expects the focus of ZIM to continue with bulk and premium messaging. We have not yet seen market acceptance for these other SMS services. Although we will continue to service our existing customer base, we do not expect growth in these areas.



SMS PRODUCTS



Revenues from our key products increased from $3,702 in the ten months ended March 31, 2004 to $162,949 in the fiscal year ended March 31, 2005. Our key products, ZIM SMS Office and ZIM Chat, are resold by mobile operators to their subscribers under the mobile operator's own brand. Currently our applications are being offered to subscribers of Rogers in Canada, StarHub in Singapore and Digi in Malaysia. We do not expect significant revenues from SMS Office as consumer behavior indicates a lack of interest in the product. ZIM Chat continues to receive significant attention from end users, and management would like to further develop strategic relationships with mobile operators to expand the use of ZIM Chat.



SOFTWARE, MAINTENANCE AND CONSULTING



We generate revenues from the sale of our database product as well as the subsequent maintenance and consulting fees. Management expected a decrease in software sales for the first six months of the fiscal year as we expected our customer base to be waiting for the release of a new version of the software. During the year, we released Zim 8. Although there were subsequent sales, we did not see a significant increase for the balance of the year. As a result, revenues from software sales decreased from $536,123 for the ten months ended March 31, 2004 to $338,143 for the fiscal year ended March 31, 2005. The market for database software has expanded substantially over the years and customers have migrated to other competitors that have larger market share. Management expects to see further deterioration of its customer base and as a result, further decreases in the sales of Zim IDE software.



In addition to the sale of the software, we are generating revenue from software maintenance and consulting. The maintenance revenues for the ten months ended March 31, 2004 of $820,651 increased slightly to $926,044 for the year ended March 31, 2005. Management expects this level of revenue to continue in the short term while our customers continue to use the Zim IDE product. However, as customers migrate to other software products, our maintenance revenue will also start to decrease.





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We will continue to put the appropriate resources to the maintenance and development of our database products while we continue to generate revenues from this product line. Although we do not see growth in this segment, we are still committed to serving our existing customers.



EXPENSES




Year ended March 31, 2005
        Ten months ended     March 31, 2004$
        $Cost of revenue
        8,317,572
        821,884Selling, general and administrative
        2,970,315
        2,577,898Research and development
        708,147
        536,156Amortization of intangible assets
        359,197
        61,891Impairment of long-lived assets
        232,270
        -Impairment of intangible assets
        967,183
        -Impairment of goodwill
        530,270
        -Loss on disposal of assets
        33,561Interest income, net
        (5,535)
        88,635Income tax benefit
        (121,421)
        (306,768)13,991,559
        3,779,696

Expenses have increased substantially from $3,779,696 for the ten months ended March 31, 2004 to $13,991,559 for the year ended March 31, 2005. This increase in expenses is due to the impairment charges recorded on long-lived assets, intangible assets and goodwill, the increase in costs of revenue due to the increased revenues and the costs associated with operating a business in the UK.



COST OF REVENUE



Included in the cost of revenue are costs related to the sale of Zim IDE and costs relating to SMS revenues.




Year ended March 31, 2005
        Ten months ended March 31, 2004$
        $SMS applicationsRevenue
        8,763,265
        750,325Cost of revenue
        (8,061,196)
        (640,007)Gross margin
        702,069
        110,3188%
        15%Software, maintenance and consultingRevenue
        1,264,187
        1,356,774Cost of revenue
        (256,376)
        (181,877)Gross margin
        1,007,811
        1,174,89780%
        87%



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Gross margins for SMS applications decreased from 15% for the ten months ended March 31, 2004 to 8% for the fiscal year ended March 31, 2005. Since premium and bulk messaging were the majority of SMS revenues for both periods, the decrease in margin can be assigned to these services.



Included in the cost of SMS applications are fees paid to the mobile operators and other aggregators as well as revenue share payments to premium SMS customers. During the 2005 fiscal year, the industry underwent a consolidation. In particular, several of the larger aggregators merged. The result of these mergers is that the resulting entities were able to offer extremely competitive pricing due to their volume discounts. In order to compete in the market, we had to ensure that our pricing to our customers was consistent with the industry. In addition, in order to improve our service offering, we commenced offering 24-7 support in the second quarter of 2005. There was no corresponding expense in the 2004 fiscal periods.



Also, the margins in fiscal 2004 only reflect messaging services in the UK, whereas the fiscal 2005 results include other European countries and Canada. Each country has a unique price point, resulting in a different margin. We are unable to predict the margins for fiscal 2006, as the margins are dependant on external and internal pressures, including our competitors' pricing, our volumes and resulting volume discounts and the countries we are operating in.



As a result of these factors, we realized a decrease of 7% in our SMS applications margins from the ten months ended March 31, 2004 to the year ended March 31, 2005.



Gross margins for software, maintenance and consulting sales decreased from 87% for the ten months ended March 31, 2004 to 80% for the fiscal year ended March 31, 2005. Included in the cost of revenue for software, maintenance and consulting are salaries relating to supporting the Zim IDE software and costs for the distribution of the software. The decrease in the margin on software sales is a result of the decrease in revenue, without a corresponding decrease in direct expenses such as salaries.



SELLING, GENERAL AND ADMINISTRATIVE



Selling, general and administrative expenses for the ten months ended March 31, 2004 and the year ended March 31, 2005 were $2,577,898 and $2,970,315 respectively. The difference of $392,417 is partially attributable to the difference in accounting periods. The monthly average expenditure in fiscal 2005 was $247,526 as compared to $257,790 for the fiscal 2004 period.



Although we incurred additional expenses related to operating the UK office, management was committed to cost management during the year. As a result, there were minimal expenses relating to travel and several support positions were eliminated. In addition, during the 2005 fiscal year, ZIM relocated its Brazilian and UK offices to smaller locations without rental commitments.



Management expects to see increased expenditures in fiscal 2006 as the Company prepares for compliance with Section 404 of Sarbanes-Oxley.



RESEARCH AND DEVELOPMENT



Research and development expenses remained relatively flat when comparing the ten months ended March 31, 2004 and the year ended March 31, 2005. Research and development expenses were $536,156 for the ten months ended March 31, 2004 as compared to $708,147 during the fiscal year ended March 31, 2005. During fiscal 2005, several of the development team positions that were working on the SMS Office project were eliminated. These positions were replaced with engineers with expertise in SMS messaging and connections.







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AMORTIZATION OF INTANGIBLE ASSETS



With the acquisition of EPL, we acquired new intangible assets. The amortization of the customer lists increased from $61,891 for the ten months ended March 31, 2004 to $359,197 for the year ended March 31, 2005. This increase is due to the acquisition of the customer list in the EPL acquisition. Core technology purchased in the acquisition is allocated to the cost of revenue for the months subsequent to February 10, 2004.



We originally estimated the life of the core technology as five years and the customer relationships as eighteen months. As discussed below, we recorded an impairment on these assets in the fourth quarter of fiscal 2005.



IMPAIRMENT CHARGES



We have recorded non-cash impairment charges relating to both intangible and long-lived assets in the UK reporting unit and goodwill in the Brazil reporting unit.



UK IMPAIRMENTS:



After the acquisition of EPL, we relied solely on the technology purchased to provide our aggregator services to the UK. Initially the technology was able to perform at reasonable levels. As we continued to add new customers and increased the load of messages, we experienced technical difficulties with this purchased platform. After several attempts to stabilize the platform and with the hiring of a new Chief Technology Advisor in January 2005, the decision was made to rebuild the platform in Canada using new technologies, thereby abandoning the UK platform by the first quarter of 2006. We therefore performed an impairment test on this asset during the fourth quarter using the discounted future cash flows method, and as a result of this test, we have determined that the technology platform is fully impaired and recorded a non-cash impairment charge of approximately $232,000. This impairment is reported under
the SMS segment.



The core technology intangible asset associated with the above physical platform purchased was also determined to be fully impaired during the fourth quarter. The carrying amount of this intangible asset was compared to its fair value using the discounted future cash flow method. The facts and circumstances leading to this impairment are the same as noted in the paragraph above. The amount of the impairment loss amounted to approximately $830,000. This impairment is also reported under the SMS segment.



On February 10, 2004, at the time of the EPL acquisition, a customer list intangible asset was recorded. The amount originally assigned to the acquired customer list was based on the costs that we would have otherwise incurred to establish these relationships. At that time, we believed that the value of these customer relationships is that it would enable us to sell our SMS Office products to the mobile operators in the UK. However, as noted earlier, even though SMS Office was well received by these international mobile operators, this product did not receive market acceptance from end users and we therefore ceased all sales efforts for this product. In addition, due to the instability of the UK platform as mentioned above, we were unable to reliably service some of the customers acquired in the acquisition, resulting in reduced revenues by the fourth quarter of the year. Although some of the customers still
exist, we do not expect to see significant future value from these relationships. Based on these events, we performed an impairment test on this asset during the fourth quarter using the future discounted cash flow method. This test resulted in a non-cash impairment charge of approximately $134,000 in the SMS segment rendering the asset fully impaired.



The annual evaluation of the goodwill associated with our UK reporting unit is performed during the fourth quarter. No impairment charges resulted from this evaluation since the fair value, as determined by discounted cash flows, exceeded the book value of this reporting unit. In performing this impairment test, management considered ZIM's projected cash flows from the aggregator business rather than just the UK operations, as the EPL acquisition enabled ZIM to move into this market. Despite the impairments noted above, management anticipates the discounted future cash flows from the aggregator business to exceed the carrying amount of the goodwill reported on the balance of $2,068,881.



24



BRAZIL IMPAIRMENTS:



The annual evaluation of goodwill associated with our Brazil reporting unit is performed during the fourth quarter. The impairment test indicated that the recorded book value of this reporting unit exceeded its fair value, as determined by discounted cash flows; this resulted in a non-cash impairment charge of approximately $530,000. During the year, the Brazil operations experienced a substantial decline in operating performance when compared to prior year performance and budgeted 2005 result. Management expected to see a return to historical levels subsequent to the release of ZIM 8 in the fall of 2004, however results for the third and fourth quarter failed to meet expectations. Further, as we are no longer focused on the database market and as the database market has become increasingly competitive, management made the decision to limit sales initiatives in Brazil or in the database market and focus on the
SMS segment. Management will continue to support their existing ZIM IDE software customers but we are not forecasting significant new revenues or new customers in this segment. Management also decided during the year to close the office in Brazil and terminate three of the six employees. As a result of the lack of sales, the increased competition and management's decision to downsize the Brazilian office, we have determined that the goodwill associated with the Brazil reporting unit is fully impaired.



LOSS ON DISPOSABLE OF FIXED ASSETS



As a result of our decision to terminate employees and to close the Brazil and UK offices, we have incurred a loss on the disposable of fixed assets of $33,561.



INTEREST EXPENSE



For the ten and twelve months ended March 31, 2004, the Company incurred interest on the debt held by our Chief Executive Officer and a related party at 5% per annum. This debt was converted into shares in January 2004, and as a result, there are no significant interest expenses for the year ended March 31, 2005. Our operations in Brazil received interest income on their surplus funds for the period.



INCOME TAXES



Included in income taxes are taxes paid on revenues earned in Brazil as well as investment tax credits ("ITC") on research and development expenditures in Canada. During the 2005 fiscal year we changed the nature of certain research projects, which disallow them for ITCs. As a result, the income taxes recovered are substantially lower for the year ended March 31, 2005, as compared to the ten and twelve months ended March 31, 2004.



As a result of the factors described above, the net loss for the year ended March 31, 2005 was $3,964,107 as compared to $1,672,597 for the ten months ended March 31, 2004.







25



LIQUIDITY AND CAPITAL RESOURCES



At March 31, 2005, ZIM had cash of $737,888 and working capital of $ 1,120,710, as compared to cash of $870,520 and working capital of $ 568,219 at March 31, 2004. This improved financial position is a result of the increase in revenues generated from our SMS services, as well as a private placement of common shares in June, July and October 2004.



Cash flows for the fiscal periods were as follows:






Year ended March 31, 2005
        Ten months ended March 31, 2004$
        $SMS applicationsRevenue
        8,763,265
        750,325Cost of revenue
        (8,061,196)
        (640,007)Gross margin
        702,069
        110,3188%
        15%Software, maintenance and consultingRevenue
        1,264,187
        1,356,774Cost of revenue
        (256,376)
        (181,877)Gross margin
        1,007,811
        1,174,89780%
        87%



ZIM used $1,762,459 in operating activities for the year ended March 31, 2005 as compared to $1,687,579 for the ten months ended March 31, 2004.



ZIM used $402,648 of cash in its investing activities during the ten months ended March 31, 2004, as compared to $42,917 for the year ended March 31, 2005. Of this amount in 2004, $320,028 related to the purchase of EPL and $82,620 was used in the purchase of fixed assets. In the 2005 fiscal year, we decreased our fixed asset purchases to $42,917. This is a result of reduced staff and office space.



ZIM increased its cash by $1,621,326 from private placements and the exercise of options in fiscal 2005. For the ten-month period ended March 31, 2004, we increased our cash by $2,423,332, also from private placements and stock option exercises.



Accounts receivable increased from $1,022,626 as at March 31, 2004 to $2,174,148 as at March 31, 2005. This change is a result of the increase in SMS messaging traffic in fiscal 2005. Also, in March 2004, we relied on direct connections with mobile operators to send the majority of our messages. By March 2005, we had expanded our international connections through indirect connections to mobile operators through other aggregators. In general, mobile operators in the UK pay within 35 days of the month end, and Canadian operators pay up to 90 days after month end, on a quarterly basis. For other international connections, we rely on other aggregators that pay up to 60 days after month end. Each of the mobile operators and aggregators have signed contracts with us outlining the terms of their payments.



Credit terms for software, maintenance and consulting services have remained consistent from prior periods at 30 days.



26



As at March 31, 2005, approximately 63% of all related receivables are current, 33% are between 1 and 30 days past due, with the balance spread over 31 to 90 days overdue. We review all accounts regularly for collection and believe that the allowance is sufficient.



Other sources of cash during the 2005 fiscal period were the issuance of shares pursuant to the exercise of stock options by employees. We issued 305,000 common shares upon exercise of options, for gross and net proceeds of $81,050, for the year ended March 31, 2005. Also, on June 25, 2004, ZIM completed a non-brokered private placement of 1,010,555 units at $0.38 per unit, for total gross proceeds of $384,011 and net proceeds of $381,535. Each unit consisted of one common share and two common share purchase warrant. Each warrant may be exercised at any time prior to September 30, 2005 at an exercise price of $0.38. Subsequent non-brokered private placements were completed on July 30, 2004 and October 7, 2004 for 2,004,211 and 1,018,077 units respectively. The July 30, 2004 units were priced at $0.38 and consisted of one common share and two common share purchase warrants, exercisable for 15 months. The
October 7, 2004 units were priced at $0.39 and also consisted of one common share and two common share purchase warrants, exercisable for 15 months. There were no expenses associated with the private placements on July 30, 2004 or October 7, 2004.



In the 2004 fiscal period, we issued 728,300 shares pursuant to the exercise of stock options by employees. On January 30, 2004, ZIM completed a non-brokered private placement of 1,150,006 units at $0.75 per unit, for total gross proceeds of $862,505 and net proceeds of $819,587. Each unit consisted of one common share and one common share purchase warrant. Each warrant had an original expiry July 30, 2004 at an exercise price of $0.75. The warrant's original expiry was extended to July 31, 2005 by the Board of Directors due to the time involved with the registration of the underlying shares. In April 2005, we requested the SEC to withdraw the registration statement relating to these shares.



ZIM will need an estimated $1,800,000 in financing in order to fund its operating losses and other working capital requirements for the next 12 months. Subsequent to the year end, ZIM obtained a working capital line of credit for $250,000. We do not have any other bank credit facility under which ZIM may borrow funds for the estimated additional financing of $1,550,000. ZIM has not received any commitments from any third parties to provide additional financing.



Future liquidity and cash requirements will depend on a wide range of factors including the level of business in existing operations and ZIM's ability to raise additional financing. Accordingly, there can be no assurance that ZIM will be able to meet its working capital needs for any future period. As a result of some of the items noted above, the Independent Registered Public Accounting Firm's Report for the year ended March 31, 2005 indicated that there was substantial doubt regarding our ability to continue as a going concern.



If ZIM is unable to obtain the necessary funds, we may have to curtail or suspend certain of our business operations which could have a material adverse effect on our business relationships, financial results, financial condition and prospects.



The following is a summary of ZIM's contractual obligations for the periods indicated that existed as of March 31, 2005.



Operating lease obligations:






$2006
        121,5832007
        125,0572008
        41,686288,326





27



NEW ACCOUNTING PRONOUNCEMENTS



(I) SFAS NO. 123R



In December 2004, the FASB issued SFAS 123R, Share-Based Payment, ("SFAS 123R"). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. The impact on ZIM'S financial statements of applying one of the acceptable fair-value based methods of accounting for stock options is disclosed in Note 2.



(II) SFAS 153



The FASB issued Statement of Financial Accounting Standards No. 153 ("SFAS 153"), "Exchanges of Non-Monetary Assets" as an amendment to Accounting Principles Board Opinion No. 29 ("APB 29"), "Accounting for Non-Monetary Transactions." APB 29 prescribes that exchanges of non-monetary transactions should be measured based on the fair value of the assets exchanged, while providing an exception for non-monetary exchanges of similar productive assets. SFAS 153 eliminates the exception provided in APB 29 and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 is to be applied prospectively and is effective for all non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect there to be any material effect on the consolidated financial statements upon adoption of the new standard.





28



ITEM 7. FINANCIAL STATEMENTS.



REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of ZIM Corporation



We have audited the accompanying consolidated balance sheets of ZIM Corporation as of March 31, 2005 and 2004 and the related consolidated statements of operations, shareholders' equity and comprehensive loss and cash flows for the year ended March 31, 2005 and the ten months ended March 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of ZIM Corporation as of March 31, 2005 and 2004 and the results of its operations and its cash flows for the year ended March 31, 2005 and the ten months ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company incurred a net loss of $3,964,107 and used $1,762,459 of cash from operations, during the year ended March 31, 2005. The Company also has generated negative cash flows from operations during each of the last five years. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Raymond Chabot Grant Thornton LLP

---------------------------------------------

Raymond Chabot Grant Thornton LLP



Ottawa, Canada

May 31, 2005







29



ZIM CorporationConsolidated Statements of Operations(Expressed in US dollars)Year ended        March 31, 2005
        
        Ten months ended March 31, 2004$
        
        $RevenueSMS applications
        
        8,763,265
        
        750,325Software
        
        1,264,187
        
        1,356,774Total revenue
        
        10,027,452
        
        2,107,099Operating expensesCost of revenue
        
        8,317,572
        
        821,884Selling, general and administrative
        
        2,970,315
        
        2,577,898Research and development
        
        708,147
        
        536,156Amortization of intangible assets
        
        359,197
        
        61,891Impairment of long-lived assets
        
        232,270
        
        -Impairment of intangible assets
        
        967,183
        
        -Impairment of goodwill
        
        530,270
        
        -Total operating expenses
        
        14,084,954
        
        3,997,829Loss from operations
        
        (4,057,502)
        
        (1,890,730)Other income (expense):Loss on disposal of property and equipment
        
        (33,561)
        
        -Interest income, net
        
        5,535
        
        (88,635)Total other income (expense)
        
        (28,026)
        
        (88,635)Loss before income taxes
        
        (4,085,528)
        
        (1,979,365)Income tax benefit
        
        121,421
        
        306,768Net loss
        
        (3,964,107)
        
        (1,672,597)Basic and fully diluted loss per share
        
        (0.07)
        
        (0.04)Weighted average number of shares outstanding
        
        57,968,459
        
        43,714,904The accompanying notes are an integral part of these consolidated financial statements.

30



ZIM CorporationConsolidated Statement of Shareholders' Equity and Comprehensive Loss(Expressed in US dollars)Number of common shares issued and outstanding
        Common shares
        Additional paid-in-capital
        Accumulated deficit
        Accumulated other comprehensive income (loss)
        Total shareholders' equity$
        $
        $
        $
        $Balance as at May 31, 2003
        33,192,254
        7,620,822
        1,540,959
        (10,576,976)
        (120,223)
        (1,535,418)Effect of reverse take-over transaction
        1,734,455
        
        
        
        
        -Conversion of special shares into common shares
        5,163,500Shares issued through the exercise of options
        728,300
        348,411
        
        
        
        348,411Shares issued upon conversion of debt
        9,211,511
        3,960,950
        
        
        
        3,960,950Shares issued through a private placement, net of expenses
        1,150,006
        819,587
        
        
        
        819,587Shares issued upon a business acquisition
        4,000,000
        3,280,000
        
        
        
        3,280,000Comprehensive loss
        
        
        
        
        
        -Net loss
        
        
        
        (1,672,597)Cumulative translation adjustment
        
        
        
        
        (190,905)Total comprehensive loss
        
        
        
        
        
        (1,863,502)Balance as at March 31, 2004
        55,180,026
        16,029,770
        1,540,959
        (12,249,573)
        (311,128)
        5,010,028Shares issued through the exercise of options
        305,000
        81,050
        
        
        
        81,050Stock options granted to non-employees
        
        
        334,422
        
        
        334,422Shares issued through a private placement, net of costs
        4,032,843
        1,540,186
        
        
        
        1,540,186Comprehensive loss
        
        
        
        
        
        -Net loss
        
        
        
        (3,964,107)Cumulative translation adjustment
        
        
        
        
        402,911Total comprehensive loss
        
        
        
        
        
        (3,561,196)Balance as at March 31, 2005
        59,517,869
        17,651,006
        1,875,381
        (16,213,680)
        91,783
        3,404,490The accompanying notes are an integral part of the consolidated financial statements.

31

ZIM CorporationConsolidated Statements of Cash Flows(Expressed in US dollars)Year ended     March 31, 2005
        
        Ten months ended March 31, 2004$
        
        $OPERATING ACTIVITIESNet loss
        
        (3,964,107)
        
        (1,672,597)Items not involving cash:Depreciation of property and equipment
        
        209,118
        
        139,716Amortization of intangible assets
        
        563,570
        
        81,723Impairment of long-lived assets
        
        232,270
        
        -Impairment of intangible assets
        
        967,183
        
        -Impairment of goodwill
        
        530,270
        
        -Loss on disposal of property and equipment
        
        33,561
        
        -Stock-based compensation
        
        334,422
        
        -Changes in operating working capital:Increase in accounts receivable
        
        (1,008,208)
        
        (713,340)Increase in investment tax credits receivable
        
        (124,963)
        
        (202,141)Increase in prepaid expenses
        
        (31,253)
        
        (35,531)Increase in accounts payable
        
        597,277
        
        371,579Increase (decrease) in accrued liabilities
        
        (70,616)
        
        295,207Increase (decrease) in deferred revenue
        
        (30,983)
        
        47,805Cash flows used in operating activities
        
        (1,762,459)
        
        (1,687,579)INVESTING ACTIVITIESPurchase of property and equipment
        
        (42,917)
        
        (82,620)Business acquisitions
        
        
        
        (320,028)Cash flows used in investing activities
        
        (42,917)
        
        (402,648)FINANCING ACTIVITIESRepayment of capital lease obligations
        
        -
        
        (12,696)Proceeds from the exercise of options
        
        81,050
        
        348,411Proceeds from shares issued through a private placement
        
        1,540,186
        
        819,587Net proceeds from related parties
        
        -
        
        1,268,030Cash flows provided by financing activities
        
        1,621,236
        
        2,423,332Effect of changes in exchange rates on cash
        
        51,508
        
        (23,611)Increase (decrease) in cash
        
        (132,632)
        
        309,494Cash, beginning of period
        
        870,520
        
        561,026Cash, end of period
        
        737,888
        
        870,520Supplemental cash flow disclosureInterest paid
        
        6,436
        
        (501)Income taxes paid
        
        23,130
        
        41,130The accompanying notes are an integral part of these consolidated financial statements.



32



ZIM CorporationConsolidated Balance Sheets(Expressed in US dollars)March 31
        
        March 312005
        
        2004$
        
        $ASSETSCurrent assetsCash
        
        737,888
        
        870,520Accounts receivable, net
        
        2,174,148
        
        1,022,626Investment tax credits receivable
        
        512,337
        
        350,780Prepaid expenses
        
        98,541
        
        60,4303,522,914
        
        2,304,356Property and equipment, net
        
        211,843
        
        601,523Intangible assets, net
        
        3,056
        
        1,442,666Goodwill
        
        2,068,881
        
        2,397,6205,806,694
        
        6,746,165LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilitiesAccounts payable
        
        1,163,586
        
        491,053Accrued liabilities
        
        875,006
        
        876,007Deferred revenue
        
        363,612
        
        369,0772,402,204
        
        1,736,137Commitments and contingenciesShareholders' equity:Preferred shares, no par value, non-cumulative
        
        -
        
        -dividend at a rate to be determined by the Board of Directors redeemable for CDN $1 per share.  Unlimited authorized shares; issued and outstanding NIL shares at March 31, 2005 and 2004.Special shares, no par value, non-voting,participating, convertible into common shares on a one-for-one basis at any time at the option of the holder and automatically on the earlier of (i) the fifth day following the date of issuance of a receipt for a final prospectus qualifying the common shares issuable upon conversion of the special shares; (ii) June 1, 2004.  Unlimited authorized shares; issued and outstanding NIL shares at March 31, 2005 and 2004.
        
        -
        
        -Common shares, no par value,unlimited authorized shares issued and outstanding 59,517,869 shares as at March 31, 2005 and 55,180,026 shares as at March 31, 2004.
        
        17,651,006
        
        16,029,770Additional paid-in capital
        
        1,875,381
        
        1,540,959Accumulated deficit
        
        (16,213,680)
        
        (12,249,573)Accumulated other comprehensive income (loss)
        
        91,783
        
        (311,128)3,404,490
        
        5,010,0285,806,694
        
        6,746,165The accompanying notes are an integral part of these consolidated financial statements.



33



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



1 - NATURE OF OPERATIONS AND LIQUIDITY



COMPANY OVERVIEW



ZIM Corporation ("ZIM" or the "Company") is a leading provider of mobile messaging and data services. In addition, the Company has designed and developed consumer and enterprise applications for the global SMS (Short Message Service) channel. Prior to entering the SMS or mobile messaging industry, ZIM was recognized as the developer and provider of the Zim Integrated Development Environment software, which continues to be used by companies in the design, development, and management of information databases.



BUSINESS DEVELOPMENT



ZIM was formed under the laws of Canada on October 17, 2002 in order to purchase ZIM Technologies International Inc. ("ZIM Technologies"), which was formed in 1997 to acquire the software technology now called the Zim Integrated Development Environment (the "Zim IDE software"). On February 10, 2004, ZIM purchased UK-based SMS service firms EPL Communications Limited and E-Promotions Limited (together referred to as "EPL"). ZIM is also the sole shareholder of ZIM Technologies do Brazil Ltda., a company incorporated in Brazil that distributes the Zim IDE Software, and PCI Merge, Inc., a Florida based holding company with no operations. Until March 31, 2004, ZIM was the sole shareholder of ZIM Technologies, a Canadian federal corporation and the chief operating company of the ZIM group of companies. On April 1, 2004, ZIM Corporation and ZIM Technologies amalgamated into ZIM Corporation.



BUSINESS OF THE COMPANY



Historically, we have been known as a developer and provider of the Zim IDE software. Zim IDE software is currently used by companies in the design, development, and management of information databases and mission critical applications. The technology for the Zim IDE software was developed at Bell Northern Research in Ottawa, Ontario in the 1980s and acquired by ZIM in 1996. The software is now licensed to thousands of customers through direct sales as well as through an established network of value added resellers ("VARs") and distributors.



Beginning in 2001, we expanded our business strategy to include the design and development of a line of mobile data software products. We designed these mobile data software products to take advantage of the existing wireless data network infrastructure known as SMS. SMS, mobile messaging, or text messaging as it is also known, enables users to communicate person to person and application to person through cellular handsets and other SMS-enabled devices. The use of SMS is already considered an accepted form of communication throughout Europe and Asia and the market is now expanding in North America.



We began marketing our main SMS product, referred to as "SMS Office" in the summer of 2003. Although we were successful in establishing several relationships with mobile operators , the product did not receive significant market acceptance from end users. We continue to support these products but our main focus has shifted to our SMS aggregation service offering and to our chat applications.



Since the acquisition of EPL, we have focused on providing aggregation services to mobile content providers. Aggregators transmit a broad variety of messaging, content, and applications worldwide. ZIM is now providing an operator-grade, high-volume delivery infrastructure that is scalable, with detailed reporting available to our mobile content customers. Our goal is to continue to expand our network,





34



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



allowing our customers to send their messages and campaigns internationally, with reliance that the messages are being successfully delivered.



LIQUIDITY



The Company has incurred a net loss of $3,964,107 during the year ended March 31, 2005. In addition, the Company generated negative cash flows from operations of $1,762,459 for the year ended March 31, 2005 and has generated negative cash flows from operations during the last five years.



All of the factors above raise substantial doubt about the Company's ability to continue as a going concern. Management's plans to address these issues by continuing to raise capital through the placement of equity, obtaining advances from related parties and, if necessary, renegotiating the repayment terms of accounts payable and accrued liabilities. The Company's ability to continue as a going concern is subject to management's ability to successfully implement the above plans. Failure to implement these plans could have a material adverse effect on the Company's position and/or results of operations and may necessitate a reduction in operating activities. The consolidated financial statements do not include adjustments that may be required if the assets are not realized and the liabilities settled in the normal course of operations.



In the longer term, the Company has to generate the level of sales which would result in cash self sufficiency and it may need to continue to raise capital by selling additional equity or by obtaining credit facilities. The Company's future capital requirements will depend on many factors, including, but not limited to, the ability to attract new customers, the market acceptance of its services or software, the level of its promotional activities and advertising required to support its activities. No assurance can be given that any such additional funding will be available or that, if available, it can be obtained on terms favorable to the Company.



2 - SIGNIFICANT ACCOUNTING POLICIES



BASIS OF PRESENTATION



These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP") applied on a consistent basis.



PRINCIPLES OF CONSOLIDATION



These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. The results of operations for acquisitions are included in these consolidated financial statements from the date of acquisition. Inter-company transactions and balances are eliminated upon consolidation.



USE OF ESTIMATES



The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts recorded in the financial statements and the notes to the financial statements. These estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future. Actual results may differ from those estimates.







35



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



FISCAL YEAR



The Company changed its financial year end from May 31 to March 31 in 2004.



COMPREHENSIVE INCOME (LOSS)



Comprehensive income (loss) includes net loss and other comprehensive income (loss) ("OCI"). OCI refers to changes in net assets from transactions and other events and circumstances other than transactions with shareholders. These changes are recorded directly as a separate component of shareholders' equity and excluded from net income. The only comprehensive income item for the Company relates to foreign currency translation adjustments relating to the translation of the financial statements into the reporting currency.



ALLOWANCE FOR DOUBTFUL ACCOUNTS



Accounts receivable are recorded at the invoiced amount net of an allowance for doubtful accounts. The Company determines its allowance for doubtful accounts by considering a number of factors, including the age of the receivable, the financial stability of the customer, discussions that may have occurred with the customer and management's judgment as to the overall collectibility of the receivable from that customer. In addition, the Company may establish an allowance for all the receivables for which no specific allowances are deemed necessary. This general allowance for doubtful accounts is based on a percentage of the total accounts receivable with different percentages used based on the different ages of the receivables. The percentages used are based on the Company's historical experience and management's current judgment regarding the state of the economy. The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period of recovery.



REVENUE RECOGNITION



The Company derives revenue from two sources: Short Message Service (SMS) services and applications and enterprise software, including maintenance and consulting services. SMS involves providing SMS applications and services. Enterprise software involves providing enterprise software for designing, developing and manipulating database systems and applications.



SHORT MESSAGE SERVICE REVENUE RECOGNITION



Revenues from SMS services and applications are derived principally from providing aggregation services whereby ZIM sends messages from its customers through mobile operators to end users on their cell phones. In this situation, the Company contracts with its customers that can not connect directly to the mobile operators and with the third party mobile operators or other aggregators directly for the transmission of the messages. Fees are charged on a monthly or per message basis. Revenues and cost of revenues are recognized in the month in which the service is performed, provided no significant ZIM obligations remain. We rely on a number of mobile network operators and other aggregators globally to deliver our services. Generally, (i) within 15 to 30 days after the end of each month, ZIM receives a statement from each of the operators or aggregators confirming the amount of charges billed to that operator's
mobile phone users and (ii) within 30 to 90 days after delivering a monthly statement, each operator or aggregator remits the fees for the month to ZIM. ZIM records the fee charged by third party mobile phone operators and mobile content providers as a cost of revenue. Revenues are recorded on a gross basis as the Company is the primary obligor in the arrangement, which is evidenced by a number of factors including;







36



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)






        the platform is designed and developed by the Company;
        the mobile operators or aggregators that ZIM contracts with to deliver these services to the end customers are not involved in the design or development of the services that are provided by ZIM;
        the end customer purchases the content, access or value added services that ZIM provides;
        the end customer receives identical services from ZIM regardless of which third party mobile operator or aggregator is used to deliver the message;
        customers contract directly with ZIM to determine the terms of the service that will be provided; and
        ZIM is responsible for fulfillment of the contract and accepts all the risk related to the content provided to the end customers and has latitude in establishing prices.



ENTERPRISE SOFTWARE REVENUE RECOGNITION



ZIM records revenues from the perpetual license of the Company's software products and the sale of related maintenance and consulting. The Company's standard license agreement provides a license to use the Company's products based on the number of licensed users. The Company may license its software in multiple element arrangements if the customer purchases any combination of maintenance, consulting or training services in conjunction with the license.



The Company recognizes revenue pursuant to the requirements of the American

Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP

97-2") "Software Revenue Recognition", as amended by SOP 98-9 "Software Revenue Recognition with Respect to Certain Transactions." Revenue is recognized using the residual method when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more delivered elements. The Company allocates revenue to each undelivered element based on its respective fair value determined by the price charged when that element is sold separately. The Company defers revenue for the undelivered elements and recognizes the residual amount of the arrangement fee, if any, when the basic criteria in SOP 97-2 have been met.



Under SOP 97-2, revenue is recognized when the following four criteria have been met:




o
        persuasive evidence of an arrangement exists;o
        delivery has occurred;o
        the fee is fixed and determinable; ando
        collectibility is probable.

The Company records revenue as earned as evidenced by contracts or invoices for its services at prices established by contract, price list and/or fee schedule less applicable discounts. If at the outset of an arrangement the Company determines that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes due. If at the outset of an arrangement the Company determines that the collectibility is not probable, revenue is deferred until payment is received.



Collectibility is assessed based on the collection history of the client, current economic trends, customer concentrations and customer credit worthiness. Delivery of the software has occurred once the customer has accepted the product or has been provided with permanent keys to the file transfer protocol ("FTP") site. If an arrangement allows for customer acceptance of the software or services, the Company defers revenue recognition until the earlier of customer acceptance or when the acceptance right lapses.





37



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



MAINTENANCE AND CONSULTING REVENUE RECOGNITION



Maintenance revenues are recognized equally over the term of the maintenance contract.



Consulting revenue, which represents services provided on a per diem basis to customers, is recognized as the services are performed as there are no customer acceptance provisions involved in these types of arrangements.



In general, credit terms of 30 days are extended to customers.



RESEARCH AND DEVELOPMENT EXPENSES



Costs related to research, design and development of products and applications are charged to research and development expense as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established, which generally occurs upon completion of a working model, and ending when a product is available for general release to customers. All subsequent costs are expensed as incurred. To date, completing a working model of the Company's products and the general release of the products has substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant.



ADVERTISING



Advertising costs are expensed as incurred. Advertising costs amounted to $42,311 for the year ended March 31, 2005 ($24,556 for the ten month period ended March 31, 2004).



INVESTMENT TAX CREDITS



Investment tax credits are accounted for using the cost reduction approach whereby they are recorded as a reduction of the related capital cost of the asset acquired when there is reasonable assurance that they will be realized.



GOVERNMENT ASSISTANCE



Government assistance is recorded as a reduction of the related expense or the cost of the assets acquired. Government assistance is recorded in the accounts when reasonable assurance exists that the Company has complied with the terms and conditions of the approved grant program.



TRANSLATION OF FOREIGN CURRENCIES



The Company's reporting currency is the US dollar and the functional currency is the Canadian dollar.



Assets and liabilities of the Company's subsidiaries, recorded in functional currencies other than Canadian dollars, are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Revenues, expenses and cash flow amounts are translated at the weighted average exchange rates for the period. The resulting translation adjustments are included in accumulated other comprehensive income (loss) in shareholders' equity.





38



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



The accounts of the Company's subsidiaries that are recorded in the Company's functional currency, the Canadian dollar, translate their foreign currency transactions as follows: gains or losses from foreign currency transactions such as those resulting from the settlement of receivables or payables denominated in foreign currency, are translated at the weighted average exchange rates for the period and are included in the statement of operations of the current period. For the year ended March 31, 2005 and the ten months ended March 31, 2004, the Company recognized a foreign exchange gain of $31,768 and $8,765 respectively in the accompanying consolidated statements of operations.



The translation of the Company's financial statements from the functional currency to its reporting currency is performed as follows: All assets and liabilities are translated into US dollars at the rate of exchange in effect at the balance sheet date. Revenues, expenses and cash flow amounts are translated at the weighted average exchange rates for the period. The resulting translation adjustments are included in comprehensive income/(loss) in shareholders' equity.



INCOME TAXES



Income taxes are accounted for under the asset and liability method. Deferred 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 and operating loss and tax credit carry-forwards. When necessary, a valuation allowance is recorded to reduce tax assets to an amount for which realization is more likely than not. The effect of changes in tax rates is recognized in the period in which the rate change occurs.



EARNINGS PER SHARE



Basic earnings per share are computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share are calculated giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to such shares at the later of the beginning of the period or the issuance date. The "if-converted" method is used to determine the dilutive effect of common shares. The treasury stock method is used to determine the dilutive effect of warrants. The treasury stock method assumes that proceeds received from the exercise of in-the-money share purchase warrants are used to repurchase common shares at the average market price during the period.



STOCK OPTION PLAN



Stock option grants are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations including Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price or in connection with the modification to outstanding awards and/or changes in grantee status.



No compensation expense is recognized for this plan when stock options are issued to directors and employees of the Company. Any consideration paid by the eligible participants on exercise of stock options is credited to share capital. If stock options are repurchased from eligible participants, the excess of the consideration paid over the carrying amount of the stock option cancelled is charged to shareholders' equity. Since the Company does not account for options granted to participants using the fair value method, it discloses pro forma information related to net income and earnings per share figures, which are calculated as if the entity applied the fair value method of accounting to stock options granted to participants.





39



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



Compensation expense related to stock options granted to non-employees is accounted for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which requires entities to recognize an expense based on the fair value of the related awards. The following table illustrates the effect on net loss and basic and diluted net loss per share as if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.




Year ended March 31, 2005
        
        Ten Months ended March 31, 2004$
        
        $Net loss, as reported
        (3,964,107)
        
        (1,672,597)Stock-based compensation income (expense) included in net loss
        -
        
        -Stock-based employee compensation expense determined under fair value based method for all awards
        (1,375,406)
        
        (4,435,145)Net loss, pro forma
        (5,339,513)
        
        (6,107,742)Basic and diluted net loss per share:As reported, basic and diluted
        (0.07)
        
        (0.04)Pro forma, basic and diluted
        (0.09)
        
        (0.14)

The fair value of the options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:




Year Ended March 31, 2005
        
        Ten Months ended March 31, 2004Risk-free interest rates
        3.00%
        
        1.54%Expected volatility
        80%
        
        80%Dividend yield
        0
        
        0Expected life of options (years)
        1.5
        
        1.5





40



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



PROPERTY AND EQUIPMENT



Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the underlying assets using the following methods and rates:




Computer equipment
        40%
        Declining balanceSoftware
        40%
        Declining balanceTechnology platform
        33%
        Declining balanceOffice furniture and equipment
        40%
        Declining balanceVoice communications equipment
        1 year
        Straight lineLeasehold improvements
        5 years
        Straight line



Effective June 1, 2003, the Company changed its method of depreciating some property and equipment from the straight-line method to the declining balance method. The Company's management believes this method is preferable because it provides a better matching of costs with related revenues. The adoption of the declining balance method did not have a material effect on the financial statements of the prior periods therefore they have not been restated to apply the new method retroactively.



LEASES



Leases are classified as either capital or operating in nature. Capital leases are those which substantially transfer the benefits and risks of ownership to the Company. Assets acquired under capital leases are amortized at the same rates as those described for property and equipment. Obligations recorded under capital leases are reduced by the principal portion of lease payments. The imputed interest portion of lease payments is charged to expense. Operating leases are expensed as incurred.



LONG-LIVED ASSETS



Long-lived assets are tested for impairment when evidence of a decline in value exists and are adjusted to estimated fair value if the asset is impaired. Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144") requires that, whenever events and circumstances indicate that the Company may not be able to recover the net book value of its productive assets, the undiscounted estimated future cash flows from the expected use of those assets must be compared to their net book value to determine if impairment is indicated. FAS 144 requires that assets deemed impaired be written down to their estimated fair value through a charge to earnings. FAS 144 states that fair values may be estimated using discounted cash flow analysis or quoted market prices, together with other available information. Under the
provisions of FAS 144 the Company reviewed its long-lived assets for impairment to determine if there were events or changes in circumstances that would indicate that the carrying amount of the assets may not be recoverable through future cash flows.







41



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



INTANGIBLE ASSETS



Intangible assets that are determined to have finite lives will continue to be amortized on the straight-line method over their estimated useful lives.



Customer lists relating to ZTI do Brasil Ltda. are amortized over their estimated rate of customer attrition which has been assumed to be 40% in the first year, 50% of the then residual in the second and third years, and the remaining balance in the fourth year.



Customer relationships relating to E-Promotions Limited and EPL Communications (together referred to as "EPL") were being amortized on a straight-line basis over 18 months and the core technology relating to EPL was being amortized on a straight-line basis over five years.



In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142. SFAS No. 142 requires goodwill and other intangible assets to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process prescribed in SFAS No. 142, whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any.



GOODWILL



Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination accounted for under the purchase method. As a result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangibles" ("FAS 142"), that was effective for the Company as of the beginning of fiscal year 2003, goodwill and other intangible assets with an indefinite useful life are not amortized but evaluated for impairment annually.



We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist to determine if the recorded goodwill is impaired. Our impairment process compares the fair value of ZTI do Brasil Ltda. and EPL to their respective carrying values, including the goodwill related to these reporting units.



OTHER



No renumeration has been recorded in these financial statements for the services of the Chief Executive Officer and majority shareholder.



3 - BUSINESS ACQUISITIONS



ACQUISITION OF EPL



Effective February 10, 2004, ZIM acquired all of the issued and outstanding common shares of EPL. EPL is a provider of wireless messaging solutions and is part of ZIM's international growth strategy. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the identifiable assets acquired and liabilities assumed using estimates of their fair value. The results of operations are included in the consolidated financial statements beginning on the acquisition date. The total purchase price of $3,606,247 included cash of $250,000, acquisition costs of $76,247 and $3,280,000 in common shares. 4,000,000 common shares were issued. These shares were valued at $0.82 based on the market price on February 10, 2004.




42



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



The aggregate purchase price for these acquisitions was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as follows:




$Assets acquired:Cash
        
        6,219Accounts receivable
        
        501,222Software and equipment
        
        361,406Goodwill
        
        1,881,355Intangibles
        
        1,480,0004,230,202Current liabilities assumed
        
        623,955Total purchase price
        
        3,606,247

SUPPLEMENTAL PRO FORMA INFORMATION



Had the acquisition of EPL occurred on June 1, 2003, the pro forma combined revenue and net loss of the Company would have been as follows:




Year ended    March 31, 2005
        Ten months ended March 31, 2004(Audited)
        (Unaudited)$
        $Revenue
        10,027,452
        3,268,546Net loss
        (3,964,107)
        (1,606,788)Basic and fully diluted net loss per share
        (0.07)
        (0.03)



CONTINGENT CONSIDERATION



Effective August 1, 2001, the Company acquired 100% of the issued and outstanding common shares of its South American distributor, ZTI do Brasil Ltda. Upon acquisition, ZTI do Brasil Ltda.'s name was changed to ZIM Technologies do Brasil Ltda.





43



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



Consideration in the amount of $130,890 was payable to the previous shareholders of Zim Technologies do Brasil Ltda. in the event the Company was not a reporting issuer in Ontario with its common shares listed on any North American stock exchange on or before December 31, 2002. During December 2002, the Company entered into an agreement to settle the contingency through the issuance of 300,000 stock options as well as employment contracts for two years for one shareholder and one year for the other. The options were granted December 23, 2002, subject to approval by the Board of Directors, with an exercise price of approximately $0.82, a contractual life of three years and immediate vesting. On June 10, 2003, the Board of Directors approved the grant of options. Goodwill has been increased by $117,614 to reflect the settlement of the contingency through the granting of employment contracts and the issuance of options.



4 - ACCOUNTS RECEIVABLE




March 31, 2005
        
        March 31, 2004$
        
        $Trade accounts receivable
        
        1,606,444
        
        1,032,575Unbilled trade accounts receivable
        595,227
        
        10,547Allowance for doubtful accounts
        (56,733)
        
        (34,268)Other
        
        29,210
        
        13,7722,174,148
        
        1,022,626



5 - PROPERTY AND EQUIPMENT




March 31, 2005
        Cost
        Accumulated depreciation
        Impairment
        Net book value$
        $
        $
        $Computer equipment
        819,060
        671,794
        -
        147,266Software
        54,287
        48,572
        -
        5,715Technology platform
        707,406
        475,136
        232,270
        0Office furniture and equipment
        180,792
        125,027
        -
        55,765Leasehold improvements
        119,396
        116,299
        -
        3,0971,880,941
        1,436,828
        232,270
        211,843

The Company reviewed its fixed assets for impairment to determine if there were events or changes in circumstances that would indicate that the carrying amount of the assets may not be recoverable through future cash flows. In February 2005, it was determined that the technology platform in the UK would no longer be required as it was being replaced with new technology and development in Canada. As a result, the technology platform purchased in the EPL acquisition in February 2004 no longer has any recoverable value.





44



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)






March 31, 2004
        Cost
        Accumulated depreciation
        Net book value$
        $
        $Computer equipment
        803,758
        610,682
        193,076Software
        50,034
        40,428
        9,606Technology platform
        647,055
        331,763
        315,292Office furniture and equipment
        198,323
        119,156
        79,167Voice communications equipment
        20,560
        20,560
        -Leasehold improvements
        111,350
        106,968
        4,3821,831,080
        1,229,557
        601,5236 - INTANGIBLE ASSETS




March 31, 2005
        Cost
        Accumulated amortization
        Impairment
        Net book value$
        $
        $
        $Customer list
        78,206
        75,150
        -
        3,056Core technology
        1,077,683
        244,510
        833,173
        -Customer relationships
        549,838
        415,828
        134,010
        -1,705,727
        735,488
        967,183
        3,056



After the acquisition of EPL, we relied solely on the technology purchased to provide our aggregator services to the UK. Initially the technology was able to perform at reasonable levels. As we continued to add new customers and increased the load of messages, we experienced technical difficulties with this purchased platform. After several attempts to stabilize the platform and with the hiring of a new Chief Technology Advisor in January 2005, the decision was made to rebuild the platform in Canada using new technologies, thereby abandoning the UK platform by the first quarter of 2006. We therefore performed an impairment test on this asset during the fourth quarter using the discounted future cash flows method, and as a result of this test, we have determined that the technology platform is fully impaired and recorded a non-cash impairment charge of approximately $232,000. This impairment is reported under
the SMS segment.



The core technology intangible asset associated with the above physical platform purchased was also determined to be fully impaired during the fourth quarter. The carrying amount of this intangible asset was compared to its fair value using the discounted future cash flow method. The facts and circumstances leading to this impairment are the same as noted in the paragraph above. The amount of the impairment loss amounted to approximately $830,000. This impairment is also reported under the SMS segment.





45



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



On February 10, 2004, at the time of the EPL acquisition, a customer list intangible asset was recorded. The amount originally assigned to the acquired customer list was based on the costs that we would have otherwise incurred to establish these relationships. At that time, we believed that the value of these customer relationships is that it would enable us to sell our SMS Office products to the mobile operators in the UK. However, as noted earlier, even though SMS Office was well received by these international mobile operators, this product did not receive market acceptance from end users and we therefore ceased all sales efforts for this product. In addition, due to the instability of the UK platform as mentioned above, we were unable to reliably service some of the customers acquired in the acquisition, resulting in reduced revenues by the fourth quarter of the year. Although some of the customers still
exist, we do not expect to see significant future value from these relationships. Based on these events, we performed an impairment test on this asset during the fourth quarter using the future discounted cash flow method. This test resulted in a non-cash impairment charge of approximately $134,000 in the SMS segment rendering the asset fully impaired.



As a result, and in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company recorded an impairment charge in its Consolidated Statement of Operations for the year ended March 31, 2005 of approximately $967,000 related to the core technology and customer relationships.



The remaining customer list will be fully amortized in fiscal 2006.




March 31, 2004
        Cost
        Accumulated amortization
        Net book value$
        $
        $Customer list
        72,143
        58,631
        13,512Core technology
        994,122
        26,724
        967,398Customer relationships
        507,206
        45,450
        461,7561,573,471
        130,805
        1,442,666

7 - GOODWILL



The annual evaluation of goodwill associated with our Brazil reporting unit is performed during the fourth quarter. The impairment test indicated that the recorded book value of this reporting unit exceeded its fair value, as determined by discounted cash flows; this resulted in a $530,270 non-cash impairment charge. During the year, the Brazil operations experienced a substantial decline in operating performance when compared to prior year performance and budgeted 2005 result. Management expected to see a return to historical levels subsequent to the release of ZIM 8 in the fall of 2004, however results for the third and fourth quarter failed to meet expectations. Further, as we are no longer focused on the database market and as the database market has become increasingly competitive, management made the decision to limit sales initiatives in Brazil or in the database market and focus on the SMS segment.
Management will continue to support their existing ZIM IDE software customers but we are not forecasting significant new revenues or new customers in this segment. Management also decided during the year to close the office in Brazil and terminate three of the six employees. As a result of the lack of sales, the increased competition and management's decision to downsize the Brazilian office, we have determined that the goodwill associated with the Brazil reporting unit is fully impaired.





46



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)






$Balance at June 1, 2003
        468,710Goodwill recorded on settlement of contingent liability
        117,614Goodwill recorded on acquisition of EPL
        1,881,335Foreign exchange
        (70,039)Balance at March 31, 2004
        2,397,620Goodwill impairment charge
        (530,270)Foreign exchange
        201,531Balance at March 31, 2005
        2,068,881



8 - ACCRUED LIABILITIES




March 31, 2005
        March 31, 2004$
        $Employee related accruals
        
        42,461
        102,594Professional fees
        
        73,336
        199,991Withholding tax accrual
        
        96,794
        76,260Trade
        
        523,239
        431,534Other
        
        139,176
        65,628875,006
        876,007



9 - RELATED PARTY TRANSACTIONS



On June 25, 2004, the Company's Chief Executive Officer ("CEO") and majority shareholder, a corporation owned by the spouse of the Company's CEO ("160879 Canada Inc.") and the spouse of the Company's CEO participated in a private placement of the Company's common shares whereby they purchased an aggregate of 775,789 units for gross proceeds of $294,800. The shares issued in the private placement were priced at $0.38 per unit, the closing market price on the Over the Counter Bulletin Board ("OTCBB") on June 8, 2004, with each unit consisting of one common share and two warrants to purchase common shares for $0.38 per share.



On July 30, 2004, the Company completed the second part of this private placement of 2,004,211 units at $0.38 per unit, for gross proceeds of $761,600. All of the 2,004,211 units were purchased by the spouse of the Company's Chief Executive Officer.



On October 7, 2004, the Company completed a private placement of 1,018,077 units at $0.39 per unit, the closing market price of ZIM's common shares on the OTCBB, on October 6, 2004. The units were purchased by the spouse of the Company's CEO, with each unit consisting of one common share and two warrants to purchase common shares for $0.39 per share. Gross proceeds were $397,050.







47



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



DUE TO RELATED PARTIES



On January 7, 2004, the Board of Directors approved the conversion of the $630,000 debt held by the Company's CEO and majority shareholder and the $2.7 million debt held by 160879 Canada Inc. to common shares based on the last closing price of our common shares on the OTCBB. The total amount due, with interest, was $3,960,950. The share price used in the conversion was $0.43, resulting in 9,211,511 common shares being issued to the Company's CEO and majority shareholder and to 160879 Canada Inc.



10 - SHAREHOLDERS' EQUITY



Transactions for the periods include the following:



The Company issued 305,000 common shares in the year ended March 31, 2005 pursuant to the exercise of stock options by employees and non-employees. In the ten months ended March 31, 2004, 728,300 common shares were issued pursuant to the exercise of stock options by employees.



On January 7, 2004, the Board of Directors of ZIM approved the conversion of all amounts due to related parties, in return for 9,211,511 common shares of the Company (see Note 9).



On January 30, 2004, the Company completed a non-brokered private placement of 1,150,006 units at $0.75 per unit, for total gross proceeds of $862,505 and net proceeds of $819,587. Each unit consists of one common share and one common share purchase warrant. Each warrant may be exercised at any time prior to July 30, 2005. The units were issued to unaffiliated persons, except that James Stechyson, a member of our Board of Directors, purchased 50,000 of the units. On February 10, 2004, in  connection with the acquisition of EPL, the Company issued 4,000,000 common shares to the shareholders of EPL.



On June 25, 2004, the Company completed the first part of a non-brokered private placement of 1,010,555 units at $0.38 per unit, for total gross proceeds of $384,011. Each unit consisted of one common share and two common share purchase warrants. Each warrant may be exercised at any time prior to September 25, 2005 at an exercise price of $0.38 per share. Of these 1,010,555 units, 775,789 were purchased by related parties.



On July 30, 2004, the Company completed the second part of this private placement of 2,004,211 units at $0.38 per unit, for total gross proceeds of $761,600. Each unit consisted of one common share and two common share purchase warrants. Each warrant may be exercised at any time prior to October 30, 2005 at an exercise price of $0.38 per share. All of the 2,004,211 units were purchased by the spouse of the Company's CEO.



On October 7, 2004, the Company completed a private placement of 1,018,077 units at $0.39 per unit, the closing market price of ZIM's common shares on the OTCBB, on October 6, 2004. The units were purchased by the spouse of the Company's CEO, with each unit consisting of one common share and two warrants to purchase common shares for $0.39 per share. Gross and net proceeds were $397,050. Each warrant may be exercised at any time prior to January 6, 2006 at an exercise price of $0.39 per share.





48



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



ADDITIONAL PAID IN CAPITAL



During the year ended March 31, 2005, the Company issued options to non-employees, in consideration for advisory services, and as a result, additional paid in capital has been increased by $334,422. In the ten months ended March 31, 2004, no options were issued to non-employees in consideration for advisory services.



The fair value was estimated using the Black-Scholes option pricing model with the following assumptions:




Dividend yield
        NilExpected volatility
        80%Risk-free interest rate
        3.00%Expected life
        1.50 years

11 - STOCK OPTIONS



Under the Company's Employee Stock Option Plan, the Company may grant options to its officers, directors and employees for up to 22,200,000 common shares. As at March 31, 2005, 16,551,871 (March 31, 2004, 12,550,071) options were outstanding under the Employee Stock Option Plan. In addition, 6,110,000 (March 31, 2004, 8,285,000) options were issued in prior periods outside of the Company's Employee Stock Option Plan. Stock options are granted with an exercise price equal to the common shares' fair market value at the date of grant. Options are granted periodically and both the maximum term of an option and the vesting period are set at the Board's discretion.



Early in 2004, the Board of Directors reviewed directors' compensation. It was noted that, historically, the members of the Board were issued options but that, because of the Company's on-going need to comply with securities regulations and the time it took to establish a market for the underlying shares, there have been limited opportunities for members of the Board to exercise their options within the lifetime of the options. As a result, on February 5, 2004, the Board extended the life of 6,110,000 options to February 2007 without changing the exercise price. No compensation expense was recognized as the exercise price approximated the market price.



A summary of the status of the stock options is as follows:


March 31, 2005
        
        March 31, 2004Number of options outstanding
        Weighted average exercise price
        
        Number of options outstanding
        Weighted average exercise price$
        
        
        $Options outstanding, beginning of period
        20,835,071
        0.75
        
        14,863,332
        0.76Granted
        10,154,182
        0.42
        
        7,395,539
        0.69Exercised
        (305,000)
        0.27
        
        (728,300)
        0.46Forfeited
        (8,022,382)
        0.65
        
        (695,500)
        0.76Options outstanding, end of period
        22,661,871
        0.64
        
        20,835,071
        0.75





49



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



The following table represents a summary of the options outstanding as at March 31, 2005:




Options outstanding
        
        Options exercisableRange of exercise prices
        
        Number outstanding at March 31, 2005
        Weighted average remaining contractual life
        Weighted average exercise price
        Number exercisable at March 31, 2005
        Weighted average exercise price$
        
        
        Years
        $
        
        $0.17-0.33
        
        2,800,000
        2.85
        0.18
        2,800,000
        0.180.38-0.48
        
        3,279,707
        1.91
        0.39
        3,279,707
        0.390.52-0.69
        
        5,151,682
        2.19
        0.55
        5,151,682
        0.550.75-0.83
        
        7,079,150
        1.86
        0.82
        7,079,150
        0.820.91
        
        4,351,332
        1.13
        0.91
        4,351,332
        0.9122,661,871
        1.92
        0.64
        22,661,871
        0.64

EMPLOYEE AND NON-EMPLOYEE OPTIONS



During the year ended March 31, 2005, 8,414,182 options were granted to employees. During the ten months ended March 31, 2004, 7,175,539 options were granted to employees.



During the year ended March 31, 2005, 1,740,000 options were granted to non-employees. During the ten months ended March 31, 2004, 245,000 options were granted to non-employees.



Of the 1,740,000 options granted to non-employees, 400,000 were granted at below market prices.



During the year ended March 31, 2005 certain employees were terminated and are no longer providing any substantive services to the Company. Under their termination agreements, their option grants were modified and the options were retained and extended to their original term. In accordance with Issue 20 of Issue 00-23, the options are accounted for under Opinion 25. The intrinsic values of the modified options are recognized as compensation expense on the date of termination, which is considered the measurement date.



12  INTEREST


Year ended March 31, 2005
        Ten months ended March 31, 2004$
        $Interest expense
        6,436
        90,883Interest income
        (11,971)
        (2,248)Total
        (5,535)
        88,635





50



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



13 - INCOME TAXES



Income tax expense varies from the amount that would be computed by applying the basic federal and provincial income tax rates to loss before taxes, as follows:




Year ended March 31, 2005
        
        Ten months ended March 31, 2004Tax rate
        36.12%
        
        36.47%$
        
        $Expected Canadian Income Tax Recovery
        (1,475,693)
        
        (721,874)Adjustment due to application of Small Business Deduction
        714,967
        
        353,317Change in valuation allowance for originating temporary differences and losses available for carry forward
        744,947
        
        364,056Difference between Canadian and foreign tax rates
        11,527
        
        (14,165)Other
        51,003
        
        54,317Refundable income tax credits
        (168,173)
        
        (342,418)(121,421)
        
        (306,768)

The change in valuation allowance for originating temporary differences and losses available for carry forward, is calculated using an effective tax rate of 18.62%, based on the application of the Small Business Deduction. The rate at which such amounts may be realized as disclosed as part of a deferred tax asset and related valuation allowance takes into account the enacted tax rate decreases over the expected period of realization.



Income tax recovery of $121,421 for the year ended March 31, 2005 and $306,768 for the ten months ended March 31, 2004 relates to refundable income tax credits receivable, partially offset by income taxes paid by the Company's Brazilian subsidiary.



Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effects of temporary differences that gave rise to significant portions of the deferred tax asset and deferred tax liability are as follows:







51



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)




March 31, 2005
        
        March 31, 2004$
        
        $Temporary differencesLosses available for carry forward
        1,744,609
        
        1,259,505Property and equipment - differences in net book value and unamortized capital cost
        143,432
        
        70,312Intangible assets - differences in net book value and tax basis
        143,702
        
        (135,899)Unused scientific research and experimental development amounts deductible
        694,634
        
        397,723Other
        (14,917)
        
        (12,727)Gross deferred tax asset
        2,711,460
        
        1,578,914Valuation allowance
        (2,711,460)
        
        (1,578,914)Net deferred tax asset
        -
        
        -



The Company has federal and provincial non-capital losses available to reduce taxable income in Canada which expire in the following years:




Federal
        
        Provincial$
        
        $2006
        876,415
        
        916,2522007
        355,481
        
        401,4032008
        2,708,253
        
        2,615,1252009
        1,625,830
        
        1,625,8302010
        609,961
        
        625,951thereafter
        3,033,080
        
        3,087,3179,209,020
        
        9,271,878As at March 31, 2005, the Company had accumulated unclaimed federal and provincial scientific research and experimental development deductions of approximately $2,033,658 and $2,849,822 respectively ($2,032,048 and $2,579,510 in 2004). This amount can be carried forward indefinitely to reduce income taxes payable in future years.









52



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



The Company has federal scientific research and experimental development credits available to reduce income taxes in Canada which expire in the following years:




$2010
        
        14,9452011
        
        292,8352012
        
        1,8802013
        
        2,354312,014



For the year ended March 31, 2005, the Company recorded an amount of $168,173 of investment tax credits ($342,418 for the ten months ended March 31, 2004).



14 - LOSS PER SHARE



For the purposes of the loss per share computation, the weighted average number of common shares outstanding has been used. Had the treasury stock method been applied to the unexercised share options and warrants, the effect on the loss per share would be anti-dilutive.



The following securities are considered "in the money" and could potentially dilute basic loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:




March 31, 2005
        March 31, 2004Stock options
        2,460,000
        2,316,702Warrants
        -
        -

Total options outstanding at March 31, 2005 and 2004 were 22,661,871 and 20,835,071 respectively. Total warrants outstanding at March 31, 2005 and 2004 were 9,215,692 and 1,150,006, respectively.



15 - FINANCIAL INSTRUMENTS



RISK MANAGEMENT ACTIVITIES



The Company operates internationally, giving rise to significant exposure to market risks from changes in foreign exchange rates.



FOREIGN EXCHANGE RISK MANAGEMENT



Cash includes the following amounts in their source currency:


March 31, 2005
        
        March 31, 2004Canadian dollars
        
        121,047
        
        322,868US dollars
        
        92,120
        
        501,182Brazilian reals
        
        162,933
        
        42,420British pounds
        
        256,464
        
        56,826



53



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN US DOLLARS)



Accounts receivable include the following amounts receivable in their source currency:





March 31, 2005
        
        March 31, 2004Canadian dollars
        
        1,036,455
        
        150,838US dollars
        
        121,530
        
        79,040Brazilian reals
        
        488,009
        
        571,049British pounds
        
        474,643
        
        345,013Euros
        
        86,582
        
        -



Accounts payable include the following amounts payable in their source currency:




March 31, 2005
        March 31, 2004Canadian dollars
        485,695
        138,754US dollars
        213,864
        3,979Brazilian reals
        29,425
        40,783British pounds
        276,532
        183,358Euros
        11,460
        -

CONCENTRATION OF CREDIT RISK



The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. Credit exposure is minimized by dealing with only creditworthy counterparties in accordance with established credit approval policies.



Concentrations of credit risk in accounts receivable are indicated below by the percentage of the total balance receivable from customers in the specified geographic area:




March 31, 2005
        
        March 31, 2004Canada
        36%
        
        11%North and South America, excluding Canada
        15%
        
        23%Great Britain
        41%
        
        62%Europe, excluding Great Britain
        8%
        
        3%Other
        0%
        
        1%100%
        
        100%FAIR VALUE



The carrying values of cash, accounts receivable, investment tax credits receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short periods to maturity of the instruments.







54



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Expressed in US dollars)



16 - COMMITMENTS AND CONTINGENCIES



OPERATING LEASE COMMITMENTS



The Company has the following lease commitments relating to facilities:




$2006
        121,5832007
        125,0572008
        41,686288,326



For the year ended March 31, 2005, rent expense was $235,308 ($171,360 for the ten months ended March 31, 2004).



GOVERNMENT ASSISTANCE



During the year ended May 31, 2002, the Company received $101,653 from the Canadian International Development Agency for the purpose of undertaking a viability study of acquiring Zim Technologies do Brasil Ltda. The amount has been recorded in the consolidated statement of operations as a reduction in selling, general and administrative expenses. The amount is repayable, based on 1% of Zim Technologies do Brasil Ltda.'s revenues from July 23, 2001 to May 31, 2005 to a maximum of $94,841, on revenues realized by Zim Technologies do Brasil Ltda. in excess of $4,133,500 cumulatively.  As of March 31, 2005, ZIM has recorded a liability of $884.



OTHER



The Company is committed to pay an arm's length third party $75,000 upon the listing of ZIM Company's common shares on a national securities exchange selected by ZIMs Board of Directors.



Zim Technologies do Brasil Ltda. may be subject to the Contribution of Intervention on Economic Domain tax on values remitted abroad. However, the Company's management intends to contest this assessment if issued. Consequently, no provision has been accounted for in that respect. If an assessment is issued and the Company is unsuccessful at contesting the assessment, the resulting settlement would not have a material impact on the consolidated financial statements of the Company.







55



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Expressed in US dollars)



17 - SEGMENT REPORTING



Management has determined that the Company operates in two reportable segments: enterprise software and Short Message Service (SMS). Enterprise software involves providing enterprise software for designing, developing and manipulating database systems and applications. SMS involves providing SMS applications and services.



The Company considers all revenues and expenses to be of an operating nature and accordingly, allocates them to the segments.  Costs specific to a segment are charged directly to the segment.  Company office expenses are allocated to either of the segments based on revenues.  Significant assets of the Company include cash, working capital and goodwill.  The accounting policies of the reportable segments are the same as those described in the summary of the significant accounting policies.



The following table sets forth external revenues, cost of revenues, operating expenses and other amounts attributable to these product lines:


Year ended March 31, 2005
        Ten months ended March 31, 2004$
        $SMS applicationsRevenue
        8,763,265
        750,325Cost of revenue
        (8,061,196)
        (640,007)Gross margin
        702,069
        110,318Allocation of operating expenses
        3,214,709
        1,108,895Amortization of intangible assets
        347,762
        51,569Impairment of long-lived assets
        232,270
        -Impairment of intangible assets
        967,183
        -Loss on disposable of fixed assets
        33,561
        -Allocation of interest expense (income)
        (4,837)
        31,562Income tax expense (recoverable)
        (143,771)
        (126,068)4,646,877
        1,065,959Net loss from SMS segment
        (3,944,808)
        (955,641)Enterprise softwareRevenue
        1,264,187
        1,356,774Cost of revenue
        (256,376)
        (181,877)Gross margin
        1,007,811
        1,174,897Allocation of operating expenses
        463,753
        2,005,159Amortization of intangible assets
        11,435
        10,322Impairment of goodwill
        530,270
        -Allocation of interest expense (income)
        (698)
        57,073Income tax expense (recoverable)
        22,350
        (180,700)1,027,110
        1,891,853Net loss from enterprise software segment
        (19,299)
        (716,956)



56



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Expressed in US dollars)



Approximately 87% of revenue in fiscal 2005 was from the SMS segment and 13% was from the enterprise software segment.  In the ten months ended March 31, 2004, 36% of revenue was from the SMS segment and 64% of revenue was from the enterprise software segment.



The increase in SMS segment revenue and margin relates to the acquisition of EPL in February 2004.  The decrease in Software segment revenue and margin relates to decreasing sales and market share.



The Company has the following customers with over 10% of total revenues for the year ended March 31, 2005:





US based mobile content provider
        38%UK based mobile content provider
        23%



In the ten months ended March 31, 2004, revenue from the UK based mobile provider represented 20% of the total revenue.  All other customers in fiscal 2004 had revenues below 10% of the total revenues.



The following table sets forth segment assets used by each product line:




March 31, 2005
        
        March 31, 2004$
        
        $Segment assetsSMS
        5,074,629
        
        5,705,354Software
        732,065
        
        1,040,8115,806,694
        
        6,746,165



The following table sets forth external revenues and long-lived assets attributable to geographic areas. External revenues are based on the location of the customer:




Year ended March 31, 2005
        Ten months ended March 31, 2004$
        $Canada
        488,471
        251,301United Kingdom
        4,814,743
        605,215United States
        3,599,124
        192,999Brazil
        866,825
        915,585Other
        258,289
        141,999Total revenue
        10,027,452
        2,107,099





57



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Expressed in US dollars)




March 31, 2005
        March 31, 2004$
        $Long-lived assetsCanada
        205,016
        244,784Brazil
        9,883
        513,933United Kingdom
        2,068,881
        3,683,092Total long-lived assets
        2,283,780
        4,441,809Management evaluates each segments performance based upon revenues and margins achieved.



18 - COMPARATIVE FIGURES



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



19  SUBSEQUENT EVENTS



On May 31, 2005 ZIM Corporation entered into an Agreement and Release with the former shareholders of EPL Communications Ltd. and E-Promotions Limited ("EPL Shareholders"). Due to ZIM's recent withdrawal of its Registration Statement on Form SB-2, it was unable to register for resale the shares issued to the EPL Shareholders as specified in the EPL Purchase Agreement. Under the Agreement and Release, ZIM issued to the EPL Shareholders options to purchase an aggregate of 3,600,000 shares of ZIM common stock at an exercise price of $0.20 per share, the market price on May 12, 2005.  In addition, the EPL Shareholders and ZIM released one another from any and all prior, current or future claims in connection with the EPL Purchase. ZIM has also entered into Consulting Agreements with certain of the EPL Shareholders, pursuant to which they agreed to provide ZIM with technical expertise.



20 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



(i) SFAS NO. 123R



In December 2004, the FASB issued SFAS 123R, Share-Based Payment, ("SFAS 123R"). This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. Management believes the impact on ZIM'S financial statements of applying one of the acceptable fair-value based methods of accounting for stock options approximates the amounts disclosed in Note 2.







58



ZIM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Expressed in US dollars)

(ii) SFAS 153

The FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), "Exchanges of Non-Monetary Assets" as an amendment to Accounting Principles Board Opinion No. 29 (APB 29), "Accounting for Non-Monetary Transactions." APB 29 prescribes that exchanges of non-monetary transactions should be measured based on the fair value of the assets exchanged, while providing an exception for non-monetary exchanges of similar productive assets. SFAS 153 eliminates the exception provided in APB 29 and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 is to be applied prospectively and is effective for all non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect there to be any material effect on the consolidated financial statements upon adoption of the new
 standard.







59



ITEM 13. EXHIBITS




(a) Exhibits




EXHIBIT LIST




Exhibit
        EXHIBITNumber






10.10
        Addendum I dated October 11, 2004 to Agreement by and between ZIM Corporation and ** dated June 23, 2004.  CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. (*)23.1
        Consent of Raymond Chabot Grant Thornton LLP (*)31.1
        Certification by the President and Chief Executive Officer, Dr. Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)31.2
        Certification by the Chief Financial Officer, Ms. Jennifer North, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)32.1
        Certification by the President and Chief Executive Officer, Dr. Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*)32.2
        Certification by the Chief Financial Officer, Jennifer North, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*)







(*)
        Filed herewith.







60



SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





ZIM Corporation

(Registrant)





By /s/ Michael Cowpland


------------------------------------


Michael Cowpland (President and CEO)








Date
        November 17, 2005








61



EXHIBIT INDEX




Exhibit
        EXHIBITNumber




10.10
        Addendum I dated October 11, 2004 to Agreement by and between ZIM Corporation and ** dated June 23, 2004.  CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.(*)23.1
        Consent of Raymond Chabot Grant Thornton LLP (*)31.1
        Certification by the President and Chief Executive Officer, Dr. Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)31.2
        Certification by the Chief Financial Officer, Ms. Jennifer North, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)32.1
        Certification by the President and Chief Executive Officer, Dr. Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*)32.2
        Certification by the Chief Financial Officer, Jennifer North, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*)


(*)
        Filed herewith.






62