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

FORM 10-K

|x | ANNUAL   REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|- | ------------------------------------------------------------------------------------------
|  | FOR   THE FISCAL YEAR ENDED DECEMBER 31, 2005                                             
|  |                                                                                           
|  | OR                                                                                        
|  |                                                                                           
|o | TRANSITION   REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|                                                                 
|-----------------------------------------------------------------
|COMMISSION FILE NUMBER:  000-31146                               
|                                                                 
|724   SOLUTIONS INC.                                             
|(Exact   name of registrant as specified in its charter)         
|                                                                 
|Canada                                                           
|(State or   other jurisdiction of incorporation and organization)
|                                                                 
|Inapplicable                                                     
|(I.R.S.   Employer Identification No.)                           
|                                                                 
|1221 State Street, Suite 200    Santa Barbara, CA  93101         
|(Address   of principal executive offices, including zip code)   
|                                                                 
|(805) 884-8308                                                   
|(Registrants   telephone number, including area code)           

Securities registered pursuant to
Section 12(b) of the Act:  None Securities registered pursuant to
Section 12(g) of the Act:  Common Shares, no par value (together with
associated rights to purchase additional Common Shares).
(Title of class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

|Yes
o | No
x
|----- | ----

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

|Yes
o | No
x
|----- | ----

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
o
|----- | ----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.

|Yes
o | No
x
|----- | ----

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

|Large accelerated filer
o |  | Accelerated filer
o |  | Non-accelerated filer
x
|------------------------- |  | ------------------- |  | -----------------------

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

|Yes
o | No
x
|----- | ----

The aggregate market value of the voting
stock held by non-affiliates of the Registrant, based on the closing price of
the Registrants common shares on June 30, 2005 of $8.36, as reported on
the Nasdaq National Market, was approximately $45.5 million.  Common
shares held as of June 30, 2005 by each executive officer and director and by
each person who owns 5% or more of the outstanding common shares have been
excluded from this computation, in that such persons may be deemed to be
affiliates of the Registrant.  This determination of affiliate status is
not necessarily a conclusive determination for any other purpose.

As of March 1, 2006, the Registrant had outstanding 6,074,703 common shares, no par value.

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INDEX

724 SOLUTIONS INC.

ANNUAL REPORT ON FORM 10-K

|                                  |                                                                                                                | PAGE
|--------------------------------- | -------------------------------------------------------------------------------------------------------------- | ----
|                                  |                                                                                                                |     
|PART I                            |                                                                                                                |     
|Item 1.                           | Business                                                                                                       | 3   
|Item 1A                           | Risk Factors                                                                                                   | 17  
|Item 1B                           | Unresolved Staff Comments.                                                                                     | 32  
|Item 2.                           | Properties                                                                                                     | 32  
|Item 3.                           | Legal Proceedings                                                                                              | 32  
|Item 4.                           | Submission of Matters to a Vote of Security Holders                                                            | 33  
|                                  |                                                                                                                |     
|PART II                           |                                                                                                                |     
|Item 5.                           | Market for Registrants Common Equity, Related Stockholder Matters   and Issuer Purchases of Equity Securities | 34  
|Item 6.                           | Selected Financial Data                                                                                        | 43  
|Item 7.                           | Managements Discussion and Analysis of Financial Condition and   Results of Operations                        | 45  
|Item 7A.                          | Quantitative and Qualitative Disclosures about Market Risk                                                     | 72  
|Item 8.                           | Financial Statements and Supplementary Data                                                                    | 72  
|Item 9.                           | Changes in and Disagreements with Accountants on Accounting and   Financial Disclosure                         | 72  
|Item 9A.                          | Controls and Procedures                                                                                        | 72  
|Item 9B.                          | Other Information                                                                                              | 73  
|                                  |                                                                                                               
|PART III                          |                                                                                                               
|Item 10.                          | Directors and Executive Officers of the Registrant                                                             | 73  
|Item 11.                          | Executive Compensation                                                                                         | 76  
|Item 12.                          | Security Ownership of Certain Beneficial Owners and Management                                                 | 83  
|Item 13.                          | Certain Relationships and Related Transactions                                                                 | 85  
|Item 14.                          | Principal Accountant Fees and Services                                                                         | 87  
|                                  |                                                                                                                |     
|PART IV                           |                                                                                                                |     
|Item 15.                          | Exhibits and Financial Statement Schedules                                                                     | 88  
|                                  |                                                                                                               
|SIGNATURES                        | 91                                                                                                            
|                                  |                                                                                                               
|Consolidated Financial Statements | F-1                                                                                                           

2



INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements
contained in this annual report on Form 10-K (Report) which are not historical facts are forward-looking
statements within the meaning of Section 21E of the U.S. Securities Exchange Act
of 1934, as amended. A forward-looking statement may contain words such as
anticipate that, believes, continue to,
estimates, expects to, hopes,
intends, plans, to be, will be,
will continue to be, or similar words. These forward-looking
statements include the statements in this Report regarding: future developments
in our markets and the markets in which we expect to compete, including the
wireless communications industry; our estimated cost reductions; our future
ability to fund our operations and become profitable; our development of new
products and relationships; our ability to increase our customer base; the
services that we or our customers will introduce and the benefits that end users
will receive from these services; the impact of entering new markets; our plans
to use or not to use certain types of technologies in the future; our future
cost of revenue, gross margins and net losses; our future restructuring,
research and development, sales and marketing, general and administrative,
stock-based compensation, depreciation and amortization expenses; our future
interest expenses; the value of our goodwill and other intangible assets; our
future capital expenditures and capital requirements; and the anticipated impact
of changes in applicable accounting rules.

The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include the risks described in Item 1ARisk Factors below. We do not undertake any obligation to update this forward-looking information, except as required under applicable law.

PART I

|ITEM 1. | BUSINESS.
|------- | ---------

OVERVIEW

AN INVESTMENT IN OUR COMMON SHARES
INVOLVES SUBSTANTIAL RISKS AND UNCERTAINTIES.  WE ENCOURAGE YOU TO
CAREFULLY REVIEW THE INFORMATION SET FORTH IN PART I, ITEM I; PART I, ITEM
1A  UNDER THE CAPTION RISK FACTORS; AND THE FOREGOING SECTION
TITLED INFORMATION REGARDING FORWARD-LOOKING STATEMENTS, FOR A
DESCRIPTION OF THESE RISKS AND UNCERTAINTIES.

724 Solutions Inc. (724 Solutions, the Company, the Corporation, or we, us or applicable derivations thereof) designs, develops, markets and supports software products for use by mobile network operators worldwide. Mobile network operators are telecommunications companies that provide a range of mobile voice and data communications services to their consumer and business customers.  Examples of large mobile network operators include Verizon Wireless, Cingular Wireless, Sprint Nextel, Vodafone and China Mobile.

3



We offer software products that enable Internet connectivity to mobile devices such as mobile phones and handheld computing devices.  We also offer software that helps to deliver text messaging, multimedia messaging, voice services and transactions to mobile network operators end user customers using mobile phones and handheld computing devices.

We were incorporated in 1997 and we introduced our initial products in 1999. Initially, we focused on creating wireless software products that assisted financial services companies in making their traditional services available to their customers wirelessly from mobile phones and other handheld computing devices.  In January 2001, we acquired Tantau Software with a view to expanding our customer base, utilizing Tantaus software products to strengthen our products offered to financial services customers, and to expand our sales to mobile network operators.  In 2001, we began offering our mobile alerting software products and our mobile Internet gateway product (software that enables internet connectivity to mobile devices) to mobile network operators. In October 2002, our products and solutions for mobile network operators and other customers were re-branded as the X-treme Mobility Suite

(XMS) of products.  We no longer offer products developed specifically for financial institutions, although we continue to provide services to a small number of financial services customers and continue to support earlier sales to them.

During 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably.  At the same time, we judged that the market for mobile data services in the mobile network operator sector was potentially larger and likely to develop sooner. As a consequence, we began a process to restructure the company to focus on business opportunities in the mobile network operator marketplace.  During 2004, we completed this process and are now focused on selling our software products to mobile network operators.

We continue to develop and expand our X-treme Mobility Suite of products for mobile network operators to assist them in growing their next-generation data services.

Our website
is www.724.com.  Information appearing on our website shall not be
deemed to be part of this Report.

PROPOSAL FROM AUSTIN VENTURES

On February 28, 2006 we received a proposal from our largest shareholder, Austin Ventures, to acquire all of our outstanding common shares not owned by Austin Ventures for cash consideration of $3.07 per common share.

Austin
Ventures proposed that the transaction be effected by way of a court-approved
plan of arrangement.  In addition to court approval, the transaction would
require the approval of our shareholders, including by way of a majority of the
votes cast by holders other than Austin Ventures and related parties.

4



Our Board of Directors had previously formed a Special Committee composed entirely of directors who are independent of management and independent of Austin Ventures to consider potential value enhancing strategic transactions for our shareholders.  This Special Committee, in consultation with our financial and legal advisors, reviewed and considered the Austin Ventures proposal, as well as other potential means to maximize shareholder value.  The evaluation by the Special Committee was independent of ongoing company operations.

On March 9,
2006, Austin Ventures submitted a revised non-binding proposal to acquire all of
our outstanding common shares not owned by Austin Ventures for cash
consideration of $3.34 per common share.  We accepted the revised proposal
after careful consideration and evaluation by our Special Committee of
independent directors in conjunction with our financial and legal
advisors.  This revised and accepted proposal is set to terminate on April
6, 2006 in the event a definitive arrangement agreement is not reached by that
date.

We and Austin
Ventures intend to move diligently towards negotiating a definitive arrangement
agreement and, subject to receipt of a satisfactory fairness opinion and
valuation report and completion by Austin Ventures of its due diligence,
completing a transaction in
accordance with the agreement and all applicable legal and regulatory
requirements.

ACQUISITIONS

We have completed four acquisitions:

YRLESS.    In March 2000, we acquired Internet messaging gateway developer YRLess Internet Corporation of Oakville, Ontario. YRLess developed the YMG-2000, a scaleable, platform-independent carrier-grade short messaging service gateway for mobile data carriers.

EZLOGIN.    In June 2000, we completed our acquisition of Ezlogin, a provider of Internet software tools for user directed personalization.

SPYONIT.    In September 2000, we completed our acquisition of Chicago-based Spyonit, a provider of intelligent alerting software.

TANTAU
SOFTWARE.    In January 2001, we completed our acquisition of
Austin-based Tantau Software, a developer and designer of software and related
services that enable enterprises to conduct high-volume, secure, m-commerce
transactions. As part of the transaction, 724 Solutions issued to Tantaus
equity holders 1.9 million shares, and outstanding options to purchase shares of
Tantau were converted into options to purchase an aggregate of 180,000 of our
shares (all adjusted for the 10 for 1 reverse split undertaken in April 2003).
After the completion of the transaction, 724 Solutions shareholders owned
approximately 68% of the combined company and Tantaus shareholders owned
approximately 32% of the combined company, on a fully diluted basis.

5



The purpose of the acquisition was to create a global provider of software primarily for the mobile data marketplace. The combined company was intended to have an expanded geographic presence and set of customers, strong infrastructure and application technology, an experienced management team, and a greater ability to address a broader market, including the mobile network operator market. Our X-treme Mobility Gateway product that we sell to mobile network operators incorporates technology that we acquired through our purchase of Tantau. Following the completion of the transaction, John Sims, Tantaus president and chief executive officer, assumed the role of chief executive officer of 724 Solutions.

INDUSTRY OVERVIEW

Our principal focus is to design, develop, acquire, market and support software products for the mobile telecommunications marketplace. In this market, we work with mobile network operators and other industry participants to deliver a wide variety of data services.

Over the
course of the past several years mobile network operators have developed a mobile
data business that is built around a series of discrete data services that now
collectively generate a meaningful percentage of their overall revenues. These
data services include games, polyphonic ring tones, color content and graphics,
animation, short messaging services (SMS) and multi-media messaging services
(MMS). Also, mobile network operators are introducing services based on location
technologies, e-mail services and application to peer services such as a
multimedia message showing the winning goal in a sporting event. Our software
assists mobile network operators in delivering these services.

Mobile network operators, equipment manufacturers and infrastructure and application software providers are responding to the growing demand for wireless access to Internet-related and other mobile data services in a variety of ways. For example, mobile network operators continue to roll out next generation networks, which are required for the delivery of advanced mobile data services and improved user experience with existing services. Our software products address important aspects of these next generation networks. Mobile phone and other mobile equipment manufacturers are also increasingly making mobile data functionality a key feature of their product offerings. For example, mobile device manufacturers are increasingly offering higher quality and feature-rich mobile devices. We expect that the continued implementation of next generation networks and the continued development of mobile devices will
contribute to a further increase in the use of data services and a greater reliance on software like ours to support those services.

6



BUSINESS STRATEGY

THE MARKET OPPORTUNITY

As mobile network operators deploy their next-generation data networks, they face many challenges. We believe that next-generation data networks need to allow mobile network operators to make use of best-of-breed components that enable a wide variety of new revenue generating opportunities. It is also important that mobile network operators deploy a reliable data network that can seamlessly support the dramatic growth of next-generation services, without creating economic barriers or compromising their return on investment.  We have designed our X-treme Mobility Suite of products to provide mobile network operators with compelling solutions to these challenges.

OUR STRATEGY

In order to address these market opportunities, our strategy is to:

PROVIDE AN OPEN, FLEXIBLE TECHNOLOGY ARCHITECTURE: Our product architecture is open and generally designed to enable customers to expand the functionality of their next-generation networks, and to be compatible with existing systems. In this regard, our architecture allows customers to add new applications, modes of interaction and devices as their needs evolve. We expect to continue broadening the range of capabilities available to our customers.

OFFER SOLUTIONS THAT ASSIST OUR CUSTOMERS IN GROWING THEIR MOBILE DATA REVENUES: We are focused on developing and delivering differentiated solutions for our mobile network operator customers. These solutions are designed to assist our customers in increasing the average revenue per user that they derive from mobile data services. Our approach is to take advantage of our deep understanding of the competitive dynamics within our target markets and the common needs of our individual customers, and then to combine and apply our core software products and support services in creative ways to deliver innovative mobile data services.

LEVERAGE STRATEGIC PARTNERSHIPS: We have established and continue to develop strategic relationships with distribution partners and providers of complementary products and services to extend our market reach in order to enhance our solutions and improve our cost structure.

IMPROVE OPERATING EFFICIENCY: We maintain a conservative approach to the management of costs and have implemented a series of initiatives over the past four years to substantially improve our cost structure. We will continue to look for ways to reduce our operating costs and deliver our products efficiently.

RETAIN OUR KEY EMPLOYEES: As a software company, we are keenly aware of the critical importance of our key personnel to our success. To ensure that employees are motivated to remain with the company and to continue contributing their valuable expertise and experience, we strive to create a desirable work environment, to provide challenging work assignments and to offer competitive compensation programs.

7



724 SOLUTIONS  CUSTOMER BENEFITS

We believe that our products enable customers to maintain and deepen consumer relationships and accelerate the adoption of mobile data services and derive new revenue streams. Our products can be rapidly implemented, integrate easily with existing systems, are scalable and provide a robust platform for future growth. Key benefits of our products include:

ACHIEVE LEVELS OF RELIABILITY ON PAR WITH VOICE NETWORKS: Our core technology is capable of being deployed on a robust and geographically distributed basis, allowing our customers to achieve levels of availability equivalent to those derived from voice networks.

RAPIDLY INTRODUCE NEW AND INNOVATIVE PREMIUM CONTENT: Our products are designed to allow mobile network operators to rapidly provision premium content providers into mobile data services, and to manage the complex business rules associated with those services.

EASE OF INTEGRATION AND OPEN STANDARDS: Our products link to our customers existing systems, enabling them to reduce their initial investment, and to extend the productivity and functionality of their existing infrastructure to offer new services.

IMPROVE SCALABILITY AND FLEXIBILITY: Our products are designed to scale linearly to accommodate the growth of our customers mobile data services, allowing our customers to synchronize the growth of their infrastructure investments with the growth in their mobile data revenues.

OUR PRODUCTS

724 Solutions designs, develops, markets, acquires and supports software products designed for deployment on large-scale mobile data networks. Our X-treme Mobility Suite of products currently consists of our X-treme Mobility Gateway, X-treme MMS Accelerator, X-treme Service Activity Manager, X-treme Alerts Platform and Multimedia Application Gateway products, each of which is described in more detail below. These products are all designed for use in mobile data networks, but each performs unique functions and may be used and purchased separately by our customers. These products were developed to be reliable, scalable and fault tolerant and have the following features:

| |  | Open Architecture  Our products support widely used communications   standards, protocols and programming languages such as WAP, MMS, SMS and Java   technologies.          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                              
| |  | Flexible Framework  Our products feature adaptive architecture that   allows modular enhancements such as new protocols, well-defined customization   points and interfaces.
| |   |                                                                                                                                                                              
| |  | Scalable  Our products are designed to be scalable across both   processors and machines.                                                                                   
| |   |                                                                                                                                                                              
| |  | High Performance  Our products are designed to allow fast   transaction processing in order to permit efficient hardware utilization.                                       

8



The software products within XMS enable mobile network operators to implement solutions based upon open standards technologies such as WAP, MMS, SMS, J2ME and others. The applications and services enablers within XMS are specifically designed to assist mobile network operators in implementing innovative business models and bringing highly targeted content to their subscribers. A more detailed description of these products is set out below.

X-treme Mobility Gateway

The X-treme Mobility Gateway (XMG) is an open, secure, scalable and fault tolerant software product that is used in a mobile network operators data network. XMG allows mobile device users to connect to a mobile network operators data network.  During the connection setup, XMG facilitates the users login to the mobile network operators network.  Once a user is connected, the user can send requests for data services, such as mobile ringtones, from the users mobile device.  These requests are sent from the users mobile device to XMG, and XMG forwards the request to the data service provider.  The data service provider then sends the data as a response to XMG, which forwards it on to the appropriate user device.   Sales of our XMG product accounted for approximately 60% of the revenue from our XMS suite in the year ended December 31,
2005.

X-treme MMS Accelerator

The X-treme MMS Accelerator (XMA) is an open and standards-based software product used in a mobile network operators data network.  XMA delivers multimedia messages, such as picture messages, from a mobile network operators network to a users device.  XMA is designed to deliver bulk multimedia messages that are time sensitive in a cost-efficient manner.  An example is a multimedia message containing a sporting event video clip, which must be delivered to many users devices very soon after the sporting event is completed.

X-treme Service Activity Manager

The X-treme Service Activity Manager (XSAM) is a software product that is used in a mobile network operators data network.  XSAM allows mobile network operators to create reusable common business processes to allow third party content providers to quickly integrate into the mobile network operators data network, and provide content to mobile users.  An example of a business process is check to see if this prepaid users account balance is sufficient to buy this ringtone.  XSAM allows this process to be defined once by the mobile network operator, and then used by each third party content provider interested in delivering ringtones, or similar data content.  XSAM also allows mobile network operators to string many of these business processes together to form a complete data service.

9



X-treme Alerts Platform and Applications

Our X-treme Alerts Platform (XAP) is a software product that allows mobile network operators to offer alerting services to mobile device users. XAP provides a mechanism to capture the users content interests, such as,  Im interested in seeing my favorite football teams game highlight.  XAP scans the content to determine if a users content interest is matched.  If matched, XAP formulates a message in a format specified by the user and then sends it to the mobile operators delivery infrastructure for delivery to the users mobile device. In addition, through mobile network operators, we deliver a series of actionable alerting solutions for their own use and for them to offer to their enterprise customers to help them lower operating costs and improve customer relationship management.  These actionable alerting solutions include collections
management, fraud management and account management notifications. These solutions involve a broad range of notification channels including SMS, MMS, WAP Push, Instant Messaging, email and voice.

Multimedia Application Gateway

Multimedia Application Gateway (AGW) is a software product that provides subscriber functionality to a mobile network operators multimedia messaging services.  AGW has been decoupled from the mobile network operators multimedia message delivery infrastructure, usually provided by a Multimedia Messaging Service Center (MMSC), so that new multimedia functionality can be added into AGW, allowing mobile network operators to rapidly deploy new multimedia services, without the need to update their messaging infrastructure.

The current subscriber functionality provided by AGW is Legacy Device support, Email Smart Push and Multimedia Album.

| |  | Legacy Device Support:  As
  mobile network operators offer multimedia services, such as picture
  messaging, the subscribers to whom they can offer these services are limited
  to those subscribers with multimedia capable terminals. With Legacy Device
  support, subscribers who do not have multimedia capable devices can still
  participate in multimedia services. 
  These subscribers receive a text message with a link to a website
  where they can view the multimedia messages sent to them.  This expands the addressable subscriber
  base for multimedia services.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Email Smart Push (ESP): ESP allows multimedia subscribers to send
  multimedia messages to email addresses. 
  This expands the addressable subscriber base for multimedia services.                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Multimedia Album: The Multimedia Album is a web-based service that
  allows subscribers to create, edit, store, send and share multimedia messages.  Additionally, subscribers can upload
  multimedia messages from their terminals into their albums, and upload media
  from their PCs into their albums.                                                                                                                                                                                                                                                                            

10



SUPPORT SERVICES

Together with our resellers and distributors, we offer a services suite that includes professional services, training services, support and XAP application hosting. These services are designed to quickly deliver cost-effective solutions.

| |  | Professional Services  Our professional services team and our system   integrators provide our customers with a range of services to allow them to   rapidly integrate and deploy our technology and bring their various mobile   data services and applications to market. Our professional services focus on   those areas where our products interface with our customers internal systems   and on those areas where our customers are looking to differentiate their   services in the marketplace.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Training Services  We provide our customers with sophisticated   product information and hands-on experience in order to help improve   productivity and minimize learning time so they can take full advantage of   their technology investment.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Customer Support  We provide our customers with ongoing technical   support as an essential part of the sale and servicing of our products.  We offer our customers several options for   obtaining this support ranging from standard product support to onsite,   dedicated teams supporting an entire solution including hardware, custom code   and 724 products.                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | XAP Application Hosting  We provide a managed X-treme Alerts   Platform, including voice alerts, SMS alerts, Multimedia Message (MMS)   alerts, fraud alerts and collection alerts.    Our XAP software is hosted in New Jersey with Computer Sciences   Corporation, and the voice hardware is housed in Florida with InterVoice.                                                                                                                                                                       

11



CUSTOMERS

We sell our software products to customers throughout the world, primarily directly or indirectly through resellers and systems integrators to mobile network operators. In addition, we provide our customers with support, maintenance, professional services and training services.

Our agreements with our mobile network operator customers grant them nonexclusive licenses to use our software in connection with providing mobile data services to their subscribers. Similarly, our agreements with resellers and systems integrators grant the resellers and systems integrators nonexclusive licenses to resell our software to mobile network operators in connection with providing mobile data services to their subscribers. The relevant contractual terms, including pricing and payment terms for licenses, are negotiated with each customer. Products are licensed under either a perpetual license model or under a time-based license model. In addition, we typically provide fee-based maintenance and support services to mobile network operators, directly or indirectly through resellers and systems integrators, under which such operators receive error corrections and remote support.

In 2005, we derived approximately 0%, 49.1%, 43.4% and 7.5% of our revenues from customers in Canada, the United States, Europe and Asia Pacific, respectively. In 2004, we derived approximately 0%, 70.4%, 28.2% and 1.4% of our revenues from customers in Canada, the United States, Europe and Asia Pacific, respectively. See note 14 to our consolidated financial statements.

HEWLETT-PACKARD COMPANY

In January 2002, we entered into a subcontract agreement with Hewlett-Packard Company in connection with a wireless gateway project at Sprint Nextel. Under this agreement, we licensed our X-treme Mobility Gateway product to Hewlett-Packard for re-licensing the software to Sprint Nextel. We also agreed, as subcontractor to Hewlett-Packard, to develop custom software for Sprint and to perform related services in connection with the software. These services included the integration of the software at Sprint Nextel and ongoing consultancy, training and maintenance and support services in connection with the software.  All of these services were performed as a subcontractor to Hewlett-Packard, and we received remuneration as follows:  license fees for the use of our software by Sprint Nextel, professional services fees for performance of integration, consultancy and training services, and maintenance

and support fees with respect to support for the software.

This subcontract agreement was terminated as of October 31, 2005.  We recognized approximately $5.9 million in revenue in the twelve months ended December 31, 2005 related to this subcontract. This represented 32% of our total revenue of $18.3 million. We anticipate that the termination of this subcontract will result in a reduction in monthly revenues of approximately $500,000. Our contract with Sprint Nextel for our XSAM product is unaffected by this termination.

12



RESEARCH AND DEVELOPMENT

As of March 1, 2006, our research and development department consisted of 59 employees and full-time equivalents. These employees are responsible for assessing new technologies, scheduling new releases, product architecture, security, performance engineering, product requirements, quality assurance and product support.

SALES AND MARKETING

Our sales and marketing activities are primarily directed at mobile network operators. A number of departments within a customers organization are typically involved in purchase decisions with respect to our products, including senior management, network engineering personnel, and the procurement and marketing departments.

We maintain sales offices in the United States, the United Kingdom and Hong Kong, and we have individual sales representatives in several other countries. Our sales activities are supported by marketing efforts, including marketing communications, product management, market research and strategic alliances. As of March 1, 2006, our sales and marketing group consisted of 15 employees and full-time equivalents. Our sales employees generally receive incentive compensation based on individual sales volume in addition to their base salaries.

In addition to offering our X-treme Mobility Suite of products directly to mobile network operators, to expand our distribution capability we supplement our direct sales and marketing efforts by utilizing relationships with resellers such as hardware and other software/solutions providers and independent sales agents and regional systems integrators. These relationships are important to us because, in some cases, these distribution partners have an established local presence in markets in which we do not, are familiar with local trade customs in those markets and may be existing suppliers to end customers in those markets and often are the system integrator in the sale, installation and ongoing support of our software product. These relationships are customary in the software industry.  Moreover, in some cases, rather than dealing directly with suppliers like the Company, large mobile network
operators sometimes prefer to deal with larger and, in some cases, more locally well known companies.

STRATEGIC RELATIONSHIPS

We have established and continue to develop relationships with mobile network operators, wireless network software and equipment suppliers and content and technology providers throughout the world to facilitate the sale and adoption of our products and services. We anticipate that some of these relationships will lead to formal arrangements in which strategic partners will agree to incorporate, resell and/or implement our solutions. Through strategic relationships, we seek to gain worldwide access and positioning, technological leadership, and an early awareness of emerging mobile technologies. These relationships generally do not give rise to material rights and obligations for us outside of specific agreements with respect to the sale of our products.

13



COMPETITION

The market for our products and services is becoming increasingly competitive. The widespread adoption of open standards may make it easier for new market entrants and existing competitors to introduce products that compete against ours. We believe that we will compete primarily on the basis of the quality, functionality and ease of integration of our products, as well as on the basis of price. Because we are smaller than most of our competitors, we believe that we can be more attentive to the needs of our customers than some of our competitors.   As a provider of next-generation IP-based network and data services, we assess potential competitors based primarily on their product functionality and range of services, the security and scalability of their product architecture, their customer base and geographic focus, and their capitalization and other resources.

| | Our principal current and potential competitors include:                                                                                                                                                                                                                        
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | MOBILE ACCESS GATEWAY VENDORS AND MESSAGING SOLUTION PROVIDERS:   Companies in this category include Openwave Systems, LogicaCMG, Comverse,   Materna, Nokia and Ericsson. Some of these companies can be both partners and   competitors with respect to our software products.
| | ALERTS FOCUSED BUSINESSES: Companies that
focus in the development and delivery of alerts and message-based technology
include: Xiam, First Hop, Materna and Infospace. These companies are
competitive with our XAP software product.                                          
| | NETWORK EQUIPMENT AND DEVICE MANUFACTURERS: Ericsson, Nokia, Motorola   and other large wireless technology vendors are both potential competitors   and potential partners for our software products.                                                                          

Particularly with respect to several of our competitors for the mobile access gateway product and competitors who are equipment and device manufacturers, our competition have longer operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong brand recognition in each of the above-mentioned categories.  These competitors may be able to compete more effectively than us based on price or by bundling other goods and services with their product offering that we cannot. However, we believe that we will compete primarily with these competitors on the basis of the quality, warranty, functionality and ease of integration of our products, as well as on the basis of price.

In addition, particularly with respect to our alerts products, we face competition from small private companies that may have even lower cost structures and may be able to take more financial risk with respect to customer pricing than we are willing to consider.  We believe that we will compete with these competitors on the basis of the quality, warranty, functionality and ease of integration of our products, as well as on the basis of price.

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Our competitors have established, and may establish in the future, strategic relationships among themselves or with third parties to increase their ability to address the needs of our current and prospective customers. Through these relationships or independently, current and potential competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products to both our existing customers and our potential customers. There can be no assurance that we will be able to compete successfully with existing or new competitors for new customers and for ongoing business from our current customers. Failure by us to adapt to changing market conditions and to compete successfully with established or new competitors may have a material adverse effect on our results of operations and
financial condition.

INTELLECTUAL PROPERTY

We protect our proprietary technology through a combination of contractual confidentiality provisions, trade secrets, and patent, copyright and trademark laws. We have received registered trademarks in Australia, Canada, the United Kingdom, Mexico, Japan and the European Community. In addition, we have applied for registration of some of our trademarks in the United States.

We have also
applied for patents relating to our mobile commerce technology, the X-treme
Mobility Suite of products and our multi-channel framework technology. We have
applied for patent protection in Canada, the United States, Japan and Europe. To
date, we have received twenty-three patents with respect to the technologies
relating to our X-treme Mobility Suite of products. Our performance depends in
part on our ability to protect our intellectual property rights in our products,
including our ability to enforce our existing patent rights. Our XMG and XMA
products are built using the key concepts in our patents of processing multiple
tasks simultaneously, as opposed to sequentially, which is a cornerstone of our
ability to process information faster than competitive products. Our inability
to protect these rights could have a material adverse effect on our results of
operations and financial condition. However, we do not believe that our business
will be materially affected if we do not receive the patents and trademarks for
which we have applied and not yet received.

There can be no assurance that the confidentiality provisions in our contracts will be adequate to prevent the infringement or misappropriation of our copyrights, pending and issued patents, trademarks and other proprietary rights. There can be no assurance that independent third parties will not develop competing technologies, or reverse engineer our trade secrets, software or other technology. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent, as do the laws of Canada and the United States. Therefore, the measures taken by us may not adequately protect our proprietary rights.

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We use certain third-party software that may not be available to us on commercially reasonable terms or prices or at all in the future. Moreover, some of our third-party license agreements are non-exclusive and, therefore, our competitors may have access to some of the same technology.

To date, no claims have been made that any of our products infringe on the proprietary rights of third parties, but third parties could claim infringement by us with respect to our existing or future products. Any claim of this kind, whether or not it has merit, could result in costly litigation, divert managements attention, cause delays in product installation, or cause us to enter into royalty or licensing agreements on terms that may not be acceptable to us.

EMPLOYEES

As of March 1, 2006, we had 113 employees and full-time equivalents worldwide.

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|ITEM 1A. | RISK FACTORS
|-------- | ------------

RISK FACTORS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES IN THE FUTURE.

We have not been profitable since our inception. Any shortfall in our revenues relative to our expectations could cause a significant increase to our net losses. We cannot predict if we will ever achieve profitability and, if we do, we may not be able to sustain or increase our profitability.

WE MAY EXPERIENCE AN INCREASE IN PRICE PRESSURE IN THE FUTURE; AND IF WE ARE NOT SUCCESSFUL IN REDUCING OUR COSTS, WE MAY EXPERIENCE A DECREASE IN GROSS MARGINS.

We believe that a variety of factors in the current market contribute to the risk that prices and therefore our gross margins will decrease in future fiscal quarters. For example, as our customers continue to assess their business strategies and their budgets for wireless spending, we may feel additional pressure to lower our prices. In addition, consolidation among mobile network operators, as well as heightened competition, could create increased pricing pressure in the marketplace.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND ITS FUTURE PROSPECTS.

Because we are in an early stage of development, our prospects are difficult to predict and may change rapidly. We may encounter difficulties as a young company in a new and rapidly evolving market, including as a result of our dependence on a small number of products with only limited market acceptance. Our business strategy may not be successful, and we may not successfully address these risks.

WE HAVE A LENGTHY AND COMPLEX SALES CYCLE FOR SEVERAL OF OUR PRODUCTS, WHICH COULD CAUSE THE DELAY OR LOSS OF REVENUE AND INCREASE OUR EXPENSES.

Our sales efforts target mobile network operators worldwide, which require us to expend significant resources educating prospective customers and partners about the uses and benefits of our products. Because the purchase of our products is a significant decision for these prospective customers, they may take a long time to evaluate them. Our sales cycle has typically ranged from four to six months, but can be longer due to significant delays over which we have little or no control. As a result of the long sales cycle, it may take us a substantial amount of time to generate revenue from our sales efforts.

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WE ARE DEPENDENT UPON THE GROWTH OF PENETRATION OF OUR PRODUCTS IN THE MOBILE NETWORK OPERATOR MARKETPLACE.

We have made mobile network operators the main focus of our activities. Our future success depends on our ability to increase revenues from sales of our software and services directly and indirectly to mobile network operators. We may not be able to attract a large number of these customers.

Currently, only a limited number of mobile network operators and other customers have implemented and deployed services based on our products. Mobile network operators may not widely deploy or successfully sell services based on our software and services, and subscribers to these services may not seek to use them. Any developments of this kind could limit our ability to sell our solutions to companies in this industry.

In addition, our success is dependent upon increased adoption by end users of the services that are based on our software and services. Mobile network operators and their competitors (for example, other communications providers) may successfully deploy and market services that compete with the services that are based on our technology. If subscribers of our mobile network operator customers do not increase their use of services that are based on our software and services, our operating results will be harmed.

WE FACE RISKS AS A RESULT OF OUR OPERATIONS IN INTERNATIONAL MARKETS.

We expect that sales in international markets will be a major factor in our growth, particularly since the use of wireless networks and wireless devices have generally proceeded more rapidly outside North America.  Risks inherent in conducting business internationally include:

| |  | reliance on local distribution partners;                                                                            
| | - | --------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                     
| |  | fluctuations in currency exchange rates;                                                                            
| |   |                                                                                                                     
| |  | unexpected changes in regulatory requirements applicable to our   business;                                         
| |   |                                                                                                                     
| |  | customer concentration;                                                                                             
| |   |                                                                                                                     
| |  | the pace of adoption of our technology;                                                                             
| |   |                                                                                                                     
| |  | export restrictions on encryption and other technologies;                                                           
| |   |                                                                                                                     
| |  | difficulties in collecting accounts receivable resulting in longer   collection periods;                            
| |   |                                                                                                                     
| |  | lower pricing of license and professional service fees; and                                                         
| |   |                                                                                                                     
| |  | differences in foreign laws and regulations, including foreign tax,   intellectual property, labor and contract law.

Any of these factors could harm our international operations and, consequently, our operating results and growth.

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OUR PRODUCTS HAVE ACHIEVED LIMITED MARKET ACCEPTANCE TO DATE, AND IF THEY FAIL TO ACHIEVE BROADER MARKET ACCEPTANCE, OUR BUSINESS WILL NOT GROW.

Our products are among a number of competing products that are currently available in a new and rapidly evolving market. Other companies may introduce other software products that will compete with ours. Customers may not prefer our products to competing technologies. Some potential customers may be reluctant to work with us due to our fluctuating stock price, or due to our financial condition. If customers do not accept our products as the preferred solution, we may not attract new customers, and our business will not grow.

WE NEED TO RETAIN OUR CUSTOMERS AND ADD NEW CUSTOMERS OR OUR REVENUE MAY BE SUBSTANTIALLY REDUCED AND OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.

We have agreements with existing customers in which they either pay us based on the usage of the services that are based on our products or have an option to purchase additional software licenses and/or renew their current relationship with us. If any of our customers discontinue their use of our software in connection with the services that they offer or discontinue their relationship with us for any reason, do not renew their agreements or seek to reduce or renegotiate their purchase and payment obligations, our revenue may be substantially reduced. Consolidation of companies in the telecommunications industry may reduce the number of potential new customers that would be available to us. If our sales efforts to these potential customers are not successful, our products may not achieve market acceptance and our revenue will not grow. Further decreases in adoption will have a material impact on our
revenues.

WE HAVE RELIED ON SALES TO A LIMITED NUMBER OF CUSTOMERS, AND IF WE FAIL TO RETAIN THESE CUSTOMERS OR TO ADD NEW CUSTOMERS, OUR REVENUE MAY BE SUBSTANTIALLY REDUCED AND OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.

To date, a
significant portion of our revenues in any particular period has been
attributable to a limited number of customers. In 2005, 32% of our revenue was
derived from Hewlett-Packard (as reseller to Sprint Nextel), 19% was derived
from Vodafone and 18% was derived from Nokia.  Most of our revenue from
these customers and our other customers depends on their or their
customers continued use of our products. If our customers or their
customers discontinue or materially reduce their use of our products, or obtain
one or more additional suppliers of competing software and services, our
revenues may decline.

As discussed
above, on October 31, 2005, our subcontract agreement with Hewlett-Packard with
respect to the deployment of our access gateway solution at Sprint Nextel terminated.
We recognized $5.9 million in revenue in the twelve months ended December 31,
2005 related to this subcontract. This represents 32% of our total revenue of
$18.3 million.

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We believe that we may continue to rely upon a limited number of customers for a significant portion of our revenues in the foreseeable future, and any failure by us to capture or retain a significant share of these customers could materially harm our business.

Also, if our customer base consolidates, we will have increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.

See Part I, Item 1, Business -Customers and Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.

IF WE DO NOT RESPOND ADEQUATELY TO EVOLVING TECHNOLOGY STANDARDS, SALES OF OUR PRODUCTS MAY DECLINE.

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging technologies, including technologies related to communications and the Internet generally. The wireless data market is a rapidly evolving market and is characterized by an increasing number of market entrants that have introduced or developed, or are in the process of introducing or developing, products that facilitate the delivery of data services through wireless devices. In addition, our competitors may develop alternative products that gain broader market acceptance than ours. As a result, the life cycle of our products is difficult to estimate.

We need to
develop and introduce new products and enhancements to our existing products on
a timely basis to keep pace with technological developments, evolving industry
standards, changing customer requirements and competitive technologies that may
render our products obsolete. These research and development efforts may require
us to expend significant capital and other resources. In addition, as a result
of the complexities inherent in our products, major enhancements or improvements
will require long development and testing periods. If we fail to develop
products and services in a timely fashion, or if we do not enhance our products
to meet evolving customer needs and industry standards, including security
technology, we may not remain competitive.

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ANY DISRUPTION OF THE SERVICES SUPPORTED BY OUR PRODUCTS DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY DAMAGE OUR REPUTATION, REDUCE OUR REVENUE, EXPOSE US TO COSTLY LITIGATION OR REQUIRE CAPITAL INVESTMENTS IN ALTERNATIVE SECURITY TECHNOLOGY.

Despite our efforts to maximize the security of our platform, we may not be able to stop unauthorized attempts to gain access to or disrupt transactions between our customers and the consumers of their services. Specifically, computer viruses, break-ins and other disruptions could lead to interruptions, delays, loss of data or the inability to accept and confirm the receipt of information or instructions regarding transactions. Any of these events could substantially damage our reputation. We rely on encryption and authentication technology licensed from third parties to provide key components of the security and authentication necessary to achieve secure transmission of confidential information. We cannot necessarily ensure that this technology, future advances in this technology or other developments will be able to prevent security breaches. As a result, we may need to develop or license other
technology in the future, to the extent available, to address these security concerns.

If a third-party were able to steal a users proprietary information, we could be subject to claims, litigation or other potential liabilities that could cause our expenses to increase substantially. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to costly litigation or a significant loss of revenue. Although our customer agreements contain provisions which limit our liability relating to security to some extent, our customers or their consumers may seek to hold us liable for any losses suffered as a result of unauthorized access to their communications. Any litigation of this kind, regardless of its outcome, could be extremely costly and could significantly divert the attention of our management. We may not have adequate insurance or resources to cover these losses.

FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY EXCHANGE LOSSES.

Our
functional currency is the U.S. dollar, as we recognize the majority of our
revenues in dollars.  In the foreseeable future, the majority of our non-US
dollar denominated expenses will be incurred in Canadian dollars, Euros, Swiss
francs and United Kingdom pounds sterling. Changes in the value of these
currencies relative to the U.S. dollar may result in currency gains and losses,
which could affect our operating results.  We do not currently hedge
against these currency fluctuations.  In the year ended December 31, 2005,
we incurred realized and unrealized foreign currency losses relating to the
translation of our non-U.S. dollar denominated monetary assets and liabilities
of approximately $260,000. No assurance can be given as to what foreign exchange
gains or losses there may be in future periods.

WE MAY LIMIT INVESTMENTS IN OTHER COMPANIES AND NEW TECHNOLOGIES.

Because of the continuing volatility in the financial markets, as well as other factors, we intend to limit equity investments in other companies and the purchase of new technologies during the next few fiscal quarters, and possibly longer. As a result, we may not take advantage of investment opportunities that could provide us significant financial benefits, or that could provide us with the opportunity to build relationships with other companies in our industry and target markets.

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WE MAY HAVE DIFFICULTIES COLLECTING RECEIVABLES.

A significant portion of our receivables is derived from customers in foreign countries. Due to varying economic conditions and business practices in these countries, our collections cycle from these customers may be longer than with our North American customers. In the event of adverse economic conditions, there will be a greater risk that our customers will have difficulties in paying us in accordance with the terms of their contracts, and our risk of bad debt may increase substantially.

OUR GROSS MARGINS MAY DECREASE.

We believe that certain factors in the current market may contribute to the risk that our gross margins will decrease in future fiscal quarters. We may have to lower our prices in order to accommodate our customers. In addition, many of our customers are reluctant to make a commitment to pay large upfront license fees or to guarantee purchases of a minimum number of licenses or licensed capacity, which could also cause our revenues to decrease. Some mobile network operators are also unwilling to pay for installations and customizations to our products, which could negatively impact our operating results.

WE WILL NEED TO RECRUIT, TRAIN AND RETAIN KEY MANAGEMENT AND OTHER QUALIFIED PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS.

Our ability to execute our business successfully depends in large part upon our ability to have a sufficient number of qualified employees to achieve our goals. There are only a limited number of persons with the requisite skills to serve in many key management and non-management positions, and it is difficult to retain and hire these persons. If we are unable to do so, our business could be negatively affected. The morale of our current employees may have been adversely affected by previous workforce reductions and departures, potentially impacting their performance or their willingness to remain with us.  Our ability to attract potential new employees in the future may suffer if our reputation suffers as a result of these staffing reductions or otherwise.

OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS THAT COULD DAMAGE OUR REPUTATION.

The software that we develop is complex and must satisfy the stringent technical requirements of our customers. We must develop our products quickly to keep pace with the rapidly changing industry in which we operate. Software products that are as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. In addition, our software may not properly operate when integrated with the systems of some customers or when used to deliver services to a large number of a customers subscribers.

While we continually test our products for errors and work with customers to identify and correct bugs, errors in our product may be found in the future. Our software may not be free from errors or defects even after it has been tested, which could result in the rejection of our products and damage to our reputation, as well as lost revenue, diverted development resources and increased support costs.

22



WE MAY BE SUBJECT TO LITIGATION CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS TO US.

As noted in
Item 3  Legal Proceedings, we and certain of our former officers and
directors were named as defendants in a series of purported class actions
relating to our initial public offering. Litigation may be time consuming,
expensive, and distracting from the conduct of our business, and the outcome of
litigation may be difficult to predict. The adverse resolution of any of these
proceedings could have a material adverse effect on our business, results of
operations and financial condition.

OUR PRODUCTS CONTAIN ENCRYPTION TECHNOLOGY WHOSE EXPORT IS RESTRICTED BY LAW, WHICH MAY SLOW OUR GROWTH OR RESULT IN SIGNIFICANT COSTS.

The U.S., Canadian and other foreign governments generally limit the export of encryption technology, which our products incorporate. A variety of cryptographic products generally require export approvals from certain government agencies in the case of exports from certain countries, although there are currently no restrictions on exports of these products from Canada into the U.S. If any export approval that we receive is revoked or modified, if our software is unlawfully exported or if the U.S., Canadian or other relevant government adopts new legislation or regulations restricting export of software and encryption technology, we may not be able to distribute our products to potential customers, which will cause a decline in sales. We may need to incur significant costs and divert resources in order to develop replacement technologies or may need to adopt inferior substitute technologies to satisfy
these export restrictions. These replacement or substitute technologies may not
be the preferred security technologies of our customers, in which case our
business may not grow. In addition, we may suffer similar consequences if the
laws of any other country limit the ability of third parties to sell encryption
technologies to us.

IF WE DO NOT HAVE SUFFICIENT CAPITAL TO
FUND OUR OPERATIONS, WE MAY BE FORCED TO DISCONTINUE PRODUCT DEVELOPMENT, REDUCE
OUR SALES AND MARKETING EFFORTS OR FOREGO ATTRACTIVE BUSINESS
OPPORTUNITIES.

In order to help ensure that we would have sufficient capital to take advantage of our core business opportunities, we have taken significant actions to reduce our operating expenses and in the first half of 2004, raised $8.0 million of convertible debt. However, most of our operating expenses, such as employee compensation and lease payments for facilities and equipment, are relatively stable, and these expense levels are based in part on our expectations regarding future revenues. As a result, any sustained shortfall in our revenues relative to our expectations would negatively impact our operating results. Accordingly, if the cost-cutting actions that we have taken are insufficient, we may not have sufficient capital to fund our operations, and additional capital may not be available on acceptable terms, if at all.

23



Any of these outcomes could adversely impact our ability to respond to competitive pressures or could prevent us from conducting all or a portion of our planned operations. We may need to undertake additional measures to reduce our operating expenses in the future.

We expect that the cash we receive through our operations and our cash on hand will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. After that, we may need to raise additional funds, and additional financing may not be available on acceptable terms, if at all. We also may require additional capital to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. If we issue additional equity securities to raise funds, the ownership percentage of existing shareholders will be reduced. If we incur debt, the debt will rank senior to our common shares, we will incur debt service costs and we will likely have to enter into agreements that will restrict our operations in some respects and our ability to declare dividends to the holders of our common shares.

The terms of
the Secured Convertible Promissory Notes (the Notes) that we have issued to our affiliate, Austin Ventures, may also make
it more difficult for us to obtain additional financing.  For example,
these Notes limit our ability to issue equity securities at prices that are less
than specified amounts, and Austin Ventures has obtained a security interest as
to our assets.

The $8.0 million of convertible debt plus interest due at maturity of approximately $1.4 million is payable in the second quarter of 2007 in cash or shares at a conversion price of $3.07 at the option of Austin Ventures. If Austin Ventures demands cash we may not have sufficient funds to meet that demand and we may have to raise additional capital. We cannot predict the terms under which capital may be available to us at that time, if at all.

RISK FACTORS RELATED TO OUR INDUSTRY

OUR FUTURE REVENUES AND OPERATING RESULTS ARE DEPENDENT TO A LARGE EXTENT UPON UNCERTAIN GENERAL ECONOMIC CONDITIONS.

Our future revenues and operating results are dependent to a large extent upon general economic conditions, conditions in the wireless market and within that market, our primary target market of mobile network operators. If general economic conditions are adverse, if the economies in which our target customers are located suffer from a recession, if demand for our solutions does not expand, or if war or terrorism impacts the U.S., Europe, Asia or our other target markets, our ability to increase our customer base may be limited, and our revenue may decrease further.

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OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS DATA SERVICES DOES NOT CONTINUE TO GROW.

The markets for wireless data services and related products are still emerging and continued growth in demand for, and acceptance of, these services remains uncertain. Our products depend on the acceptance of wireless data services and Internet-enabled devices in the mobile network operator market. Current barriers to market acceptance of these services include cost, reliability, platform and distribution channel constraints, consumer privacy concerns, functionality and ease of use. Mobile individuals currently use many competing products, such as portable computers, to remotely access the Internet. These products generally are designed for the visual presentation of data, while, until recently, wireless devices historically have been limited in this regard. We cannot be certain that these barriers will be overcome.

Since the market for our products is new and evolving, it is difficult to predict the size of this market or its future growth rate, if any. Our future financial performance will depend in large part upon the continued demand for data services through wireless devices. We cannot ensure that a sufficient volume of subscribers will demand these services. If the market for these wireless online services grows more slowly than we currently anticipate, our revenue may not grow.

OUR FUTURE REVENUE DEPENDS ON CONSUMERS USING THE SERVICES THAT ARE BASED ON OUR PRODUCTS, AND IF OUR CUSTOMERS DO NOT SUCCESSFULLY MARKET THESE SERVICES, OUR REVENUE WILL NOT GROW.

Revenue under most of our license agreements depends on the number of monthly subscribers to the services that are based on our products or the amount of use of those services. As a result, our revenue growth will be limited if the number of subscribers or use of the services that are based on our software does not increase. To stimulate consumer adoption of these services, our customers must implement our products quickly. However, our customers may delay implementation because of factors that are not within our control, including budgetary constraints, limited resources committed to the implementation process and limited internal technical support.

Consumer adoption of these services also requires our customers to market these services. However, our customers currently have no obligation to launch a marketing campaign of any kind, may choose not to do so, or may not do so effectively. Some of our customers have only provided these services on a test basis to a limited number of consumers. Some of our customers may choose not to expand their use of these services if they do not perceive a sufficiently high rate of adoption among their consumers. As a result, we cannot ensure that a large number of consumers will use these services in the future.

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OUR BUSINESS DEPENDS ON CONTINUED INVESTMENT AND IMPROVEMENT IN COMMUNICATION NETWORKS.

Some of our customers and other mobile network operators have made substantial investments in 2.5 generation and 3rd generation networks. These networks are designed to support more complex applications, and to provide consumers with a more robust user experience. If network operators delay their deployments of these networks, or do not roll them out successfully, there could be reduced demand for our products and services. In addition, if communication service providers fail to continue to make investments in their networks or do so at a slower pace in the future, there may be less demand for our products and services.

WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW PRODUCTS, WHICH COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR REVENUE TO DECLINE.

The widespread adoption of open industry standards may make it easier for new market entrants and existing competitors to introduce products that compete with ours. In addition, competitors may develop or market products and services that are superior or more cost-effective than ours, which could decrease demand for our products and cause our revenue to decline. Currently, our competitors include:

| |  | mobile access gateway vendors and messaging solution providers;
| | - | ---------------------------------------------------------------
| |   |                                                                
| |  | alerts focused businesses; and                                 
| |   |                                                                
| |  | network equipment and device manufacturers.                    

We may also
face competition in the future from established companies that have not
previously entered the market for wireless data infrastructure software and
services. Barriers to entry in the software market are relatively low and it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. See Item 1  Business - Competition above.

MANY OF OUR COMPETITORS ARE SIGNIFICANTLY LARGER THAN US.

Many of our competitors are significantly larger than us in terms of revenue, marketing and research and development expenditures and numbers of employees in their sales, services and support organizations. The competitors we face on our XMS sales opportunities include Nokia, Ericsson, Comverse, Alcatel and Openwave. Our success is dependent on our ability to win our share of these opportunities against these larger competitors and to retain our customers. Many of these competitors are able to bundle other products (including handsets and/or network equipment) into sales of competitive products, which they might argue reduces risk to their customers.  We do not believe that we can offer similar product bundles, which could prevent us from competing with these competitors, offering similar pricing, retaining key customers or acquiring new customers.

26



CHANGES IN GOVERNMENT REGULATIONS MAY RESULT IN INCREASED EXPENSES, TAXES OR LICENSING FEES THAT COULD DECREASE THE DEMAND FOR OUR PRODUCT AND NEGATIVELY IMPACT OUR RESULTS.

We are not currently subject to direct regulation by any governmental agency, other than regulations applicable to businesses generally and laws and regulations directly applicable to access to, or commerce on, the Internet and wireless networks. However, a number of legislative and regulatory proposals under consideration by federal, state, provincial, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet and wireless networks, including but not limited to, online content, user privacy, taxation, access charges and liability for third-party activities. Additionally, it is uncertain how existing laws governing issues such as property ownership, copyright, trade secrets, libel and personal privacy will be applied to the Internet and wireless networks. The adoption of new laws or the broader application of existing laws may expose us to
significant liabilities and additional operational requirements and may decrease the growth in the use of the Internet and wireless networks, which could, in turn, both decrease the demand for our products and increase the cost of doing business.

RISKS RELATING TO INTELLECTUAL PROPERTY

WE RELY ON THIRD-PARTY SOFTWARE, TECHNOLOGY AND CONTENT, THE LOSS OF WHICH COULD FORCE US TO USE INFERIOR SUBSTITUTE TECHNOLOGY OR TO CEASE OFFERING OUR PRODUCTS.

We must now, and may in the future, license or otherwise obtain access to the intellectual property of third parties. In addition, we use, and will use in the future, some third-party software that may not be available in the future on commercially reasonable terms, or at all. For example, we could lose our ability to use this software if the rights of our suppliers to license it were challenged by individuals or companies that asserted ownership of these rights. The loss of, or inability to maintain or obtain, any required intellectual property could require us to use substitute technology, which could be more expensive or of lower quality or performance, or force us to cease offering our products. Moreover, some of our license agreements from third parties are non-exclusive and, as a result, our competitors may have access to some of the technologies used by us.

IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE OUR COMPETITIVE ADVANTAGE.

We depend on
our ability to develop and maintain the proprietary aspects of our technology.
We seek to protect our proprietary technology, including software, documentation
and other written materials under patent, trade secret and copyright laws, as
well as confidentiality provisions in contracts with our customers, suppliers,
contractors and employees, all of which afford limited protection. We cannot
ensure that these steps will be adequate, that we will be able to secure the
desired patent or trademark registrations for our patent/trademark applications
in Canada, the U.S. or other countries, or that third parties will not breach
the confidentiality provisions in our contracts or infringe or misappropriate
our copyrights, patents or pending patents, trademarks and other proprietary
rights. Similarly, we cannot ensure that our employees will comply with the
confidentiality agreements that they have entered into with us, and
misappropriate our technology for the benefit of a third party. If a third party
or any employee breaches the

27



confidentiality provisions in our contracts or
misappropriates or infringes on our intellectual property, we may not have
adequate remedies. In addition, third parties may independently discover or
invent competing technologies that are not covered by our patents or may
reverse-engineer our trade secrets, software or other technology. Moreover, the
laws of some foreign countries may not protect our proprietary rights to the
same extent, as do the laws of the U.S. and Canada. Therefore, the measures we
are taking to protect our proprietary rights may not be adequate.

THIRD PARTIES MAY CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR INTELLECTUAL PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSES FOR LITIGATION OR FOR DEVELOPING OR LICENSING NEW TECHNOLOGY.

Although we are not currently aware of any claims asserted by third parties that our products infringe their intellectual property rights, in the future, third parties may assert claims of this kind. We cannot predict whether third parties will assert these types of claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against these types of claims, whether they are with or without any merit or whether they are resolved in favor of or against us, or our licensors, we may face costly litigation and diversion of managements attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may not be available on acceptable terms, or at all, which could prevent us from selling our products,
increase our expenses or make our products less attractive to customers.

RISKS RELATING TO THE OWNERSHIP AND TRADING OF OUR COMMON SHARES

IF WE CAN NO LONGER FULFILL STOCK EXCHANGE LISTING REQUIREMENTS, THE LIQUIDITY OF OUR COMMON SHARES WILL BE LIMITED.

On March 8,
2006, we received a Nasdaq Staff Deficiency Letter indicating that we are not in
compliance with the Nasdaqs Marketplace Rule 4310(c)(2)(B), which requires
a listed company to have a minimum of  $2,500,000 in stockholders
equity, or $35,000,000 market value of listed securities, or $500,000 of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years.  We have submitted a
response, and Nasdaq staff is reviewing our eligibility for continued listing on
the Nasdaq Capital Market; however, in the event that the plan to regain and
remain in compliance is not acceptable to Nasdaq staff, we may be delisted from
the Nasdaq Capital Market.  The Toronto Stock Exchange (TSX) has its own listing requirements, with
which we currently comply.

28



If our
common shares are not listed on the Nasdaq Capital Market, trading of our common
shares could be conducted in the U.S. in the over-the-counter market on an
electronic bulletin board established for unlisted securities, or directly
through market makers in our common shares. If our common shares trade in the
U.S. over-the-counter market, an investor may find it more difficult to dispose
of, or to obtain accurate quotations for the price of, the common shares. 
A delisting from the Nasdaq Capital Market and failure to obtain listing on such
other market or exchange would subject our securities to the so-called U.S.
penny stock rules, which impose additional sales practice and
market-making requirements on broker-dealers who sell or make a market in such
securities.  In addition, when the market price of our common shares is
less than $5.00 per share, as is the case as the date of this filing, we are
subject to the U.S. penny stock rules even if our common shares are still listed
on the Nasdaq Capital Market.

THE RIGHTS THAT HAVE BEEN AND MAY IN THE FUTURE BE GRANTED TO OUR SHAREHOLDERS MAY ALLOW OUR BOARD AND MANAGEMENT TO DETER A POTENTIAL ACQUISITION OF OUR COMPANY.

Our Board of Directors has adopted a shareholder rights plan, or poison pill which will expire on the date of our next shareholders meeting in 2006.  While our Board of Directors currently does not intend to seek shareholder approval to renew the shareholder rights plan, it remains in effect at the present time.   Under the plan, rights to purchase common shares have been issued to holders of common shares. These rights become exercisable under certain circumstances in which someone acquires 20% or more of our outstanding shares. As part of the $8 million financing transactions in May 2004 and June 2004 between Austin Ventures and us, our Board of Directors agreed to waive the terms and provisions of the plan to permit the acquisition by Austin Ventures or its affiliates of up to forty-nine percent of our outstanding common shares.  As a result of the plan, anyone
wishing to take over the company may be forced under certain circumstances to negotiate a transaction with our Board and management or comply with certain bid criteria in order not to trigger the exercise of rights. The need to negotiate with the Board or management or to comply with certain bid criteria could add complexity to a proposed takeover. For example, a proposed hostile bidder might have to bring court or regulatory proceedings to have the shareholder rights plan cease-traded. This could prolong the take-over process and, arguably, deter a potential bidder.

OUR ABILITY TO ISSUE PREFERRED SHARES COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, TO THE DETRIMENT OF HOLDERS OF COMMON SHARES.

Our ability to issue preferred shares could make it more difficult for a third party to acquire us, to the detriment of holders of common shares. Provisions in our articles of incorporation may make it difficult for a third party to acquire control of us, even if a change in control would be beneficial to our shareholders. Our articles authorize our Board to issue, at its discretion, an unlimited number of preferred shares. Without shareholder approval, but subject to regulatory approval in certain circumstances, the Board has the authority to attach special rights, including voting or dividend rights, to the preferred shares. Preferred shareholders who possess these rights could make it more difficult for a third party to acquire us.

29



IF THE PROPOSED PURCHASE BY AUSTIN VENTURES OF THE BALANCE OF OUR COMMON SHARES DOES NOT PROCEED, YOU MAY NOT HAVE AS BENEFICIAL AN OPPORTUNITY TO SELL YOUR SHARES, AND RESOURCES THAT WE HAVE INVESTED IN NEGOTIATING THE TRANSACTION MAY NOT PRODUCE ANY BENEFIT.

On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of our outstanding common shares not then-owned by Austin Ventures for cash consideration of $3.34 per common share. After careful consideration and evaluation by our Special Committee of independent directors, which had been previously constituted in order to consider potential value enhancing strategic transactions for our shareholders, we accepted the proposal.  The proposal involves certain termination rights by either party, as well as an expiry date of April 6, 2006 in the event that a definitive agreement is not reached by that time.  If the transaction does not proceed, or proceeds on less favorable terms than as proposed, we may not have alternative transactions available to us or our shareholders that are as beneficial as the transaction that has been proposed.  In pursuing this transaction,
we will have also expended significant management attention and resources, which may be of little or no value if an agreement cannot be achieved and closed.

YOUR TAX LIABILITY MAY INCREASE IF WE ARE TREATED AS A PASSIVE FOREIGN INVESTMENT COMPANY.

If at
any time we qualify as a passive foreign investment company under U.S. tax laws,
U.S. Holders (as defined below in this Report) may be subject to adverse tax
consequences. We could be a passive foreign investment company if 75% or more of
our gross income in any year is considered passive income for U.S. tax purposes.
For this purpose, passive income generally includes interest, dividends, some
types of rents and royalties, and gains from the sale of assets that produce
these types of income. In addition, we could be classified as a passive foreign
investment company if the average percentage of our assets during any year that
produced passive income or that were held to produce passive income, is at least
50%. If we are classified as a passive foreign investment company, and if U.S.
Holders sell any of their common shares or receive some types of distributions
from us, they may have to pay taxes that are higher than if we were not
considered a passive foreign investment company. It is impossible to predict how
much shareholders taxes would increase, if at all.

30



Shares
held by a U.S. Holder generally are treated as shares in a passive foreign
investment company if, at any time during the holding period of the U.S. Holder
with respect to such shares, we were a passive foreign investment company. 
There is a risk that we were a passive foreign investment company for the year
2005 or prior years. To determine whether we were a passive foreign investment
company, our revenue and expenses and the value of our assets would need to be
examined each year.  The tests are complex and require, among other things,
that we determine how much of our income each year will be passive income. In
addition, we are required to determine each year whether the value of our assets
that produce passive income or are held to produce passive income will
constitute at least 50% of our total assets. The manner in which the tests apply
to our business is not certain.  In certain years prior to 2005, as a
result of the size of our cash position, based on the published position of the
Internal Revenue Service (IRS) that for this purpose, cash is
considered to be an asset which produces passive income, even if the cash is
held as working capital, we would have been considered a passive foreign
investment company. The published position of the IRS that cash held as working
capital is a passive asset has not been promulgated in regulations, and no other
official guidance has been issued on the question.   Therefore,
although the risk that we were a passive foreign investment company is
substantial, it is unclear that we were a passive foreign investment company for
such prior years, and shareholders should consult their own advisors regarding
our status as a passive foreign investment company for 2005 and prior years.
Even if it were determined that we were not a passive foreign investment company
for 2005 or prior years, no assurances can be given that we will not be a
passive foreign investment company in future years. See Item 5 Market for
Registrants Common Equity and Related Stockholder Matters  Passive
Foreign Investment Company Considerations.

Each holder
of our common shares is urged to consult, his, her or its own tax advisor to
discuss the potential consequences to such investor if at any time we qualify as
a passive foreign investment company.

FUTURE SALES OF COMMON SHARES BY OUR EXISTING SHAREHOLDERS COULD CAUSE OUR SHARE PRICE TO FALL.

The volume of
trading in our common shares on the TSX and the NASDAQ
Capital Market has not been substantial. As a result, even small dispositions of
our common shares in the public market could cause the market price of the
common shares to fall. The perception among investors that these sales will
occur could also produce this effect.

We have
granted options to purchase our common shares in accordance with our 2005 Stock
Incentive Plan, 2000 Stock Option Plan and previous stock option plans. The
exercise of options and the subsequent sale of shares could adversely affect the
market price of our common shares.  In addition, our affiliate, Austin
Ventures, owns approximately 9% of our common shares, and if Austin Ventures
exercises its right to convert the Notes held by it plus the
interest due at March 1, 2006 into common shares, it will own approximately
38.5% of our outstanding common shares.  As a result, sales of our common
shares by Austin Ventures could adversely affect the market price of our
shares.  Austin Ventures has the right to require us to register these
shares with the Securities and Exchange Commission (SEC) for resale.

31



A LIMITED NUMBER OF SHAREHOLDERS OWN A SIGNIFICANT PORTION OF OUR COMMON SHARES, AND MAY ACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER SHAREHOLDERS.

Our
significant shareholders and members of our management team, including Austin
Ventures, which is affiliated with a member of our Board of Directors,
beneficially owned approximately 10% of our common shares as of March 1, 2006.
Austin Ventures may receive additional common shares upon conversion of the
Notes that it owns (please see note 8 to our consolidated financial statements
for the year ended December 31, 2005).  Accordingly, these shareholders
may, if they act together, exercise significant influence over all matters
requiring shareholder approval, including the election of a majority of the
directors and the determination of significant corporate actions. This
concentration could also have the effect of delaying or preventing a change in
control that could be otherwise beneficial to our shareholders. Furthermore, in
the event that Austin Ventures were to convert all or part of the Notes as it is
entitled to do, the ownership percentage of existing shareholders will be
reduced, which would be reflected in certain performance metrics of the
Corporation such as earnings per share, and which may also negatively impact the
market value of our securities.

|ITEM 1B. | UNRESOLVED STAFF COMMENTS.
|-------- | --------------------------

Not applicable.

|ITEM    2. | PROPERTIES.
|---------- | -----------

Our
registered office, as required by the Canada Business Corporations Act,
is located in Toronto, Ontario, Canada and our principal executive office is
located in Santa Barbara, California.  We also have development and sales
offices in Hong Kong, Switzerland and the United Kingdom.  We occupy all of our offices under lease agreements with terms
from one to five years.

|ITEM    3. | LEGAL PROCEEDINGS.
|---------- | ------------------

The Company has been named in several class actions filed in federal court in the Southern District of New York between approximately June 13, 2001 and June 28, 2001 (collectively the IPO Allocation Litigation). The IPO Allocation Litigation was filed on behalf of purported classes of plaintiffs who acquired the Companys common shares during certain periods. These lawsuits have since been consolidated into a single action and an amended complaint was filed on or about April 19, 2002. Similar actions have or since been filed against over 300 other issuers that have had initial public offerings since 1998 and all are included in a single coordinated proceeding in the Southern District of New York.

The amended
complaint in the IPO Allocation Litigation names as defendants, in addition to
the Company, some former directors and officers of the Company (the
Individual Defendants) and certain underwriters of the
Companys initial public offering of securities (the Underwriter
Defendants). In general, the amended complaint alleges that the
Underwriter Defendants: (1) allocated shares of the Companys offering of
equity securities to certain of their customers, in exchange for which these
customers agreed to pay the Underwriter Defendants extra commissions on
transactions in other securities; and (2) allocated shares of the Companys
initial public offering to certain of the Underwriter Defendants
customers, in exchange for which the customers agreed to purchase additional
common shares of the Company in the after-market at certain pre-determined
prices. The amended complaint also alleges that the Company and the Individual Defendants failed to disclose
these facts and that the Company and the Individual Defendants were aware of, or
disregarded, the Underwriter Defendants conduct. In October 2002, the
Individual Defendants were dismissed from the IPO Allocation Litigation without
prejudice.

32



In July 2003, a committee of the Companys Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of the Company and of the Individual Defendants for the conduct alleged in the action to be wrongful in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Companys insurers.

In June 2004, an agreement of settlement was submitted to the Court for preliminary approval.  The Court granted the preliminary approval motion on February 15, 2005, subject to certain modifications.

On August 31,
2005, the Court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes.  The Court also
appointed the Notice Administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members beginning on
November 15, 2005.  The settlement fairness hearing has been set for April
24, 2006.  Following the hearing, if the Court determines that the
settlement is fair to the class members, the settlement will be approved. 
There can be no assurance that this proposed settlement would be approved and
implemented in its current form, or at all.

If the proposed settlement is not consummated, the Company intends to continue to vigorously defend itself and the Individual Defendants against these claims. However, due to the inherent uncertainties of litigation, and because the IPO Litigation is at a preliminary stage, we cannot accurately predict the ultimate outcome IPO Allocation Litigation. No amount is accrued at December 31, 2005, as a loss is not considered probable and estimable.

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY   HOLDERS.
|------- | ------------------------------------------------------

Not applicable.

33



|PART II |                                                                                                                
|------- | ---------------------------------------------------------------------------------------------------------------
|        |                                                                                                                
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS   AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common
shares are listed on the Nasdaq Capital Market under the symbol SVNX
and on the TSX (the TSX) under the symbol
SVN. Prior to September 18, 2002 and between June 12, 2003 and July
13, 2004, our common shares were traded on the Nasdaq National Market. The
following table sets forth the high and low closing sales prices per share of
our common shares as reported on Nasdaq Capital Market and Nasdaq National
Market, as applicable, and the TSX for each of the quarters
during the fiscal years ending December 31, 2005 and December 31, 2004.

34



Year Ended December 31, 2005

|   |  | 724   Solutions |      
|-- |  | --------------- | -----
|   |  |                 |      
|   |  | Nasdaq   [US$]  |      
|   |  |                 |      
|   |  | High            |      
|   |  |                 |      
|Q1 |  | $               | 15.34
|Q2 |  | $               | 14.10
|Q3 |  | $               | 8.22 
|Q4 |  | $               | 5.99 

Year Ended December 31, 2004

|   |  | 724   Solutions |     
|-- |  | --------------- | ----
|   |  |                 |     
|   |  | Nasdaq   [US$]  |     
|   |  |                 |     
|   |  | High            |     
|   |  |                 |     
|Q1 |  | $               | 4.39
|Q2 |  | $               | 4.00
|Q3 |  | $               | 3.95
|Q4 |  | $               | 7.98

On March 8, 2006 we received a Nasdaq Staff Deficiency Letter indicating that we fail to comply with the Nasdaqs Marketplace Rule 4310(c)(2)(B).  Marketplace Rule 4310(c)(2)(B) requires companies listed on the Nasdaq Capital Market to have a minimum of $2,500,000 in stockholders equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.

We submitted a response to Nasdaq and Nasdaq staff is reviewing our eligibility for continued listing on the Nasdaq Capital Market.  If Nasdaq is not satisfied with our proposal, they will issue a delisting notice, which can be appealed. In the event such an appeal was not successful, our shares would be delisted from Nasdaq.

RECORD HOLDERS

As of March
1, 2006, approximately 33 of the holders of record of our Common Shares
had addresses in the U.S.  These holders owned  3,944,787 Common
Shares, or approximately  65% of our total issued and outstanding Common
Shares.

DIVIDEND POLICY

We have never
declared or paid any cash dividends on our Common Shares.  We currently
intend to retain any future earnings to fund the development and growth of our
business and we do not anticipate paying any cash dividends in the foreseeable
future.

35



SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

The following table sets forth certain information relating to our option plans as of December 31, 2005:

|Plan Category                                               |  | Name of   Plan           |  | Number of   Common Shares to be Issued upon Exercise of Outstanding Options |           | Weighted-Average   Exercise Price of Outstanding Options |   | Number of   Securities Remaining for Future Issuance under Plan |     
|----------------------------------------------------------- |  | ------------------------ |  | --------------------------------------------------------------------------- | --------- | -------------------------------------------------------- | - | --------------------------------------------------------------- | ----
|                                                            |  |                          |  |                                                                             |           |                                                          |   |                                                                 |     
|Option Plans approved by the Corporations Shareholders     |  | Pre-IPO Canadian   Plan  |  |                                                                             | 8,323     |                                                          | $ | 31.83                                                           |     
|                                                            |  | Pre-IPO U.S.   Plan      |  |                                                                             | 226       |                                                          | $ | 100.00                                                          |     
|                                                            |  | 2000 Stock   Option Plan |  |                                                                             | 880,789   | (2)                                                      | $ | 8.94                                                            |     
|                                                            |  | 2005 Plan(3)             |  |                                                                             | 523,213   |                                                          | $ | 5.70                                                            |     
|Subtotal                                                    |  |                          |  |                                                                             | 1,412,551 |                                                          | $ | 7.87                                                            |     
|Option Plans not approved by the Corporations Shareholders |  | TANTAU Plan(4)           |  |                                                                             | 21,897    |                                                          | $ | 21.66                                                           |     
|Totals                                                      |  |                          |  |                                                                             |           | 1,434,448                                                |   | $                                                               | 8.10

|   
|---
|(1)
|   
|(2)
|   
|(3)
|   
|(4)

36



MATERIAL UNITED STATES FEDERAL AND CANADIAN INCOME TAX CONSEQUENCES

GENERAL

The following discussion of material U.S. federal income tax consequences and Canadian federal income tax consequences of ownership of 724 Solutions common shares is included for general information purposes only and does not purport to be a complete description of all potential tax consequences.  The discussion does not address any potential tax effects to non-U.S. Holders (as defined below) nor does the discussion address all potential tax effects that may be relevant to U.S. Holders subject to special U.S. federal income or Canadian tax treatment, including:

| |  | persons who   own (actually or constructively) 5% or more of either the total voting power or   total value of all capital stock of 724 Solutions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                   
| |  | persons   subject to the alternative minimum tax;                                                                                                 
| |   |                                                                                                                                                   
| |  | persons who   are or have been residents of Canada or engaged in a trade or business in   Canada through a permanent establishment;               
| |   |                                                                                                                                                   
| |  | persons who   hold their shares as part of a hedge, straddle or conversion transaction;                                                           
| |   |                                                                                                                                                   
| |  | persons   whose functional currency is not the U.S. dollar;                                                                                       
| |   |                                                                                                                                                   
| |  | insurance   companies;                                                                                                                            
| |   |                                                                                                                                                   
| |  | financial   institutions;                                                                                                                         
| |   |                                                                                                                                                   
| |  | dealers in   securities;                                                                                                                          
| |   |                                                                                                                                                   
| |  | traders that   mark to market;                                                                                                                    
| |   |                                                                                                                                                   
| |  | tax-exempt   organizations; and                                                                                                                   
| |   |                                                                                                                                                   
| |  | retirement   plans.                                                                                                                               

The following discussion does not address the effect of applicable state, provincial, local or foreign (other than Canadian) tax laws.

U.S. Holder means a holder of shares of 724 Solutions who is (i) a citizen or resident of the U.S., (ii) a corporation or other entity taxable as a corporation created in or organized under the laws of the U.S. or any political subdivision of the U.S., (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) in general, a trust if a U.S. court can exercise primary supervision over the administration of that trust, and one or more U.S. persons have the authority to control all of the substantial decisions of that trust.  A non-U.S. Holder means a holder of shares who is not a U.S. Holder.

37



MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

This summary of material U.S. federal income tax consequences is based on the Internal Revenue Code, Treasury regulations, administrative rulings and practice and judicial precedent, each as in effect at the date of this annual report, all of which are subject to change.  Any such change, which may or may not be retroactive, could alter the tax consequences discussed herein.  No rulings have been or are expected to be sought from the IRS concerning the tax consequences of holding common shares of 724 Solutions, and this tax discussion as to the material U.S. federal income tax consequences will not be binding on the IRS or any court.  This discussion relies on assumptions, including assumptions regarding the absence of changes in existing facts.

TAXATION OF DIVIDENDS

Subject to the discussion below under Passive Foreign Investment Company Considerations, for U.S. federal income tax purposes, the U.S. dollar value of any distribution made out of 724 Solutions current or accumulated earnings and profits as determined for federal tax income purposes will be included in gross income by a U.S. Holder and will be treated as foreign source dividend income (except that if more than 50% of 724 Solutions stock is owned by U.S. persons, a portion of any dividends may be treated as U.S. source for purposes of calculating such Holders U.S. foreign tax credit).  The U.S. dollar value of any distribution received in Canadian dollars will be based on the spot exchange rate for the date of receipt.

If dividends paid by 724 Solutions were to exceed 724 Solutions current and accumulated earnings and profits as determined for U.S. federal income tax purposes, any excess would be treated as a non-taxable return of capital to the extent of the U.S. Holders adjusted basis in the common shares of 724 Solutions, and thereafter as a capital gain.

Under recently-enacted U.S. federal income tax legislation, a non-corporate U.S. holders qualified dividend income currently is subject to tax at reduced rates not exceeding 15%. For this purpose, qualified dividend income generally includes dividends paid by a foreign corporation if either (a) the stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or (b) that corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury.  The IRS has determined that the Canada-U.S. Tax Convention is satisfactory for this purpose.  Dividends paid by a foreign corporation will not qualify for the reduced rates, however, if such corporation is treated,
for the tax year in which the dividend is paid or the preceding tax year, as a passive foreign investment company for U.S. federal income tax purposes.  See the discussion under Passive Foreign Investment Company Considerations below.

A U.S. Holder will be required to include in income the Canadian withholding tax paid with respect to dividends and may claim a foreign tax credit or a deduction with respect to such tax, subject to applicable limitations.

38



TAXATION OF GAINS

Upon the sale or disposition of a common share of 724 Solutions, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your adjusted tax basis in the share.  Subject to the discussion below under the heading Passive Foreign Investment Company Considerations, such gain or loss will generally be treated as U.S. source capital gain or loss.  If you are an individual, any such capital gain will generally be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met.

PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS

The rules governing passive foreign investment companies can have significant tax effects on U.S. Holders.  If we are a passive foreign investment company, or PFIC, for any taxable year in which a U. S. Holder owns any of our common shares, the U.S. federal income tax consequences of owning and disposing of common shares may differ from those described above.  Our treatment as a PFIC could result in a reduction in the after-tax return to the U.S. Holders of our common shares.

For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value (or in some cases, adjusted tax basis) of all of our assets for the taxable year produce or are held for the production of passive income.  For this purpose, passive income generally includes interest, dividends, some types of rents and royalties, annuities and the excess of gains over losses from the disposition of assets that produce these types of income.

Common shares
held by a U.S. Holder generally are treated as shares in a PFIC if, at any time
during the holding period of the U.S. Holder with respect to such shares, we
were a PFIC.  There is a risk that we were a PFIC for the year 2005 or
prior years. To determine whether we were a PFIC, our revenue and expenses and
the value of our assets would need to be examined each year. The tests are
complex and require, among other things, that we determine how much of our
income each year will be passive income. In addition, we are required to
determine each year whether the value of our assets that produce passive income
or are held to produce passive income will constitute at least 50% of our total
assets. The manner in which the tests apply to our business is not certain. In
certain years prior to 2005, as a result of the size of our cash position, based
on the published position of the IRS that for this purpose, cash is considered
to be an asset that produces passive income, even if the cash is held as working
capital, we would have been considered a PFIC. The published position of the IRS
that cash held as working capital is a passive asset has not been promulgated in
regulations, and no other official guidance has been issued on the
question.   Therefore, although the risk that we were a PFIC is
substantial, it is unclear that we were a PFIC for such prior years, and
shareholders should consult their own advisors regarding our PFIC status for
2005 and prior years. Even if it were determined that we were not a PFIC for
2005 or prior years, no assurances can be given that we will not be a PFIC in
future years.

39



If we are a PFIC for U.S. federal income tax purposes for any taxable year in which a U.S. Holder owns common shares, such U.S. Holder would be subject to certain U.S. tax consequences, including special rules applicable to certain excess distributions, as defined in Section 1291 of the Code, and gain on the sale of common shares. In general, the U.S. Holder must allocate the excess distribution or gain ratably to each day in such holders holding period for the common shares.  The portion of the excess distribution or gain allocated to the current taxable year and any taxable year in the holding period before we were a PFIC would be taxed as ordinary income for the current year.  The portion of the excess distribution or gain allocated to each of the other taxable years would be subject to tax at the maximum ordinary income rate in effect for such taxable year and an interest
charge would be imposed on the resulting tax liability determined as if that liability had been due with respect to that prior year.

The tax consequences referred to above will not apply if the U.S. Holder makes a timely election to treat us as a qualified electing fund, or QEF, for the first taxable year in which the U.S. Holder owns common shares and in which we are a PFIC, and certain other requirements are satisfied.  A shareholder making the QEF election is required for each taxable year to include in income a pro rata share of the ordinary income and net capital gain of the QEF, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge.  The inclusion in income is required regardless of whether or not we actually distribute any dividends, and a U.S. Holder could therefore have a tax liability for our earnings or gain without a corresponding receipt of cash.  To make a QEF election, U.S. Holders will need to have an annual information statement from us setting
forth, among other things, our earnings and capital gains for the year.  Because of the substantial risk that we have been a PFIC, we will supply the PFIC annual information statement to any U.S. Holder who requests it, provided we are able to do so.  Further information can be requested from Investor Relations, (805) 884-8308 extension 4, or through our website at www.724.com/contactus/ir.asp.

The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS.  In general, a U.S. Holder must make a QEF election on or before the due date for filing its income tax return for the first year to which the QEF election will apply.  In certain circumstances, however, U.S. Holders may make a retroactive election to be treated as a QEF.  This retroactive election in some cases requires the filing of a protective statement with the holders income tax return for the first year to which the QEF election would apply.  In addition, QEF elections may in certain circumstances be made for years after the first year in which we are a PFIC, but adverse consequences may result from elections filed for such years.  U.S. Holders should consult with their own tax advisors concerning the advisability, requirements, procedures and timing for
making a QEF election or a retroactive QEF election.

As an alternative to making the QEF election the U.S. Holder of PFIC stock which is publicly traded may in certain circumstances avoid the tax consequences generally applicable to holders of a PFIC by electing to mark the stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the U.S. Holders adjusted tax basis in the PFIC stock.  Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years.  This election is available for so long as our common shares constitute marketable stock.  The term marketable stock includes stock of a PFIC that is regularly traded on a qualified exchange or other market. Generally,
a qualified exchange or other market means (i) a national securities exchange which is registered with the U.S. Securities and Exchange Commission or the national market system established pursuant to Section 11A of the Securities Exchange Act of 1934 or (ii) a foreign securities exchange that meets certain requirements.  A class of stock that is traded on one or more qualified exchanges or other markets is regularly traded on such exchanges or markets for any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.  We believe that the Nasdaq Capital Market will constitute a qualified exchange or other market for this purpose.  However, no assurances can be provided that our common shares will continue to trade on the Nasdaq Capital Market, that the Toronto Stock Exchange will be deemed to be a qualified exchange or other market for this purpose, or that the shares will be
regularly traded for this purpose.  As set forth above, Nasdaq staff is reviewing our eligibility for continued listing on the Nasdaq Capital Market, and in the event that we cannot submit a plan to regain and remain in compliance which is acceptable to Nasdaq staff, we may be delisted from the Nasdaq, which would remove the ability of U.S. Holders to treat our shares as regularly traded on the Nasdaq Capital Market.  See Risks Relating to the Ownership and Trading of our Common Shares.

Any U.S. Holder who owns, directly or indirectly, any stock in a PFIC must file an annual return with the IRS.  All U.S. Holders are advised to consult their own tax advisers about the PFIC rules generally and about the advisability, requirements, procedures and timing of their making any of the available tax elections, including the QEF or mark-to-market elections, or elections that may apply if a corporation ceases to be a PFIC.

40



U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING

A holder of 724 Solutions common shares may, under certain circumstances, be subject to certain information reporting requirements and backup withholding tax with respect to dividends paid on the 724 Solutions common shares, or the proceeds of sale of the 724 Solutions common shares, unless such holder (i) is a corporation or comes within certain other exempt categories, and when required, demonstrates this fact or (ii) provides a correct taxpayer identification number (T.I.N.), certifies that such holder is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules.  A holder of 724 Solutions common shares who does not provide a correct T.I.N. may be subject to penalties imposed by the U.S. Internal Revenue Service.  Any amount withheld under backup withholding rules generally will be creditable against the holders
U.S. federal income tax liability and a holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for a refund with the IRS. The backup withholding tax rate is currently 28%, and is scheduled to increase to 31% after 2010.

THIS TAX DISCUSSION DOES NOT PURPORT TO CONTAIN A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX CONSIDERATIONS RELEVANT TO THE OWNERSHIP OF 724 SOLUTIONS COMMON SHARES.  THUS, 724 SOLUTIONS SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OWNERSHIP OF 724 SOLUTIONS COMMON SHARES, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.  STOCKHOLDERS THAT ARE NOT U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THE CONSEQUENCES OF INVESTING IN 724 SOLUTIONS COMMON SHARES.

41



MATERIAL CANADIAN INCOME TAX CONSEQUENCES

The following
discussion summarizes the principal Canadian federal income tax considerations
generally applicable to a person, referred to as an Investor, who
holds common shares of 724 Solutions, and who at all material times for the
purposes of the Income Tax Act (Canada) (the Act), deals at
arms length with us, is not affiliated with us, holds common shares as
capital property, is a non-resident of Canada, and does not, and is not deemed
to, use or hold any common share in, or in the course of, carrying on business
in Canada.

This summary is based on the current provisions of the Act, including the regulations under the Act, and the Canada-United States Income Tax Convention (1980), referred to as the Treaty, as amended. This summary takes into account all specific proposals to amend the Act and the regulations under the Act publicly announced by the government of Canada prior to the date of this report, and our understanding of the current published administrative and assessing practices of the Canada Revenue Agency. It is assumed that all of those amendments will be enacted substantially as currently proposed, although no assurances can be given in this respect. Except to the extent otherwise expressly set out in this summary, this summary does not take into account any provincial, territorial, or foreign income tax law.  Special rules, which are not discussed in this summary, may apply to a non-resident
holder that is an insurer carrying on business in Canada and elsewhere, or a financial institution as defined by section 142.2 of the Act.  If you are in any doubt as to your tax position, you should consult with your tax advisor.

TAXATION OF DIVIDENDS

Any dividend
on a common share paid or credited, or deemed under the Act to be paid or
credited, by us to an Investor, will generally be subject to Canadian
withholding tax at the rate of 25% on the gross amount of the dividend, or such
lesser rates as may be available under an applicable income tax treaty.  We
will be required to withhold any such tax from the dividend, and remit the tax
directly to the Canada Revenue Agency for the account of the Investor. 
Pursuant to the Treaty, the rate of withholding tax applicable to a dividend
paid on a common share to an Investor who is a resident of the United States for
the purposes of the Treaty will be reduced to 5% if the beneficial owner of the
dividend is a company that owns at least 10% of our voting stock, and in any
other case will be reduced to 15%.  Under the Treaty, dividends paid or
credited to an Investor that is a United States tax exempt organization as
described in Article XXI of the Treaty will not be subject to Canadian
withholding tax.  It is the position of the Canada Revenue Agency that
United States limited liability companies generally do not qualify as residents
of the United States under the Treaty and therefore Treaty reductions are not
available to those Investors.

TAXATION OF GAIN ON DISPOSITION

An Investor generally will not be subject to tax pursuant to the Act on any capital gain realized by the Investor on a disposition of a common share unless the common share constitutes taxable Canadian property to the Investor for purposes of the Act and the Investor is not eligible for relief pursuant to an applicable bilateral tax treaty. A common share that is disposed of by an Investor will not constitute taxable Canadian property of the Investor provided that the common share is listed on a stock exchange that is prescribed for the purposes of the Act (the TSX and NASDAQ are so prescribed), and that neither the Investor, nor one or more persons with whom the Investor did not deal at arms length, alone or together, at any time in the five years immediately preceding the disposition, owned 25% or more of the issued shares of any class or series of our capital stock. Even if a common
share is taxable Canadian property to an

42



Investor, the Treaty will generally exempt
an Investor who is a resident of the United States for the purposes of the
Treaty, and who would otherwise be liable to pay Canadian income tax in respect
of any capital gain realized by the Investor on the disposition of a common
share, from that liability, provided that the value of the common share is not
derived principally from real property situated in Canada.  We are of the
view that the value of the 724 Solutions common shares is not currently derived
principally from real property situated in Canada.  The Treaty may not be
available to a non-resident investor that is a U.S. limited liability company,
which is not subject to tax in the United States.

THE FOREGOING SUMMARY OF MATERIAL U.S. AND CANADIAN TAX CONSEQUENCES IS BASED ON THE CONVENTION BETWEEN CANADA AND THE UNITED STATES OF AMERICA WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS, U.S. LAW, CANADIAN LAW, AND REGULATIONS, ADMINISTRATIVE RULINGS AND PRACTICES OF THE U.S. AND CANADA, ALL AS THEY EXIST AS OF THE DATE OF THIS REPORT.  THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS THAT MAY BE RELEVANT TO ANY PARTICULAR INVESTORS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.  INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES AND WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF OWNERSHIP OF 724 SOLUTIONS COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, PROVINCIAL, LOCAL AND FOREIGN TAX LAWS, ESTATE TAX LAWS AND PROPOSED CHANGES IN APPLICABLE LAWS.

RECENT SALES OF UNREGISTERED SECURITIES

None.

|ITEM 6. | SELECTED FINANCIAL DATA.
|------- | ------------------------

The selected
consolidated statement of operations data for the years ended December 31, 2005,
2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004 have
been derived from our audited financial statements, which are included elsewhere
in this Report.  The selected statement of operations data for the years
ended December 31, 2002 and 2001 and the balance sheet data as of December 31,
2003, 2002 and 2001 have been derived from other audited financial statements
not included in this report.  Our results of operations beginning in the
year 2001 reflect our January 2001 acquisition of Tantau.  These operating
results are not necessarily indicative of results for any future period. Our
historical financial results should not be relied upon as a predictor of our
future performance.  The selected consolidated financial data should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto and other financial information beginning on page F-1 in this report, as
well as the information set forth under Item 7 - Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

43



|                                                                                                        |  | 2005 |        | 2004 |   | 2003   |   | 2002 |         | 2001 |  
|------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | ---- | ------- | ---- | -
|                                                                                                        |  |      |        |      |   |        |   |      |         |      |  
|Revenue:                                                                                                |  |      |        |      |   |        |   |      |         |      |  
|Product                                                                                                 |  | $    | 7,445  |      | $ | 8,844  |   | $    | 6,964   |      | $
|Services                                                                                                |  |      | 10,820 |      |   | 6,228  |   |      | 5,891   |      |  
|                                                                                                        |  |      |        |      |   |        |   |      |         |      |  
|Total   revenue                                                                                         |  |      | 18,265 |      |   | 15,072 |   |      | 12,855  |      |  
|Operating   expenses:                                                                                   |  |      |        |      |   |        |   |      |         |      |  
|Cost of product revenue                                                                                 |  |      |        |      |   |        |   |      |         |      |  
|Amortization of intangible assets                                                                       |  |      |       |      |   |       |   |      | 3,468   |      |  
|Write-down of inventory                                                                                 |  |      |       |      |   |       |   |      |        |      |  
|Other                                                                                                   |  |      | 28     |      |   | 26     |   |      |        |      |  
|Cost of services revenue                                                                                |  |      | 7,430  |      |   | 6,614  |   |      | 6,031   |      |  
|Research and development                                                                                |  |      | 6,982  |      |   | 6,271  |   |      | 9,433   |      |  
|Sales and marketing                                                                                     |  |      | 4,036  |      |   | 4,985  |   |      | 6,968   |      |  
|General and administrative                                                                              |  |      | 3,362  |      |   | 3,074  |   |      | 4,086   |      |  
|Depreciation                                                                                            |  |      | 597    |      |   | 595    |   |      | 908     |      |  
|Stock-based compensation:                                                                               |  |      |        |      |   |        |   |      |         |      |  
|Cost of services revenue                                                                                |  |      | 53     |      |   | 15     |   |      | 14      |      |  
|Research and development                                                                                |  |      | 122    |      |   | 40     |   |      | 1,227   |      |  
|Sales and marketing                                                                                     |  |      | 136    |      |   | 34     |   |      | 296     |      |  
|General and administrative                                                                              |  |      | 720    |      |   | 63     |   |      | 141     |      |  
|Restructuring charges                                                                                   |  |      |       |      |   | 993    |   |      | 50      |      |  
|Write-down of fixed assets, goodwill,   intangible and other assets                                     |  |      |       |      |   |       |   |      | 9,097   |      |  
|                                                                                                        |  |      |        |      |   |        |   |      |         |      |  
|Total operating expenses                                                                                |  |      | 23,466 |      |   | 22,710 |   |      | 41,719  |      |  
|                                                                                                        |  |      |        |      |   |        |   |      |         |      |  
|Loss   from operations                                                                                  |  |      | (5,201 | )    |   | (7,638 | ) |      | (28,864 | )    |  
|Interest   income (expense), net                                                                        |  |      | (709   | )    |   | (396   | ) |      | 254     |      |  
|Loss   on settlement of liability                                                                       |  |      | (165   | )    |   |       |   |      |        |      |  
|Equity   in loss of affiliate                                                                           |  |      |       |      |   |       |   |      |        |      |  
|Gain   (loss) on sale of investments                                                                    |  |      |       |      |   |       |   |      | 283     |      |  
|Write-down   of investments                                                                             |  |      |       |      |   |       |   |      |        |      |  
|                                                                                                        |  |      |        |      |   |        |   |      |         |      |  
|Loss   for the period                                                                                   |  | $    | (6,075 | )    | $ | (8,034 | ) | $    | (28,327 | )    | $
|                                                                                                        |  |      |        |      |   |        |   |      |         |      |  
|Basic   and diluted loss per share                                                                      |  | $    | (1.01  | )    | $ | (1.34  | ) | $    | (4.73   | )    | $
|Weighted-average   number of shares used in computing basic and diluted loss per share (in   thousands) |  |      | 6,034  |      |   | 5,984  |   |      | 5,983   |      |  
|Cash   and cash equivalents                                                                             |  | $    | 5,272  |      | $ | 5,417  |   | $    | 13,436  |      | $
|Short-term   investments and restricted cash                                                            |  |      | 4,228  |      |   | 8,215  |   |      | 1,946   |      |  
|Working   Capital                                                                                       |  |      | 10,116 |      |   | 14,056 |   |      | 14,104  |      |  
|Fixed   assets, deferred charges, goodwill, intangible and   other assets                               |  |      | 1,003  |      |   | 1,421  |   |      | 612     |      |  
|Total   assets                                                                                          |  |      | 13,496 |      |   | 18,467 |   |      | 18,939  |      |  
|Long-term   liabilities                                                                                 |  |      |       |      |   | 92     |   |      |        |      |  
|Notes   payable to related parties                                                                      |  |      | 7,969  |      |   | 7,947  |   |      |        |      |  
|Notes   payable, net of current portion                                                                 |  |      |       |      |   |       |   |      |        |      |  
|Leasehold   inducements                                                                                 |  |      |       |      |   |       |   |      |        |      |  
|Deferred   consideration, net of current portion                                                        |  |      |       |      |   |       |   |      |        |      |  
|Long-term   interest payable to related parties                                                         |  |      | 768    |      |   | 343    |   |      |        |      |  
|Total   shareholders' equity                                                                            |  |      | 2,382  |      |   | 7,095  |   |      | 14,716  |      |  

The historic common share numbers have been adjusted to reflect the 10 for 1
share consolidation completed in the second quarter of 2003 Certain comparative
figures for prior years have been reclassified to conform to the financial
statement presentation adopted in the current year.

44



|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND   RESULTS OF OPERATIONS

The following discussion and analysis should be read together with our audited consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 and accompanying notes set forth elsewhere in this report. All financial information is presented in U.S. dollars.

Some of the statements set forth in this section are forward-looking statements relating to our future results of operations.  Our actual results may vary from the results anticipated by these statements.  Please see Information Regarding Forward-Looking Statements.

OVERVIEW

724 Solutions designs, develops, markets and supports software products for use by mobile network operators worldwide. Mobile network operators are telecommunications companies that provide a range of mobile voice and data communications services to their consumer and business customers.  Examples of large mobile network operators include Verizon Wireless, Cingular Wireless, Sprint Nextel, Vodafone and China Mobile, some of which currently license our products.

We offer software products that enable Internet connectivity to mobile devices such as mobile phones and handheld computing devices.  We also offer software that helps to deliver text messaging, multimedia messaging, voice services and transactions to mobile network operators end user customers using mobile phones and handheld computing devices.

We were incorporated in 1997 and we introduced our initial products in 1999. At that time, we focused on creating software products that assisted financial services companies in making their traditional services available to their customers through mobile phones and handheld computing devices.  In January 2001, we acquired Tantau Software with a view to expanding our customer base, utilizing Tantaus software products to strengthen our products offered to financial services customers, and to expand our sales to mobile network operators.  In 2001, we began offering our mobile alerting software products and our mobile Internet gateway product (software that enables Internet connectivity to mobile devices) to mobile network operators. In October 2002, our products and solutions for mobile network operators and other customers were re-branded as the X-treme Mobility Suite of products
 (XMS).

In 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably.  At the same time, we judged that the market for mobile data services in the mobile network operator sector was potentially larger and likely to develop sooner. As a consequence, we began to restructure our business to focus on opportunities in the mobile network operator marketplace.  During 2004, we completed this process and are now focused on selling our software products to mobile network operators. We no longer offer products developed specifically for financial institutions, although we continue to provide services to a small number of financial services customers and continue to support earlier sales to these customers.

45



We continue to develop and expand our X-treme Mobility Suite of products for mobile network operators to assist them in growing their next-generation data services.  In addition, we may in the future acquire products and/or companies that have developed software that aligns with our X-treme Mobility Suite of products.

SUBSEQUENT EVENTS

PROPOSAL FROM AUSTIN VENTURES

On February
28, 2006 we received a proposal from Austin Ventures to acquire all of our
outstanding common shares not owned by Austin Ventures for cash consideration of
$3.07 per common share.

Austin
Ventures proposed that the transaction be effected by way of a court-approved
plan of arrangement.  In addition to court approval, the transaction would
require the approval of our shareholders, including by way of a majority of the
votes cast by holders other than Austin Ventures and related parties. 
Options to purchase our common shares would also be acquired as part of the
acquisition.

Our Board of
Directors had previously formed a Special Committee composed entirely of
directors who are independent of management and independent of Austin Ventures
to consider potential value enhancing strategic transactions for our
shareholders.  This Special Committee, in consultation with our financial
and legal advisors, reviewed and considered the Austin Ventures proposal, as
well as other potential means to maximize shareholder value.  The
evaluation by the Special Committee was independent of ongoing Company
operations.

On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of our outstanding common shares not owned by Austin Ventures for cash consideration of $3.34 per common share.  We accepted the revised proposal after careful consideration and evaluation by our Special Committee of independent directors in conjunction with our financial and legal advisors.

Austin Ventures and us intend to move diligently towards negotiating a
definitive arrangement agreement and, subject to receipt of a satisfactory
fairness opinion and valuation report and completion by Austin Ventures of its
due diligence, completing a
transaction in accordance with the agreement and all applicable legal and
regulatory requirements.  This revised and accepted proposal is set to
terminate on April 6, 2006 in the event a definitive arrangement agreement is
not reached by that date.

NASDAQ NOTICE OF NON-COMPLIANCE

On March 8, 2006 we received a Nasdaq Staff Deficiency Letter indicating that we fail to comply with the Nasdaqs Marketplace Rule 4310(c)(2)(B).  Marketplace Rule 4310(c)(2)(B) requires companies listed on the Nasdaq Capital Market to have a minimum of $2,500,000 in stockholders equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.

46



We submitted a response to Nasdaq and Nasdaq staff is reviewing our eligibility
for continued listing on the Nasdaq Capital Market.  If Nasdaq is not
satisfied with our proposal, they will issue a delisting notice which can be
appealed. In the event such an appeal was not successful, our shares would be
delisted from Nasdaq.

DEVELOPMENTS IN 2005

2005 STOCK OPTION PLAN

On April 28, 2005, we held our annual and special meeting of shareholders (the
Meeting).  At the Meeting, our shareholders approved our 2005
Stock Incentive Plan (the 2005 Plan) adopted by our Board of
Directors. A total of 775,000 common shares are initially reserved for issuance
under the 2005 Plan.

Our shareholders also approved the December 2004 grant of 427,000 options to
certain of our executives, officers and directors. Subject to certain
conditions, the options vest over four years from the December 2004 grant date.
The total fair value at April 28, 2005 was calculated to be $2.8 million using
the Black-Scholes option pricing model. The fair value related to those options
that remain outstanding is being expensed as stock-based compensation over the
remaining vesting period. We expensed approximately $687,000 related to this
grant in 2005. Please see note 9 to our consolidated financial statements
for the year ended December 31, 2005.

TERMINATION OF SUB-CONTRACT BETWEEN 724 SOLUTIONS and HEWLETT-PACKARD

On October 31, 2005, our subcontract agreement with Hewlett-Packard terminated.
We recognized approximately $5.9 million in revenue in the twelve months ended
December 31, 2005 related to this subcontract. Our contract with Sprint for our
X-treme Service Activity Manager product is unaffected by this
termination.

47



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We periodically review our financial reporting and disclosure practices and
accounting policies to ensure that they provide accurate and transparent
information relative to the current economic and business environment. As part
of this process, we have reviewed our selection, application and communication
of critical accounting policies and financial disclosures. We have determined
that our critical accounting policies relating to our core ongoing business
activities are primarily those that relate to (i) revenue recognition, (ii)
allowance for doubtful accounts, (iii) income taxes, (iv) litigation, (v)
valuation of intangible assets, (vi) valuation of fixed assets, and (vii)
restructuring provisions.

SOURCES OF REVENUE

We derive revenue from licensing our products and providing related services,
including installation, integration, maintenance and support. We recognize
revenue from our license agreements when all the following conditions are
met:

| |  | We have an executed license agreement with the customer;                          
| | - | ----------------------------------------------------------------------------------
| |  | We have delivered the software product to the customer;                           
| |  | The amount of the fees to be paid by the customer is fixed and   determinable; and
| |  | Collection of these fees is deemed probable.                                      

Software license agreements can be multiple element arrangements that include
related maintenance and implementation fees. Accordingly, the fee is allocated
to each element in the arrangement based on the respective vendor specific
objective evidence of fair value (VSOE) of each element in
accordance with Statement of Position (SOP) 97-2. For these multiple
element contracts falling under SOP 97-2 for which we do not have sufficient
VSOE, we use the residual method to record revenues. Under this method, if we
have VSOE for all undelivered elements (typically, services and maintenance) we
record the remaining value of the contract as license revenue after allocating
full value to the undelivered elements.

In some software license agreements, some of our products cannot be considered
off-the-shelf and the contracted deliverables and professional
services may be essential to the functionality of the software. In these
circumstances, we recognize revenue as the deliverables and services are
performed and revenue is earned in accordance with the percentage of completion
method of accounting.

For license and services agreements that provide significant commitments to
refunds and/or penalties on the services and/or license components should the
system not perform according to documented specifications, we defer recognition
of revenue for the amount subject to refund or penalty until we achieve
contractually defined milestones or until customer acceptance has occurred, as
the case may be for those agreements.

We typically license our software on a per user or capacity basis. 
Accordingly, our revenue is dependent on whether, and the extent to which our
customers continue to use our software.

48



PRODUCT REVENUE

Product revenue consists of the following:

| |  | Variable License Fee Arrangement  a variable license fee based on   the numbers of users or the total capacity in a period. Revenue is recognized   on an ongoing basis when determinable and will vary with the number or the   total capacity of our customers end users.    In some of our agreements, there may be a cap on the total license fees paid by our customer for a   particular product.                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Reseller/OEM Arrangement  the reseller or OEM typically pays a   non-refundable licensing fee for our software and/or a royalty fee based on   the related number of users or based on a given capacity. We recognize   revenue associated with non-refundable license fees when we have met our   revenue recognition criteria for license agreements as outlined above. We   recognize royalty fee revenue when the amount is determinable and all of our   other revenue recognition criteria for license revenue are met.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Fixed License Fee Arrangement  a license fee for a fixed number of   copies or unlimited use of the software for a period of time ranging from 3   months to perpetuity. If the license is not a perpetual license, we recognize   the revenue ratably over the term of the license. If the license is a   perpetual license, we recognize the revenue when the general conditions   outlined above under Sources of Revenue are met.                                                                                      

SERVICE REVENUE

IMPLEMENTATION AND CUSTOMER SERVICE FEES

Revenue from implementation and customer service fees includes fees for
implementation of our product offerings (which may include hardware and third
party software operating on the hardware), consulting and training services.
Customers are charged a fee based on time and expenses and a fee for the
hardware and third party software they choose to buy from us. Revenue is
recognized as the implementation is performed or as the hardware is delivered
and accepted or deferred until we achieve contractually defined milestones or
until customer acceptance has occurred, as the case may be, for those contracts.

MAINTENANCE FEES

We receive revenue from maintaining and servicing our products for customers.
The maintenance fee is typically equal to a specified percentage of the
customers cumulative license fees, and may include a minimum quarterly
amount. If associated with the fixed fee license model, the maintenance revenues
received will be recorded as deferred revenue and recognized on a straight-line
basis over the contract period. When associated with the variable fee license
model, any maintenance payments will be recognized on a monthly basis as earned.

49



MANAGED ALERTS SERVICE FEES

We receive revenue from providing services to our customers using our managed
X-treme Alerts Platform (XAP).  These can include revenue from
voice alerts, Short Message Service (SMS) alerts, Multimedia Message (MMS)
alerts, fraud alerts, and collection alerts.  Our XAP software is hosted in
New Jersey with Computer Sciences Corporation and the voice hardware is hosted
in Florida with InterVoice. Customers typically pay a per alert fee, subject to
monthly minimums.  The fees are recognized on a monthly basis as earned.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Our general
credit terms are 30 to 60 days from the invoice date.  We perform an
ongoing credit evaluation of each customers financial condition and if the
financial condition of a customer deteriorates, resulting in an impairment of
its ability to make payment, an additional allowance would be required. At
December 31, 2005, our allowance for doubtful accounts totals $19,000.  Our
maximum exposure to loss on receivables at any point in time is the total
accounts receivable, which was $2.5 million at December 31, 2005.  Due to
the significant number of estimates utilized in determining an expected rate of
uncollectible receivables, actual results of collections could be materially
different from these estimates.

INCOME TAXES

We record a valuation allowance against deferred income tax assets when we
believe it is not more likely than not that some portion or all of the deferred
income tax assets will be realized. We consider factors such as the reversal of
deferred income tax liabilities, projected taxable income, the character of the
income tax asset and the potential for realization due to tax planning
strategies. At December 31, 2005, while we have $86.6 million in available net
tax benefit of loss carry forwards and other deferred tax assets, we have
experienced losses in recent years and the extent of future income for tax
purposes before utilization of these benefits is uncertain.  Accordingly,
the entire balance of deferred tax assets has been reduced by a valuation
allowance.  Due to the significant number of estimates and projections
utilized in determining an appropriate valuation for our deferred income tax
assets, the actual valuation allowance against the tax assets could be
materially different from these estimates.

LITIGATION

We are a party from time to time to legal proceedings, such as the securities
litigation relating to our initial public offering. In these cases, we assess
the likelihood that a loss will result, as well as the amount of that loss, and
the financial statements provide for the best estimate of the losses. In making
our assessment of the existence of a loss, we consider advice from legal
counsel, the nature of the claim and other settlements, if any, that are
occurring from similar claims.  To the extent that any of these legal
proceedings are resolved and require us to pay an amount in excess of what has
been provided for in the financial statements, we would be required to record,
against earnings, the excess at that time. If the resolution resulted in a gain,
or a loss less than that provided for, the gain is recognized when received or
receivable.

50



VALUATION OF INTANGIBLE ASSETS

We have acquired several other businesses. As part of the completion of any
business combination, we are required to value any intangible assets acquired at
the date of acquisition. We utilize the most current internally-generated and
publicly available information to develop an estimate of future undiscounted
cash flows including, among other things, estimated lives, residual values and
terminal values, and believe the estimates to be reasonable at the date
prepared.  This valuation is inherently subjective, and necessarily
involves judgments and estimates regarding future cash flows and other
operational variables of the intangible assets acquired. There can be no
assurance that the judgments and estimates made at the date of acquisition will
reflect future performance of the acquired intangible assets. To assist us with
the valuation process, we have adopted the practice of using independent
valuation experts in the valuation process for intangible assets acquired
through material acquisitions. However, it is possible that either we or the
independent valuation experts will make judgments or estimates that differ from
actual circumstances.  In these cases, we may be required to record a
provision or write-off certain of our intangible assets. Similarly, in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are
required to annually test the value of our goodwill. Changes in estimates could
result in different conclusions for the underlying value of goodwill. We perform
our annual impairment testing on goodwill at December 31 of each fiscal year,
provided that circumstances do not arise during the year that would necessitate
an earlier evaluation.  As at December 31, 2005, the carrying value of our goodwill
and intangible assets has been written down to nil.

VALUATION OF FIXED ASSETS

We monitor the appropriateness of the carrying values of our fixed assets,
primarily office furniture and computer software and equipment, on an ongoing
basis, in accordance with applicable accounting requirements. As required, if an
indicator of potential impairment is evident, we will review the projected
undiscounted future cash flows associated with the relevant fixed asset, to
determine if the undiscounted cash flows exceed the carrying amount of the fixed
asset. If it is determined that the net carrying amount of the fixed asset is
not recoverable, then an adjustment would be made to reduce the net carrying
amount to the fair value amount of the asset. We utilize the most current
internally-generated and publicly available information to develop our estimates
of future undiscounted cash flows including, among other things, estimated
lives, residual values and terminal values, and believe the estimates to be
reasonable. Additionally, determination of fair values of fixed assets may also
involve various methods of estimation, if comparable independent fair values are
not readily available. Accordingly, different assumptions related to cash flows
or fair values of fixed assets could materially affect our estimates.  We
have recorded charges to write-down fixed assets, primarily arising due to the
restructuring activities we have undertaken.  As at December 31, 2005, our
net book value of fixed assets was $836,000.

51



RESTRUCTURING PROVISIONS

We record restructuring provisions when specified criteria under accounting
principles are met.  While these provisions are substantially based on
contractual terms, it is necessary to make estimates of the fair values of
liabilities in some circumstances, primarily when the charge includes future
costs to be incurred on leased space which is no longer being used but for which
the lease agreement has not been terminated.  In these cases, we estimate
the fair value of future sub-lease rentals that will be realized over the term
of the agreement.  These estimates take into account expected demands and
prices available for the specific space in the areas the lease is located. 
Unless we have a fixed sub-lease for the remaining term of the lease
arrangement, the actual amount of sub-lease rental income may differ from the
estimates used in developing the provision and those changes may be
material.  Changes in estimated sub-lease income are recognized as
determinable.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Our consolidated financial statements for 2005 have been prepared in accordance
with U.S. generally accepted accounting principles.

REVENUE

PRODUCT REVENUE

Product revenue was $7.4 million in the year ended December 31, 2005, compared
to $8.8 million in 2004. Revenue from our X-treme Mobility Suite of products was
$7.1 million in the year ended December 31, 2005 compared to $8.5 million in
2004.  Our principal revenue producing deployments for XMS in both 2005 and
2004 were Hewlett-Packard (as a reseller to Sprint Nextel), Nokia and
Vodafone.  On October 31, 2005, our subcontract agreement with
Hewlett-Packard terminated. This change resulted in a decrease in product
revenue of approximately $656,000 in the fourth quarter of 2005 compared to the
prior quarter. For the year ended December 31, 2005, product revenue from
Hewlett-Packard (as a reseller to Sprint Nextel) decreased by $2.3 million
compared to 2004 as Sprint Nextel had significant adoption in 2004. Product
revenue from Nokia decreased by approximately $313,000, product revenue from
Vodafone increased by approximately $106,000 and revenue from additional license
sales to existing customers and license sales to new customers accounted for
product revenue of  $1.2 million.

The termination of the Hewlett-Packard subcontract is expected to reduce our
product revenue from Hewlett-Packard (as a reseller to Sprint Nextel) by
approximately $3.1 million in 2006 compared to 2005. Our contract with Sprint
Nextel for our X-treme Service Activity Manager product is unaffected by this
termination.

In 2005, the XMG product accounted for approximately 63% of our XMS revenue and
the Application Gateway (AGW) product accounted for approximately
24% of XMS revenue. In 2004, the XMG and AGW products accounted for
approximately 74% and 24% of the XMS revenue, respectively.  While we
provide our customers with fixed or variable pricing alternatives, in 2005, as
in 2004, essentially all of our key revenue producing contracts for the XMS
suite were on a variable pricing model.  We anticipate that the XMS
products will generate most of our product revenue in 2006.

52



During 2005 and 2004, product revenue from the financial services industry was
$308,000 and $328,000, respectively. We will continue to perform under the
contracts we currently have with our financial services customers.  We
anticipate that revenue from these customers in 2006 will remain close to 2005
levels or decline slightly. Our ability to achieve this revenue, however, is
dependent on our remaining financial services customers renewing their
contracts.

SERVICE REVENUE

Service revenue increased to $10.8 million for the year ended December 31, 2005
from $6.2 million in 2004.

In 2005, service revenue from XMS increased to $10.0 million from $5.2 million
in 2004.  Implementation and customer service fee revenue increased to $4.9
million in 2005 from $1.7 million in 2004. Implementation and customer service
fee revenue included approximately $1.0 million and $474,000 related to the
delivery of hardware in 2005 and 2004, respectively.  Of the $3.2 million
increase in implementation and customer service fee revenue, approximately $1.4
million related to increased integration and delivery of hardware to Vodafone,
approximately $238,000 related to increased professional services at Nokia,
approximately $647,000 was related to a new XMG and XAP installation at a
customer in North America, approximately $350,000 was related to a new XAP
installation at a customer in Europe, approximately $183,000 was related to a
new X-treme Service Activity Manager (XSAM) installation at customer
in Asia and most of the remaining increase was a result of increased
implementation revenue related to our XSAM and XAP products.

Managed alerts services revenue was $513,000 in 2005 compared to $455,000 in
2004. Maintenance revenue related to XMS increased to $4.5 million in 2005 from
$3.0 million in 2004.

Maintenance revenue from Nokia increased by approximately $820,000 due to
increased deployment and the fact that we had a full year of revenue from AGW in
2005, maintenance revenue from Hewlett-Packard (as a reseller to Sprint Nextel)
increased by approximately $264,000 due to an increased subscriber base using
Sprint Nextel services, maintenance revenue from Vodafone increased by
approximately $218,000 and maintenance revenue from other deployments increased
by a net of approximately $260,000.

The termination of the Hewlett-Packard reseller agreement resulted in a decrease
in service revenue of approximately $524,000 in the fourth quarter of 2005
compared to the prior quarter and is expected to reduce our services revenue
from Hewlett-Packard (as a reseller to Sprint Nextel) by approximately $2.8
million in 2006 compared to 2005.

Service revenue from the financial services industry was $852,000 in 2005, down
from $1.1 million in 2004, mainly because some financial services customers did
not renew maintenance contracts.

53



OPERATING EXPENSES

COST OF PRODUCT REVENUE

Our product revenue consists of the sale of software licenses, typically on a
per user or capacity basis.  There are no significant out-of-pocket costs
associated with manufacturing our software.   Costs that are
associated with our software are as follows:

| |  | Development   costs: 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, the completion of working models of our products has   substantially coincided with the general release of the products.  As a result, we have not capitalized any   software development costs, since those costs have not been significant.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Amortization   of intangible assets: This includes intellectual property that we have   acquired and either license as a stand alone product or embed in our software   product. The acquired software products are amortized on a straight-line   basis over a period of two to five years. All acquired software products had   been fully amortized or written down to nil by the end of September 2003 (see   note 7 to our consolidated financial statements). Therefore, the amount   amortized in 2005 was nil (2004  nil).                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Other: Some   of our products include third party embedded software.  In 2005, we recorded $28,000 of license   fees to third party vendors for the use of their software that has been   embedded in our software (2004  $26,000).                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Cost of   product revenue also includes the cost of third party inventory purchased   from third parties and sold to our customers. In 2005 as in 2004, we did not   purchase or sell any third party inventory to our customers.                                                                                                                                                                                                                                                                                                                                                               

COST OF SERVICES REVENUE

Cost of services revenue consists primarily of personnel costs associated with
customer support, training and implementations, as well as amounts paid to
third-party consulting firms for those services, together with an allocation of
expenses for our facilities and administration.  It also includes the cost
of hardware and third party software that our customers require us to
provide.

Cost of services revenue was $7.4 million for the year ended December 31, 2005,
compared to $6.6 million in 2004, an increase of 12%. Integration, product
support and managed services related revenue were all higher in the year ended
December 31, 2005 compared to 2004, leading to increased costs in these areas.
Hardware costs related to customer deployments were approximately $900,000 in
2005 compared to $400,000 in 2004. Due to improved resource utilization, cost of
services revenue increased by a lower percentage than revenue. As a result, cost
of services revenue as a percentage of total revenue was 41% for the year ended
December 31, 2005, compared to 44% in 2004.

54



We ended 2005 and 2004 with 23 and 21 professional services personnel,
respectively, and our average professional services headcount was 25 in 2005 and
16 in 2004. Professional services personnel costs increased by 30% in 2005
compared to 2004 while average headcount increased by 57%. The geographic mix of
our professional services personnel has changed from 2004 to 2005, resulting in
a lower cost per employee.

RESEARCH AND DEVELOPMENT

Research and development expenses include compensation of software development
teams working on the continuing enhancement of our products as well as our
quality assurance and testing activities. These expenses also include the cost
of retaining independent contractors and consultants, software licensing
expenses, and allocated operating expenses.

Research and development (R&D) expenses increased to $7.0 million for the
year ended December 31, 2005, compared to $6.3 million in 2004, an increase of
11%. Due to our acquisition of the AGW product in the second quarter of 2004 and
to meet customer commitments in other areas, we have added R&D personnel
since March 2004. We ended 2005 and 2004 with 56 and 49 research and development
personnel, respectively.

Costs related to R&D personnel increased by 4% in 2005 from 2004, while
average headcount increased by 20% year over year. Our R&D costs have
increased by a lower percentage than our R&D headcount because we have a
higher proportion of our development team in more cost-effective locations.

We continue to evaluate our R&D expenditure needs based on our product
architecture and services and the current market environment. We anticipate that
we will hire additional development personnel in 2006. R&D expense, as a
percentage of revenue, was 38% for the year ended December 31, 2005, compared to
42% in 2004.

SALES AND MARKETING

Sales and marketing expenses include compensation of sales and marketing
personnel, public relations and advertising, trade shows, marketing materials
and allocated operating expenses.

Sales and marketing (S&M) expenses were $4.0 million for the year ended
December 31, 2005, compared to $5.0 million in 2004.  The decrease is a
result of the reduction in the average number of sales and marketing personnel
to 17 in 2005 from 19 in 2004 and significant reductions in other sales and
marketing expenditures.  We ended 2005 and 2004 with 17 and 18 sales and
marketing personnel, respectively.  We continue to monitor our sales and
marketing expenditures to ensure that they remain aligned with our targeted
opportunities as well as prevailing market conditions. S&M expense, as a
percentage of revenue, was 22% for the year ended December 31, 2005, compared to
33% in 2004.

GENERAL AND ADMINISTRATIVE

General and administrative (G&A) expenses include salaries and benefits for
corporate personnel and other general and administrative expenses such as
facilities, travel and professional consulting costs. Our corporate staff
includes executive officers and business development, financial planning and
control, legal, human resources and corporate administration staff.

55



G&A expenses increased to $3.4 million for the year ended December 31, 2005,
compared to $3.1 million in 2004. The average number of G&A personnel was 13
in 2005 compared to 14 in 2004 and we ended 2005 with 13 general and
administrative staff, unchanged from December 31, 2004.  G&A expense,
as a percentage of revenue, was 18% for the year ended December 31, 2005,
compared to 20% in 2004.  We may need to add additional staff in this area
in the coming year to address the increased level of regulatory compliance in
todays environment.

DEPRECIATION

Depreciation expense was $597,000 in the year ended December 31, 2005, compared
to $595,000 in 2004. In 2004 and 2005, we began to reinvest in fixed assets and
anticipate that we will make further purchases of fixed assets in 2006.

STOCK-BASED COMPENSATION

Effective January 1, 2003, we prospectively adopted the fair value accounting
method for stock-based awards, as prescribed by SFAS 123, Accounting for
Stock-based Compensation.  Prior to January 1, 2003, we elected not to
apply fair value accounting to stock-based awards to employees, other than for
direct awards of stock and awards settleable in cash, which required fair value
accounting.  Prior to January 1, 2003, for awards not elected to be
accounted for under the fair value method, we accounted for stock-based
compensation in accordance with Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees (APB 25).  APB 25 is
based upon an intrinsic value method of accounting for stock-based
compensation.  Under this method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock issuance at the
measurement date over the amount to be paid by the employee.

We adopted fair value accounting for stock-based awards using the prospective
application transitional alternative available in SFAS 148, Accounting for
Stock-based Compensation - Transition and Disclosure.  Accordingly, the
fair value method is applied to all awards granted, modified or settled on or
after January 1, 2003.  Under the fair value method, compensation cost is
measured at fair value at the date of grant and is expensed over the service
period, that is the awards vesting period.  When awards are
exercised, share capital is credited by the sum of the consideration paid
together with the related portion previously credited to additional paid-in
capital when compensation costs were charged against income or acquisition
consideration.

Stock-based awards that are settled in cash or that may be settled in cash at
the option of employees are recorded as liabilities.  The measurement of
the liability and compensation cost for these awards is based on the intrinsic
value of the award, and is recorded into operating income over the service
period, that is the vesting period of the award.  Changes in our payment
obligation subsequent to vesting of the award and prior to the settlement date
are recorded as compensation cost over the service period in operating income.
Stock-based awards that are settled in cash or equity at our option are recorded
at fair value on the date of grant and recorded as additional paid-in
capital.  The fair value measurement of the compensation cost for these
awards is based on the Black-Scholes option pricing model, and is recorded in
operating income over the service period, that is the vesting period of the
award.  When awards are exercised, share capital is credited with the
related portion previously credited to additional paid-in capital.

56



Stock-based compensation increased to approximately $1.0 million for the year
ended December 31, 2005, compared to $152,000 for the year ended December 31,
2004. Stock compensation expenses in both periods related to the expensing of
the fair value of options granted since January 1, 2003.

At our April 28, 2005 annual and special meeting of shareholders (the
Meeting), our stockholders approved our 2005 Stock Incentive Plan
(the 2005 Plan) adopted by our Board of Directors. A total of
775,000 common shares are initially reserved for issuance under the 2005 Plan.
Our stockholders also approved the December 2004 grant of 427,000 options to
certain of our executives, officers and directors. Subject to certain
conditions, the options vest over four years from the December 2004 grant date.
The total fair value at April 28, 2005 was calculated to be $2.8 million using
the Black-Scholes option pricing model. The fair value related to those options
that remain outstanding will be expensed as stock-based compensation over the
remaining vesting period. Approximately $687,000 of the $1.0 million in
stock-based compensation expense in 2005 related to this grant.

RESTRUCTURING COSTS

We recorded restructuring charges of nil in 2005 compared to a net restructuring
charge of $1.0 million in the year ended December 31, 2004.

Included in our Accrued Liabilities as at December 31, 2005 is
approximately $93,000 in remaining obligations arising from a restructuring
activity undertaken in 2002. Specifically, it relates to the remaining costs
associated with an office in Europe that we have vacated. The space was sublet
but we are obligated to refurbish the space at the end of the lease. We expect
to pay out the remaining balance by the end of the first quarter of 2006.

We continue to evaluate costs on an ongoing basis to determine if costs of a
particular product or function are warranted given the anticipated revenue from
or contribution to the business of that product or function.

INTEREST EXPENSE

We had a net interest expense of $709,000 in the year ended December 31, 2005,
compared to a net interest expense of $396,000 in 2004. We issued $8.0 million in
convertible notes in the second quarter of 2004; the interest expense associated
with this debt was $989,000 in 2005 compared to $524,000 in 2004. Included in
the $989,000 was $850,000 payable to Austin Ventures, amortization of deferred
charges of $117,000 and amortization of the beneficial conversion feature of
$22,000. The increase resulted mainly from the fact that we had a full year of
interest in 2005 compared to a partial year in 2004. Interest derived from cash
and cash equivalent balances and short-term investments, representing primarily
the proceeds from the convertible debt financing completed in the second quarter
of 2004, was $280,000 in 2005 compared to $128,000 in 2004. The increase
resulted from having a higher average cash and short-term investment balance in
2005 and higher interest rates in 2005.

57



Net interest expense is expected to be approximately $900,000 in 2006,
consisting of $1.0 million in interest charges related to the convertible notes
payable to related parties offset by interest income of approximately
$130,000.

LOSS ON SETTLEMENT OF LIABILITY

In the year ended December 31, 2005, we issued 33,549 common shares with a
market value of $268,000 in settlement of interest owing of $103,000 and
recorded a loss on settlement of liability of $165,000. The payment was related
to the extinguishment of the liability related to interest due on the
convertible notes payable to related parties. We have the option of paying the
interest portion due quarterly on the Notes payable in cash or shares at a
conversion price of $3.07 (see note 8 to the consolidated financial statements
for further details). In the event we settle future interest obligations in
shares, we will record additional charges, the amount of which will depend on
the price of our shares at the time of settlement.

NET LOSS

Our net loss decreased to $6.1 million for year ended December 31, 2005 compared
to $8.0 million in 2004. Our net loss has decreased due to a number of factors.
Our revenue increased by $3.2 million and we maintained tight control over our
operating costs. The 2004 loss included the $1.0 million restructuring charge described
above. Stock-based compensation charges increased significantly in 2005 to $1.0
million from $152,000 in 2004.

DEVELOPMENTS IN 2004

ADOPTION OF U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR REPORTING PURPOSES

In 2003 and prior years, our consolidated financial statements were prepared in
accordance with Canadian generally accepted accounting principles and we have
included a reconciliation to U.S. generally accepted accounting principles.
Beginning in 2004, our consolidated financial statements have been prepared
using U.S. generally accepted accounting principles. We have determined that
this is appropriate as the majority of our shareholders reside in the United
States. Comparative financial statements have been restated to reflect this
change in basis of presentation and a reconciliation setting out the differences
between U.S. and Canadian generally accepted accounting principles as applied to
our consolidated financial statements is provided in note 20 to our annual
audited financial statements included elsewhere in this report.

CONVERTIBLE DEBT ISSUANCE TO RELATED PARTY

In the second quarter of 2004, we arranged a private placement of secured
convertible promissory notes with Austin Ventures, a related party, for a total
principal amount of $8,000,000. Austin Ventures is our largest beneficial
shareholder.

58



The first tranche of the financing involved the issuance of $3,044,000 of
convertible notes and was completed on May 14, 2004. In accordance with the
policies of The Toronto Stock Exchange and the NASDAQ National Market,
shareholder approval was required to complete the second tranche of the
financing. We obtained the approval on June 29, 2004 and completed the second
tranche of the financing by issuing $4,956,000 of convertible notes.

The notes have a three (3) year term and carry an interest rate of 2.5% per
quarter. The notes are secured by substantially all of our assets.  All
outstanding principal and interest is convertible into our common shares at a
conversion price of $3.07 per share. If we issue any common shares or securities
convertible into common shares at a price that is less than the conversion price
of the notes then in effect, then the conversion price shall be subject to a
weighted average anti-dilution adjustment. The conversion price will not be
lowered by more than 15% of the initial conversion price of $3.07.

The principal and interest payable at maturity can be converted into our common
shares at the option of Austin Ventures. All interest accrued in the second and
third quarters of 2004 plus 50% of the interest charges thereafter are payable
at maturity. The periodic interest payments can be paid in common shares at our
option at the conversion price then in effect on the interest payment date so
long as the market price of the shares on that date is greater than the
conversion price. We also agreed to include two nominees from Austin Ventures in
any slate of directors proposed for shareholder approval.

ASSET PURCHASE

In the second quarter of 2004, we completed an agreement with Nokia (NYSE: NOK)
to acquire the Nokia Multimedia Application Gateway (AGW) product. AGW is a
software product that provides subscriber functionality to a mobile network
operators multimedia messaging services. AGW has been decoupled from the
mobile network operators multimedia message delivery infrastructure,
usually provided by a Multimedia Messaging Service Center (MMSC), so that new
multimedia functionality can be added into AGW, allowing mobile network
operators to rapidly deploy new multimedia services, without the need to update
their messaging infrastructure.

The current subscriber functionality provided by AGW is Legacy Device support,
Email Smart Push and Multimedia Album.

| |  | Legacy Device Support:  As   mobile network operators offer multimedia services, such as picture messaging   (taking a picture using a camera phone, and sending it), the subscribers to   whom they can offer these services is limited to those subscribers with   multimedia capable terminals. With Legacy Device support, subscribers who do   not have multimedia capable terminals can still participate in multimedia   services.  These subscribers receive a   text message with a link to a website where they can view the multimedia   messages sent to them.  This expands   the addressable subscriber base for multimedia services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Email Smart Push (ESP): ESP allows multimedia subscribers to send   multimedia messages to email addresses (versus phone numbers).  This expands the addressable subscriber   base for multimedia services.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Multimedia Album: The Multimedia Album is a web-based service that   allows subscribers to create, edit, store, send and share multimedia   messages.  Additionally, subscribers   can upload multimedia messages from their terminals into their albums, and   upload media from their PCs into their album.                                                                                                                                                                                                                                                                                                                                      

59



In the transaction, we purchased approximately $500,000 of development hardware
that was deployed in the Toronto development center.  We also signed an OEM
agreement under which Nokia will continue to offer the product to its existing
and future customers.

RESTRUCTURING AND OTHER CHARGES

During 2004, we determined it was appropriate to implement additional cost
reductions. These efforts were implemented in order to reduce our total cost of
revenue, development, sales and marketing and general and administrative costs
from approximately $5.8 million in the first quarter of 2004 to approximately
$5.0 million in the fourth quarter of 2004, excluding any hardware costs that
may be part of a sale to a customer. As part of these restructuring efforts, we
reduced our worldwide workforce by 23 people (2 in professional services, 3 in
sales and marketing, 13 in research and development, and 5 in general and
administration).  This headcount reduction was a result of consolidating
development and G&A personnel by closing our offices in Germany and Finland,
and reducing our marketing and sales employees from whom we did not expect to
generate significant revenue. These activities were substantially completed by
June 2004. At December 31, 2004, we had no significant remaining obligations due
to our restructurings. In the first quarter of 2004, we initially announced that
we would reduce our headcount by approximately 40 people.  With the
acquisition of the AGW product in the second quarter, the additional
terminations planned in the first quarter were not carried out, as these
development staff were redeployed to develop and support the AGW
product.

As a result of these transactions, we recorded $1.2 million in restructuring
charges during 2004 of which $674,000 related to severance and $500,000 related
to lease exit costs. This amount was offset by a reduction of $181,000 in our
2002 restructuring reserve, as hosting exit costs were lower than we had
projected. The $1.2 million amount is the net of the $2.1 million restructuring
charge in the first quarter and the $900,000 reversal in the second quarter as
described above, and an additional $26,000 reversal in the fourth quarter of
2004.

Included in our Accrued Liabilities as at December 31, 2004 is
approximately $93,000 in restructuring reserve related to a restructuring
activity undertaken in 2002, specifically to costs associated with an office in
Europe that we have vacated. Although the space is sublet, we are obligated to
refurbish the space at the end of the lease. We expect to pay out the remaining
balance by the end of the first quarter of 2006.

60



RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

REVENUE

PRODUCT REVENUE

In the year ended December 31, 2004, product revenue increased to $8.8 million
from $7.0 million in 2003. Revenue from our X-treme Mobility Suite of products
increased to $8.5 million in 2004 from $5.8 million in 2003.  Our principal
revenue producing deployments for XMS were Hewlett-Packard (as a reseller to
Sprint Nextel), Nokia and a European MNO.  Hewlett-Packard (as a reseller to
Sprint Nextel) contributed $151,000 of the increase in our XMS product revenue
through strong continued customer adoption of mobile data services on
Sprint Nextels Vision network.  Our OEM relationship with Nokia
contributed $2.0 million of the increase and a European XMG customer accounted
for $863,000 of the increase.  The increases were partially offset by
decreasing product revenue at other deployments, most notably at Radiolinja
Origo, where product revenue declined by $329,000 in 2004 compared to 2003, as
the 2003 amount included a one-time license fee. In 2004, the XMG product
accounted for approximately 74% of our revenue from XMS and the AGW product, the
new product purchased from Nokia in 2004, accounted for approximately 24% of the
XMS revenue.  In 2003, our XMG product accounted for approximately 93% of
the XMS revenue.  While we provide our customers with fixed or variable
pricing alternatives, in 2004, as in 2003, essentially all of our key revenue
producing contracts for the XMS suite were on a variable pricing model.

During 2004 and 2003, product revenue from the financial services industry was
$328,000 and $1.2 million, respectively, as some older contracts ended and were
not renewed by our financial services customers.

SERVICE REVENUE

Service revenue increased to $6.2 million for the year ended December 31, 2004
from $5.9 million in 2003.

In 2004, service revenue from XMS increased to $5.2 million from $2.7 million in
2003.  Implementation and customer service fee revenue was $1.7 million in
2004 compared to $1.0 million in 2003.  Approximately 50% of the increase
was a result of the delivery of hardware to a customer, and the remaining
increase was a result of increased implementation revenue related to our XMG
revenue.  Managed alerts services revenue was $455,000 in 2004 compared to
nil in 2003, primarily due to one customer adopting this platform as a key part
of its customer retention and loyalty program.  Maintenance revenue, mainly
from Hewlett-Packard (as a reseller to Sprint Nextel) and Nokia totaled $3.0
million, up $1.3 million from $1.7 in the previous year.  Maintenance from
Hewlett-Packard (as a reseller to Sprint Nextel) increased due to a significantly
increased subscriber base using Sprint Nextel services, while the AGW product
maintenance revenue was $378,000 in 2004.

61



Service revenue from the financial services industry was $1.1 million in 2004,
down from $3.2 million in 2003, as our older contracts were not renewed by our
financial services customers, resulting in less service work for these
customers.

OPERATING EXPENSES

COST OF PRODUCT REVENUE

Amortization of intangible assets includes intellectual property that we have
acquired and either license as a stand-alone product or embed in our software
products. The acquired software products are amortized on a straight-line basis
over a period of two to five years. All acquired software products had been
fully amortized or written down to nil by the end of September 2003. Therefore,
the amount amortized in 2004 was nil, compared to $3.5 million in 2003.

Some of our products include third party embedded software.  In 2004, we
recorded $26,000 of license fees to third party vendors for the use of their
software that has been embedded in our software.

COST OF SERVICES REVENUE

Cost of services revenue was $6.6 million for the year ended December 31, 2004,
compared to $6.0 million in 2003, an increase of 10%.  Included in the 2004
amount is approximately $400,000 in hardware costs related to a customer
deployment. Our average professional services headcount was 20 in 2004 and
2003.  We ended 2004 and 2003 with 22 and 17 professional services
personnel, respectively.  Cost of services revenue, as a percentage of
total revenue, was 44% for the year ended December 31, 2004, compared to 47% in
2003.

RESEARCH AND DEVELOPMENT

Research and development (R&D) expenses decreased to $6.3 million for the
year ended December 31, 2004, compared to $9.4 million in 2003, a reduction of
34%. The decrease is a result of our restructuring initiatives, as a result of
which we reduced our average R&D headcount to 52 in 2004 from 65 in 2003, a
reduction of 20%.  We ended 2004 and 2003 with 57 and 48 research and
development personnel, respectively.  In addition, through our
restructuring initiatives, we reduced the average cost per development employee
by approximately 17%, by locating more of our development team in a more
cost-effective location.  R&D expense, as a percentage of revenue, was
42% for the year ended December 31, 2004, compared to 73% in 2003.

SALES AND MARKETING

Sales and marketing (S&M) expenses were $5.0 million for the year ended
December 31, 2004, compared to $7.0 million in 2003, a reduction of 28%. 
The decrease is a result of the reduction in the average number of sales and
marketing personnel to 19 in 2004 from 27 in 2003  a reduction of 29% and
a $350,000, or 50% reduction on marketing expenditures primarily related to
public relations and industry events.  We ended 2004 and 2003 with 17 and
21 sales and marketing personnel, respectively.  S&M expense, as a
percentage of revenue, was 33% for the year ended December 31, 2004, compared to
54% in 2003.

62



GENERAL AND ADMINISTRATIVE

G&A expenses decreased to $3.1 million for the year ended December 31, 2004,
compared to $4.1 million in 2003  a reduction of 25%. The decrease in
G&A expenses reflects our restructuring initiatives through which we reduced
our average yearly headcount in G&A to 15 in 2004 from 20 in 2003, a
reduction of 25%.  We ended 2004 and 2003 with 13 and 18 general and
administrative staff, respectively.  The reduction in personnel together
with a reduction in our insurance costs (primarily our directors and officers
insurance) and legal fees resulted in savings of approximately $200,000,
$230,000 and $250,000, respectively. G&A expense, as a percentage of
revenue, was 20% for the year ended December 31, 2004, compared to 32% in
2003.

DEPRECIATION

Depreciation expense was $595,000 in the year ended December 31, 2004, compared
to $908,000 in 2003. Depreciation decreased as we continue to utilize fixed
assets that were fully depreciated.

STOCK-BASED COMPENSATION

Stock-based compensation decreased to $152,000 for the year ended December 31,
2004, all related to the fair value of options granted in 2003 and 2004,
compared to $1.7 million for the year ended December 31, 2003. The 2003 expense
included $1.6 million related to the amortization of deferred stock-based
compensation recorded as a result of assuming, through acquisitions, stock
option plans that included unvested options and common shares.

RESTRUCTURING COSTS

During 2004, we determined it was appropriate to implement additional cost
reductions. These efforts were implemented in order to reduce our total cost of
revenue, development, sales and marketing and general and administration costs
from approximately $5.8 million in the first quarter of 2004 to just over $5.0
million, excluding hardware costs included in cost of revenue, in the fourth
quarter of 2004.  As part of these restructuring efforts, we reduced our
worldwide workforce by 23 people (2 in professional services, 3 in sales and
marketing, 13 in Research and Development, and 5 in general and
administration).  This headcount reduction was a result of consolidating
development and G&A personnel by closing our offices in Germany and Finland,
and reducing our marketing and sales employees from whom we did not expect to
generate significant revenue. These activities were substantially completed by
June 2004. Additional terminations planned in the first quarter were not carried
out due to the Nokia asset purchase in the second quarter.

As a result of these transactions, we recorded $1.2 million in restructuring
charges of which approximately $700,000 related to severance and $500,000
related to lease exit costs. The $1.2 million number is the net of the $2.1
million restructuring charge in the first quarter and the $900,000 reversal in
the second quarter.

63



Included in our Accrued Liabilities as at December 31, 2004 is
approximately $93,000 in remaining obligations arising from a restructuring
activity undertaken in 2002. Specifically, it relates to the remaining costs
associated with an office in Europe that we have vacated. Although the space is
sublet, we are obligated to refurbish the space at the end of the lease. We will
pay out the remaining balance by the end of the first quarter of 2006.

WRITE-DOWN OF GOODWILL, INTANGIBLES AND OTHER ASSETS

In 2003, we assessed the carrying value of our goodwill by comparing the
carrying value of our net assets (approximately $23.8 million, including the
amount then assigned to goodwill) to the quoted market price (which we believe
is an indicator of the fair market value) of our stock (approximately 
$16.9 million calculated using the average closing price of our shares on The
Nasdaq Stock Market on the 22 business days in December 2003).  Based on
this analysis, we concluded that an impairment in the carrying value of goodwill
had occurred.  After allocating our fair value to the fair value of our
tangible and intangible assets (which we estimated to be higher than the book
value) the resulting implied value of goodwill was determined to be nil. 
Accordingly, we recorded a write-down of $9.1 million.

INTEREST EXPENSE

We had a net interest expense of $396,000 in the year ended December 31, 2004,
compared to net interest income of $254,000 in 2003. We issued $8 million in
convertible notes in the second quarter of 2004; the interest expense associated
with this debt was $524,000 in 2004. Interest derived from cash and cash
equivalent balances and short-term investments, representing primarily the
unused portion of the proceeds from our issuances of common shares as well as
from the convertible debt financing completed in the second quarter of 2004 was
$128,000 in 2004. In 2003, interest income  was net of interest expense
related to a note payable. The note was fully repaid by the end of the first
quarter of 2003.

NET LOSS

Our net loss decreased to $8.0 million for year ended December 31, 2004 compared
to $28.3 million in 2003. Our net loss has decreased due to a number of factors.
Our revenue increased by $2.2 million and we had lower operating costs as a
result of our restructuring initiatives. We wrote down the remaining goodwill of
$9.1 million in 2003 and amortized the remaining intangible assets of $3.5
million. Stock-based compensation charges decreased significantly in 2004 to
$152,000 from $1.7 million in 2003 and depreciation expenses were lower by
$313,000 in 2004 compared to 2003.

64



LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected financial information as of December 31, 2005, 2004 and 2003 (in thousands):

|As at December 31                         |  | 2005 |        | 2004 |   | 2003   | 
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                          |  |      |        |      |   |        | 
|Cash and   cash equivalents               |  | $    | 5,272  |      | $ | 5,417  | 
|Short-term   investments                  |  |      | 4,009  |      |   | 8,005  | 
|Restricted   cash                         |  |      | 219    |      |   | 210    | 
|                                          |  |      |        |      |   |        | 
|                                          |  |      | 9,500  |      |   | 13,632 | 
|Working   capital                         |  |      | 616    |      |   | 424    | 
|                                          |  |      |        |      |   |        | 
|Current   assets less current liabilities |  | $    | 10,116 |      | $ | 14,056 | 
|                                          |  |      |        |      |   |        | 

At December 31, 2005, our cash and short-term investments were $9.5 million
compared to $13.6 million in 2004, a reduction of $4.1 million.  The
reduction in our cash balance included our loss, excluding non-cash items of
$4.0 million, a source of $141,000 related to changes to balance sheet items, a
source of $61,000 related to the exercise of stock options and a use of $345,000
related to additions to capital assets.

Our accounts receivables balance as at December 31, 2005 was $2.5 million, with
over 93% of the balance being either current or less than 30 days past
due.  We did not incur any bad debt expense in 2005 or in 2004 and we
believe that the current reserve of $19,000 is sufficient and that accounts
receivable will be collected. Our accrued liabilities balance of $1.6 million
includes approximately $93,000 of restructuring reserves that we anticipate will
be paid in 2006. Other accrued liabilities and accounts payable are anticipated
to remain at approximately the same levels.

The following table presents selected financial information for the years ended
December 31, 2005, 2004 and 2003 (in thousands):

|For the year ended December 31              |  | 2005 |        | 2004 |   | 2003   |  
|------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                            |  |      |        |      |   |        |  
|Cash from   (used in) operating activities  |  | $    | (4,000 | )    | $ | (8,415 | )
|Cash   from  (used in) financing activities |  |      | 61     |      |   | 7,670  |  
|Cash from   (used in) investing activities  |  |      | 3,642  |      |   | (7,274 | )
|Effect of exchange rate changes on cash     |  |      | 152    |      |   |       |  
|                                            |  |      |        |      |   |        |  
|Net decrease   in cash and cash equivalents |  | $    | (145   | )    | $ | (8,019 | )
|                                            |  |      |        |      |   |        |  

Net cash used in operating activities decreased to $4.0 million for the year
ended December 31, 2005, compared to $8.4 million in 2004.  Our revenue has
increased year over year and we have maintained tight control over our expense
structure. Net cash used in operating activities in 2005 consisted of our net
loss of $6.1 million less non-cash expenses of $1.9 million (depreciation and
amortization of $597,000, amortization of deferred charges of $119,000,
stock-based compensation of $1.0 million and loss on settlement of liability of
$165,000), offset by a cash source of $141,000
related to changes to balance sheet items.

65



Net cash used in operating activities in 2004 consisted of our net loss of $8.0
million, cash outflows of $1.9 million related to severance, historic
acquisition and hosting exit payments, offset by a cash source of $271,000
related to other working capital changes, a cash source of $435,000 related to
long-term liabilities and long-term interest payable increases and non-cash
items, primarily depreciation and amortization charges of $661,000, and
stock-based compensation expense of $152,000.

Financing activities provided a cash source of $61,000 for the year ended
December 31, 2005, compared to a cash source of $7.7 million in 2004. The 2005
amount was related to the issuance of common shares upon the exercise of
options, while the 2004 amount was composed of $8.0 million from the issuance of
convertible notes payable to related parties in the second quarter of 2004,
offset by a cash use of $351,000 related to issuance costs, plus $22,000 related
to the issuance of common shares upon the exercise of options.

Cash used in investing activities, before the sale (purchase) of short-term
investments, business acquisitions and restricted cash was $345,000 in 2005,
compared to $1.0 million in 2004. Both the 2005 and 2004 amounts related to the
purchase of fixed assets.

We expect our quarterly cash expenditures in 2006 to increase somewhat from the
$5.2 million achieved in the fourth quarter of 2005, as we add additional
personnel to our development teams, but we will maintain our focus on cost
management. We estimate our projected cash expenditures for 2006 to be
approximately $24.0 to $26.0 million, including capital expenditures. Most of
our revenue contracts are based on a per user or capacity basis.  We
anticipate that our cash on hand, together with our cash from operations will be
sufficient to cover our cash requirements for at least the next twelve months.
However, if our customers decide not to use our software or not to increase
their use of our software, our license and maintenance and support revenue will
be significantly negatively impacted.

We may seek to raise additional capital in the future depending upon market
conditions and conditions in our business. We may require additional financing
if we expand our operations at a faster rate than currently anticipated, if we
decide to increase our R&D investments, if our costs unexpectedly increase,
if our revenues decrease, if we lose one or more significant customers, or if we
seek to effect one or more significant acquisitions.

66



CONTRACTUAL OBLIGATIONS

Contractual obligations at December 31, 2005 are as follows:

|                                               |  | Payment   due by period |      
|---------------------------------------------- |  | ----------------------- | -----
|                                               |  |                         |      
|Contractual obligations                        |  | Total                   |      
|                                               |  |                         |      
|Convertible   notes payable to related parties |  | $                       | 8,000
|Long-term   interest payable                   |  |                         | 768  
|Operating   leases                             |  |                         | 819  
|                                               |  |                         |      
|                                               |  | $                       | 9,587
|                                               |  |                         |      

The convertible notes payable to related parties are payable to Austin Ventures.
They must be repaid at the maturity date in the second quarter of 2007, but if
an event of default occurs, the convertible notes payable to related parties may
become due prior to the maturity date. Additionally, Austin Ventures has the
option to convert the debt to shares at the applicable conversion price at any
time prior to the maturity date.

If Austin Ventures does not convert the debt to shares prior to maturity, we
will be required to pay the principal of $8.0 million plus interest due at
maturity of approximately $1.4 million in the second quarter of 2007. These
amounts are payable in cash or shares at a conversion price of $3.07 at the
option of Austin Ventures. If Austin Ventures demands cash we may not have
sufficient funds to meet that demand and we may have to raise additional
capital. We cannot predict the terms under which capital may be available to us
at that time. See note 8 to the consolidated financial statements for the year
ending December 31, 2005 for further details.

Net interest expense is expected to be approximately $900,000 in 2006; $1.0
million in interest charges related to the convertible notes payable to related
parties offset by interest income of approximately $130,000. The $1.0 million in
interest charges related to the convertible notes payable to related parties
includes approximately $893,000 of interest payable to Austin Ventures,
approximately $118,000 related to the amortization of the deferred charges and
approximately $22,000 related to the amortization of the beneficial conversion
feature. We expect to make interest payments to Austin Ventures, in cash or
shares at our option, of approximately $447,000 in 2006 and approximately
$287,000 in 2007. Additionally, we will incur additional interest charges that
are to be paid at the maturity date and are convertible to common shares at the
option of Austin Ventures. These amounts will be payable no later than the
second quarter of 2007. If Austin Ventures does not exercise its conversion
right before maturity, then the interest payable in the second quarter of 2007
related to the portion of interest convertible at the option of Austin Ventures
will be approximately $1.4 million dollars.

67



DIFFERENCES IN MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRESENTED UNDER CANADIAN GAAP

Under Canadian securities requirements, we are required to provide supplemental
information to highlight significant differences that would have resulted in the
information provided in this section had we prepared it using our Canadian GAAP
financial information. There were no differences between the Companys
financial statements as prepared under U.S. and Canadian GAAP for the year ended
December 31, 2003.

We have identified and disclosed the significant differences between Canadian
and U.S. GAAP as applied to our consolidated financial statements for the years
ended December 31, 2005 and 2004 in note 20 to the consolidated financial
statements for the year ended December 31, 2005.  The only GAAP differences
impacting the components of operating loss are the application under Canadian
GAAP of the requirement to account for the convertible notes as a compound
instrument and the requirement to separate the instrument into a liability
and equity component. Under Canadian GAAP, we calculated the liability component
of the secured convertible notes as the present value of the future obligation
using a discount rate of 15%.  The liability component amounted to
approximately $7.1 million. The residual amount of $933,000 represents the
estimated equity component for the conversion option and is recorded under
Canadian GAAP as the equity portion of the secured convertible
notes.  In addition, under Canadian GAAP the issue costs of $352,000
are allocated between equity and liability components on a proportionate basis
while under U.S. GAAP the entire amount is treated as deferred charge.
Accordingly, $41,000 of the deferred charge has been shown as an offset to
equity for Canadian GAAP purposes, therefore the net equity portion of
convertible notes payable to related parties is $892,000. The difference
between the amounts allocated to the liability and the principal amount of the
notes of $8.0 million is being amortized as non-cash imputed interest
expense over the period to maturity and the liability is being accreted up to
its maturity value.  The additional interest expense for the year ended
December 31, 2005 amounted to $311,000 (2004  $149,000).

Additionally, under U.S. GAAP, the costs related to the issuance of the secured
convertible notes payable are recorded as a long-term asset and are amortized
over the term of the notes.  For Canadian GAAP purposes, these costs are
allocated on a pro rata basis between the debt and equity components of the
compound instruments. The amount allocated to the debt component has been
recorded as a long-term asset and amortized over the term of the notes, and the
amount allocated to the equity component has been recorded as a reduction of
shareholders equity. As a result, under Canadian GAAP, the amortization of
the deferred costs is lower by $14,000 for the year ended December 31, 2005
(2004  $8,000).

68



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R, Share Based Payment, or
SFAS 123R, which requires companies to expense the fair value of employee stock
options and other forms of share based compensation. Accordingly, SFAS 123R
eliminates the use of the intrinsic value method to account for share based
compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R,
we are required to determine the appropriate fair value model to be used for
valuing share based payments, the amortization method for compensation cost and
the transition method to be used at date of adoption. We currently use the Black
Scholes option pricing model to value options. The use of a different model to
value options may result in a different fair value than the use of the Black
Scholes option pricing model. We are required to adopt SFAS 123R in the first
quarter of fiscal 2006. We are evaluating the requirements of SFAS 123R to
assess what impact its adoption will have on our financial position and results
of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, which addresses the
measurement of exchanges of non-monetary assets and redefines the scope of
transactions that should be measured based on the fair value of assets
exchanged.  The standard is effective for 2006.  We do not expect the
adoption of this standard to have a material impact on our results.

In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, replacing APB Opinion No. 20 and SFAS No. 3, which applies to
all voluntary changes in accounting principles and changes required by an
accounting pronouncement where no specific transition provisions are
included.  SFAS No. 154 requires retrospective application to prior
periods financial statements for changes in accounting principles. 
This standard also redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error.  The standard
is effective for 2006.  Early adoption is permitted.  We do not
anticipate the adoption of this standard will have a material impact on our
results.

69



QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited consolidated statements of
operations data for each of the eight most recent quarters that, in
managements opinion, have been prepared on a basis consistent with the
audited consolidated financial statements contained elsewhere in this annual
report and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the 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.

|                                                                                                        |  | Quarter   Ended                                                                 |      
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | -----
|                                                                                                        |  |                                                                                 |      
|2005                                                                                                    |  | Mar. 31                                                                         |      
|                                                                                                        |  |                                                                                 |      
|                                                                                                        |  | (In   thousands of U.S. dollars, except number of shares and per share amounts) |      
|Revenue:                                                                                                |  |                                                                                 |      
|Product                                                                                                 |  | $                                                                               | 2,985
|Services                                                                                                |  |                                                                                 | 2,820
|                                                                                                        |  |                                                                                 |      
|Total   revenue                                                                                         |  |                                                                                 | 5,805
|Operating   expenses:                                                                                   |  |                                                                                 |      
|Cost of product revenue                                                                                 |  |                                                                                 |      
|Other                                                                                                   |  |                                                                                 | 5    
|Cost of service revenue                                                                                 |  |                                                                                 | 2,026
|Research and development                                                                                |  |                                                                                 | 1,687
|Sales and marketing                                                                                     |  |                                                                                 | 1,168
|General and administrative                                                                              |  |                                                                                 | 804  
|Depreciation                                                                                            |  |                                                                                 | 157  
|Stock-based compensation:                                                                               |  |                                                                                 |      
|Cost of revenue                                                                                         |  |                                                                                 | 7    
|Research and development                                                                                |  |                                                                                 | 19   
|Sales and marketing                                                                                     |  |                                                                                 | 16   
|General and administrative                                                                              |  |                                                                                 | 31   
|                                                                                                        |  |                                                                                 |      
|Total operating expenses                                                                                |  |                                                                                 | 5,920
|                                                                                                        |  |                                                                                 |      
|Loss   from operations                                                                                  |  |                                                                                 | (115 
|Interest   income (expense), net                                                                        |  |                                                                                 | (186 
|Loss   on settlement of liability                                                                       |  |                                                                                 | (165 
|                                                                                                        |  |                                                                                 |      
|Loss   for the period                                                                                   |  | $                                                                               | (466 
|                                                                                                        |  |                                                                                 |      
|Basic   and diluted loss per share                                                                      |  | $                                                                               | (0.08
|Weighted-average   number of shares used in computing basic and diluted loss per share (in   thousands) |  |                                                                                 | 6,027

70



|                                                                                                        |  | Quarter   Ended                                                                 |       
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ------
|                                                                                                        |  |                                                                                 |       
|2004                                                                                                    |  | Mar. 31                                                                         |       
|                                                                                                        |  |                                                                                 |       
|                                                                                                        |  | (In   thousands of U.S. dollars, except number of shares and per share amounts) |       
|Revenue:                                                                                                |  |                                                                                 |       
|Product                                                                                                 |  | $                                                                               | 1,761 
|Services                                                                                                |  |                                                                                 | 1,240 
|                                                                                                        |  |                                                                                 |       
|Total   revenue                                                                                         |  |                                                                                 | 3,001 
|Operating   expenses:                                                                                   |  |                                                                                 |       
|Cost of product revenue                                                                                 |  |                                                                                 |       
|Other                                                                                                   |  |                                                                                 |      
|Cost of service revenue                                                                                 |  |                                                                                 | 1,528 
|Research and development                                                                                |  |                                                                                 | 2,089 
|Sales and marketing                                                                                     |  |                                                                                 | 1,379 
|General and administrative                                                                              |  |                                                                                 | 833   
|Depreciation                                                                                            |  |                                                                                 | 185   
|Stock-based compensation:                                                                               |  |                                                                                 |       
|Cost of revenue                                                                                         |  |                                                                                 | 2     
|Research and development                                                                                |  |                                                                                 | 4     
|Sales and marketing                                                                                     |  |                                                                                 | 4     
|General and administrative                                                                              |  |                                                                                 | 7     
|Restructuring costs                                                                                     |  |                                                                                 | 2,100 
|                                                                                                        |  |                                                                                 |       
|Total operating expenses                                                                                |  |                                                                                 | 8,131 
|                                                                                                        |  |                                                                                 |       
|Loss   from operations                                                                                  |  |                                                                                 | (5,130
|Interest   income (expense), net                                                                        |  |                                                                                 | 16    
|                                                                                                        |  |                                                                                 |       
|Loss   for the period                                                                                   |  | $                                                                               | (5,114
|                                                                                                        |  |                                                                                 |       
|Basic   and diluted loss per share                                                                      |  | $                                                                               | (0.85 
|Weighted-average   number of shares used in computing basic and diluted loss per share (in   thousands) |  |                                                                                 | 5,983 

71



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------- | -----------------------------------------------------------

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

IMPACT OF INTEREST RATE EXPOSURE

As of December 31, 2005, we had approximately $9.5 million in cash, cash
equivalents, short-term investments and restricted cash, of which $4.2 million
consisted of short-term investments and restricted cash. A significant portion
of the cash earns interest at variable rates. In addition, although our
short-term investments are fixed-rate instruments, the average term is short.
Accordingly, our interest income is effectively sensitive to changes in the
level of prevailing interest rates. Our convertible notes payable to related
parties bear interest at a fixed rate. Accordingly, we currently do not have any
interest rate exposure on our outstanding indebtedness.

IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE

Our functional currency is the U.S. dollar, as we recognize the majority of our
revenues in dollars.  In the foreseeable future, the majority of our non-US
dollar denominated expenses will be incurred in Canadian dollars, Euros, Swiss
francs and United Kingdom pounds sterling. Changes in the value of these
currencies relative to the U.S. dollar may result in currency gains and losses,
which could affect our operating results.  We do not currently hedge
against these currency fluctuations.  In the year ended December 31, 2005,
we incurred realized and unrealized foreign currency losses relating to the
translation of our non-U.S. dollar denominated monetary assets and liabilities
of approximately $260,000.

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- | --------------------------------------------

The consolidated financial statements and supplementary data of the Company and
the report of independent auditors thereon set forth beginning on page F-1 are
incorporated herein by reference.

Quarterly financial information set forth herein under Item 7 - Managements Discussion and Analysis of Financial Condition and Results
of Operations is incorporated herein by reference.

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND   FINANCIAL DISCLOSURE.
|------- | ---------------------------------------------------------------------------------------

Not applicable.

|ITEM 9A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

Prior to the filing date of this Report, management, including the
Companys Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness and operation of the Companys disclosure controls and
procedures. The Chief Executive Officer and Chief Financial Officer concluded
that, as of December 31, 2005, the disclosure controls and procedures were
effective, in all material respects, to ensure that information required to be
disclosed in the reports the

72



Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required. The Companys Chief Executive
Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures are also effective to ensure that information
required to be disclosed in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

There have not been any changes in the Companys internal controls over
financial reporting that occurred during the fourth quarter of 2005 that
materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.

|ITEM 9B. | OTHER INFORMATION.
|-------- | ------------------

Not applicable.

PART III

|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|-------- | ---------------------------------------------------
|         |                                                    

The following sets forth information about our executive officers and directors:

John J.
Sims.  Mr. Sims, 50, has served as our Chief Executive Officer and
director since January 2001, when we merged with TANTAU Software,
Inc.  He also served as our Chairman from 2002 until March 2004.  Mr. Sims,
TANTAUs co-founder, served as its President and Chief Executive Officer
since its inception in February 1999. Prior to TANTAUs
founding, Mr. Sims served as Chief Operating Officer of SCC Communications
Corp. (a U.S. telecommunications support service company).  From November
1985 until November 1995, Mr. Sims served in several management positions
at Tandem Computers (a developer of computer systems), including Vice President
and General Manager of Tandems worldwide telecommunications
business.  Mr. Sims also served in various financial and general
management positions with the Burroughs Corporation (a manufacturer of computer
and related equipment) from June 1977 until November 1985. 
Mr. Sims holds an accounting degree from the University of Glasgow,
Scotland.

Michael Luna.  Mr. Luna, 45, is currently our Chief Technology Officer. He joined us in October 2004.  Between January 1999 and October 2004, Mr. Luna held a number of senior positions at Openwave Systems Inc., a provider of software and services for mobile data communications, most recently as its Vice President Consulting Engineering in the Market Development Group and CTO office.  Prior to that time, Mr. Luna served as a senior member of the technical staff at AT&T Wireless Services and SBC Technology Resources, Inc.

Stephen
Morrison.   Mr. Morrison, 43, was appointed our Chief Financial
Officer and Senior Vice President of Corporate Services in November
2005.   Prior to his appointment to the CFO role, Mr. Morrison spent
three years as our Corporate Controller. He joined us in March 2001 as Director
of Finance for Asia Pacific.    Prior to March 2001, Mr. Morrison
held positions in finance and strategic alliances with Emergis Inc. (formerly
BCE Emergis Inc.).   Mr. Morrison is a Certified Management Accountant
and holds a Master of Business Administration from the Richard Ivey School of Business of the University of Western Ontario and a Bachelor of Arts in
administrative and commercial studies from the University of Western Ontario.

73



Alan
Prenoveau**.** Mr. Prenoveau, 55, is currently our Senior
Vice President, Consulting & Delivery Services. Mr. Prenoveau
joined TANTAU in November 2000.  Between November 1998 and
November 2000, Mr. Prenoveau was General Manager of an Internet
start-up focused on providing a fully-hosted e-commerce offering.  In the
thirteen years prior to that, he spent five years in various senior management
positions in the consulting services division of IBMs Lotus software
products division and eight years in management positions within a variety of GE
businesses.  Mr. Prenoveau holds a Masters of Business Administration
from Xavier University and a Bachelor of Science with a major in Computer and
Information Science from Ohio State University.

Elda
Rudd**.** Ms. Rudd, 37, is currently our Vice President, Marketing. She
joined us in November 2002.  Prior to that time, Ms. Rudd was President
& Co-founder of TCS, Inc., a low voltage communications cabling contractor and
consultancy.  Between November 2000 and July 2002, Ms. Rudd was
Vice-President of Marketing for Westwave Communications, a telecom soft-switch
company, and between November 1993 and October 2000, she worked at Nortel
Networks in various engineering and marketing management roles in its wireless
internet division.  Ms. Rudd holds a Masters of Business Administration
from Florida Atlantic University and a Bachelor of Science with a major in
Industrial Engineering from University of Miami.

J. Ian Giffen**.**  Mr. Giffen, 48, has been a Director
of the Corporation since February 2003 and Chairman of the Board of Directors
since March 2004. Since 1996, Mr. Giffen has been an advisor/director to
software companies and technology investment funds.  From January 1992
to January 1996, Mr. Giffen was Vice President and Chief Financial
Officer at Alias Research, a developer of 3D graphics software that was acquired
by Silicon Graphics Inc.  Mr. Giffen is a director of  MKS Inc.
(a provider of enterprise software configuration management), a director of
Sierra Systems Inc. (an IT services company), a director of The Descartes
Systems Group Inc. (a provider of software and network-based solutions for
logistics management) and a director/advisor to a number of private companies.
Mr. Giffen is a Chartered Accountant and has a Bachelor of Arts degree in
business administration from the University of Strathclyde in
Glasgow.

James D.
Dixon**.**  Mr. Dixon, 62, was President of
bankofamerica.com from February 2000 until January 2002. 
Mr. Dixon previously served as Group Executive of Bank of America
Technology and Operations between September 1998 and
February 2000.  From 1991 until the merger of NationsBank Corporation
and Bank America Corporation, Mr. Dixon served as President of NationsBank
Services, Inc.  Prior to that, he served as Chief Financial Officer of
C&S/Sovran Corporation (a predecessor to NationsBank).  Mr. Dixon is a director of Broadvision, Inc. (a provider of
personalized self-service web applications), CheckFree Corporation (a provider
of financial  electronic commerce products and services) and RARE Hospitality International, Inc. (a restaurant owner,
franchiser and operator).

Barry J.
Reiter**.**  Mr. Reiter, 57, is Chairman of the Technology
Group and Chairman of the Corporate Governance Group at Torys LLP (an
international law firm with offices in New York and Toronto). 
Mr. Reiter is also a director of Alliance Atlantis Communications Inc. (a
broadcaster, creator and distributor of filmed entertainment), Movie Distribution Income Fund (an acquirer and distributor of movies), Park Avenue Investment Corporation (a capital pool
company), SkyPower Wind Energy Fund LP (a developer of, and investor in, renewable
energy businesses) and Avotus Corporation (a communications infrastructure
management company).  Prior to joining Torys in 1982, Mr. Reiter was a
law professor at the Faculty of Law, University of Toronto.

74



Joseph C.
Aragona**.**  Mr. Aragona, 49, served on TANTAUs Board
of Directors from April 1999 until our acquisition of TANTAU in
January 2001.  Mr. Aragona is a General Partner of Austin
Ventures (a U.S. venture capital firm), which he joined in 1982. 
Mr. Aragona has a BA in Economics from Harvard University and an MBA degree
from the Harvard University School of Business Administration.

Benjamin
L. Scott**.**Mr. Scott, 55, has served since May 2002 as a
Venture Partner with Austin Ventures, a venture capital firm located in Austin,
Texas. Between January 2000 and May 2002, Mr. Scott was a partner with Quadrant
Management, an investment firm. From October 1997 to November 1999, Mr. Scott
served as the Chairman and Chief Executive Officer of IXC Communications. Mr.
Scott has served as a senior executive of AT&T, PrimeCo and Bell Atlantic.
Mr. Scott also serves on the board of directors of several private companies as well as Active Power, Inc. (a provider of battery-free back-up power solutions).  He
holds a Bachelor of Science in psychology from Virginia Polytechnic Institute
and State University.

As part of the $8 million financing
transactions in May and June 2004 between Austin Ventures and us, we agreed to increase our Board of
Directors to seven directors, appoint a nominee of Austin Ventures to the Board
of Directors and to include two nominees of Austin Ventures in any slate of
directors submitted to shareholders for approval. Mr. Aragona and Mr. Scott were
nominated to our Board in 2005 under this agreement.

Compensation Committee Interlocks and Insider Participation

Mr. Reiter and Mr. Giffen served as
members of the Governance, Nomination, Human Resources and Compensation
Committee of the Board of Directors during the year ended December 31,
2005.  No member of the Governance, Nomination, Human Resources and
Compensation Committee was at any time during the year ended December 31, 2005
or at any other time our officer or employee.  Please see Item
12Certain Relationships and Related Transactions regarding certain
relationships relating to Mr. Reiter, a member of our Governance, Nomination,
Human Resources and Compensation Committee.

During the year ended December 31, 2005, none of our executive officers served
as a member of the Board of Directors, the compensation committee, or any
similar committee of another entity, one of whose executive officers served on
our Board of Directors, Governance, Nomination, Human Resources and Compensation
Committee or Stock Option Committee.

Code of Ethics

In 2005, we adopted a Code of Ethics that applies to all employees, directors
and officers, including our Chief Executive Officer, Chief Financial Officer and
principal accounting officer/controller.  All of our employees, directors
and officers are required to submit an acknowledgment on a form applicable to
their respective role, indicating that they have received and read a copy of the
Code of Ethics and understand their obligations to comply with the provisions
outlined in it.  No material violations were reported in respect of the
Code of Ethics in 2005, and no waivers were sought by or granted to our
directors or executive officers in 2005.  A copy of the Code of Ethics is
attached to this Report as Exhibit 14.1.

75



Audit Committee

The members of our Audit Committee are J. Ian Giffen (Chair), James Dixon and
Benjamin Scott.  The Board has determined that all of the members of the
Audit Committee are independent (within the meaning of applicable listing and
securities regulation standards) and financially literate (within the meaning of
Canadian Multilateral Instrument 52-110).

The Board has adopted the following definition of financial
literacy:  the ability to read and understand fundamental
financial statements, including a companys balance sheet, income
statement, and cash flow statement.  All of the members of the Audit
Committee are financially literate as: (i) Mr. Dixon has held many
senior executive positions with Bank of America, has served as a chief financial officer and has been
chair of the Audit Committee for public companies; (ii) Mr. Giffen has
served as a consultant and chief financial officer in the past, is a
Chartered Accountant and has fulfilled the position of Audit Committee Chair for a number of companies; and (iii) Mr. Scott has served as a chief executive
officer and in senior management positions with various corporations.

The Board has also determined that all of the members of the audit committee are
Audit Committee Financial Experts (within the meaning of applicable SEC
rules).

A copy of the charter of our Audit Committee is attached to this Report as
Exhibit 99.1.

|ITEM 11. | EXECUTIVE COMPENSATION.
|-------- | -----------------------

The tables
and discussion below present information about our Named Executive
Officers, consisting of our Chief Executive Officer, our four highest paid
current executive officers (including our Chief Financial Officer) whose total
salary and bonus exceeded $100,000 for the year ended December 31, 2005 as
required by applicable Canadian rules, and any former executive officer who
would have been one of the four highest paid executive officers had they
continued to serve in that capacity.

Summary Compensation Table

The following table sets forth the remuneration paid to our Named Executive
Officers.  Unless otherwise indicated, all monetary
figures in this Report are stated in US dollars, being our functional
currency.

|                                                                                               |  |                    |  |            |                             | Annual Compensation |  | Long Term   Compensation   Awards         |     |                                                       |                          |                               
|---------------------------------------------------------------------------------------------- |  | ------------------ |  | ---------- | --------------------------- | ------------------- |  | ----------------------------------------- | --- | ----------------------------------------------------- | ------------------------ | ------------------------------
|                                                                                               |  |                    |  |            |                             |                     |  |                                           |     |                                                       |                          |                               
|Name and Principal Position                                                                    |  | Year               |  | Salary ($) |                             | Bonus ($)           |  | Other   Annual   Compensation   ($)   (1) |     | Securities   Issuable   Under Options   Granted   (#) |                          | All Other   Compensation   ($)
|                                                                                               |  |                    |  |            |                             |                     |  |                                           |     |                                                       |                          |                               
|John J.   Sims,   Chief Executive Officer                                                      |  | 2005   2004   2003 |  |            | 330,000   330,000   330,000 |                     |  |                                        |     |                                                       |                       |                               
|Tamara   Steffens,   SeniorVice President, Sales (3) (4)                                       |  | 2005   2004   2003 |  |            | 180,000   90,000   n/a      |                     |  |           n/a                           |     |                                                       | 169,201   37,766   n/a   |                               
|Glenn   Barrett,   Chief Financial Officer and Senior Vice President, Corporate Services (5)   |  | 2005   2004   2003 |  |            | 210,000   210,000   210,000 |                     |  |                                        |     |                                                       |                       |                               
|Michael   Luna,   Chief Technology Officer (6)                                                 |  | 2005   2004   2003 |  |            | 220,000   40,865   n/a      |                     |  |           n/a                           |     |                                                       |           n/a          |                               
|Alan Prenoveau,   Senior Vice President, MNO Consulting & Delivery Services                    |  | 2005   2004   2003 |  |            | 180,000   180,000   180,000 |                     |  |                                        |     |                                                       | 21,367   31,315   27,402 |                               
|Elda Rudd,   Vice President, Marketing                                                         |  | 2005   2004   2003 |  |            | 175,000   175,000   175,000 |                     |  |      20,000   19,200                     | (7) |                                                       | 5,000                  |                               
|Stephen   Morrison,   Chief Financial Officer and Senior Vice President, Corporate Services(9) |  | 2005   2004   2003 |  |            | 143,641   140,000   140,000 |                     |  | 4,000                                   |     |                                                       |                       |                               

|      
|------
|Notes:
|      
|(1)   
|      
|(2)   
|      
|(3)   
|      
|(4)   

76



|(5) | Mr. Barrett resigned from his position of Chief Financial Officer and   Senior Vice President, Corporate Services effective November 29, 2005. His   last day of employment with the Company was February 15, 2006.       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                           
|(6) | Mr. Luna joined the Corporation as Chief Technology Officer effective   October 25, 2004.                                                                                                                                 
|    |                                                                                                                                                                                                                           
|(7) | In 2004, Ms. Rudd received a performance
bonus of $20,000 based on her achievement of established quarterly performance
objectives relating to her area of responsibility.  The corresponding figure for 2003 was $19,200.
|    |                                                                                                                                                                                                                           
|(8) | In 2003, Ms. Rudd received a one-time payment of $74,820 in order to   reimburse her for moving costs and expenses incurred by her in connection   with her relocation to our office in Santa Barbara, California.        
|    |                                                                                                                                                                                                                           
|(9) | Mr. Morrison was appointed to the position of Chief Financial Officer   and Senior Vice President, Corporate Services, effective November 29, 2005.   Prior to that, he spent three years as our Corporate Controller.    

Option Grants During the Year Ended December 31, 2005

The following table sets forth the options to purchase Common Shares granted to the Named Executive Officers under our stock option plans during the year ended December 31, 2005.

|                 |  | Securities Under 
      Options Granted
    # |        | % of Total Options Granted to Employees in Financial Year(1) |  | Exercise or Base Price ($/Security) |    | Market Value of Securities Underlying Options on the Date of Grant ($/Security) |      | Expiration Date |   | Potential Realizable Value ($) at
Assumed Annual Rate of Stock Price Appreciation for Option
Term(2) | 
|---------------- |  | --------------------------------------------- | ------ | ------------------------------------------------------------ |  | ----------------------------------- | -- | ------------------------------------------------------------------------------- | ---- | --------------- | - | ---------------------------------------------------------------------------------------------------- | 
|                 |  |                                               |        |                                                              |  |                                     |    |                                                                                 |      |                 |   |                                                                                                     
|Name             |  |                                               |        |                                                              |  |                                     | 5% |                                                                                 | 10%  |                
|                 |  |                                               |        |                                                              |  |                                     |    |                                                                                 |      |                 |   |                                                                                                      | 
|Stephen Morrison |  |                                               | 1,600  |                                                              |  | <1                                  | %  | $                                                                               | 4.60 |                 | $ | 4.60                                                                                                 | 
|Stephen Morrison |  |                                               | 51,000 |                                                              |  | 27.4                                | %  | $                                                                               | 4.56 |                 | $ | 4.56                                                                                                 | 

|      
|------
|Notes:
|      
|(1)   
|      
|(2)   

Aggregated Option Exercises During the Year Ended December 31, 2005 and Year-End Option Values

The following table sets forth, for each Named Executive Officer as at December
31, 2005, the aggregate number of securities acquired on exercise of options
during 2005 and the aggregate value realized of the securities acquired on
exercise.  It also shows the aggregate number of outstanding options to
purchase common shares as at December 31, 2005, together with the value of such
options at that date, and the aggregate number of shares purchasable under
options that were vested as at December 31, 2005 for each of the Named Executive
Officers.

Amounts reported under Value of Unexercised in-the-Money Options at
Financial Year-End represent the difference between:  (i) the
market value as at December 30, 2005, the last business day of the year, of the
common shares for which vested options were owned having an exercise price less
than such market value; and (ii) the exercise price of such options,
multiplied by the applicable number of options.  The closing trading price
of the common shares on the TSX and on Nasdaq as of December 30, 2005 was CDN
$4.26 and US $3.64 per common share, respectively.

77



|Name                  |  |  | Securities   Acquired on Exercise   (#) |  |  | Aggregate   Value Realized ($) |  |  | Unexercised   Options at Year-End    (#)    Exercisable/ Unexercisable |  |  | Value of   Unexercised in-the-Money Options at Financial Year-End    ($)    Exercisable/ Unexercisable | 
|--------------------- |  |  | --------------------------------------- |  |  | ------------------------------ |  |  | ---------------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------ | 
|                      |  |  |                                         |  |  |                                |  |  |                                                                        |  |  |                                                                                                        | 
|John J. Sims          |  |  |                                        |  |  |                               |  |  | 111,375/131,125                                                        |  |  | 11,356/18,429                                                                                          | 
|Tamara   Steffens (1) |  |  |                                        |  |  |                               |  |  | 22,500/67,500                                                          |  |  | 11,025/33,075                                                                                          | 
|Glenn   Barrett (2)   |  |  |                                        |  |  |                               |  |  | 57,000/96,000                                                          |  |  | CDN$615/CDN$765                                                                                        | 
|Michael Luna          |  |  |                                        |  |  |                               |  |  | 22,500/67,500                                                          |  |  | 0/0                                                                                                    | 
|Alan   Prenoveau      |  |  |                                        |  |  |                               |  |  | 22,443/38,750                                                          |  |  | 5,018/7,133                                                                                            | 
|Elda Rudd             |  |  |                                        |  |  |                               |  |  | 26,250/30,750                                                          |  |  | 3,065/5,115                                                                                            | 
|Stephen   Morrison    |  |  |                                        |  |  |                               |  |  | 3,997/56,316                                                           |  |  | 1,112/1,690                                                                                            | 

|      
|------
|Notes:
|      
|(1)   
|      
|(2)   

Stock Option Committee

The Stock Option Committee, consisting of Mr. Reiter, administers our capped-off
stock option plans, including our Canadian Stock Option Plan and our U.S. Stock
Option Plan (which plans govern stock options granted prior to our initial
public offering and are collectively referred to as the Pre-IPO
Plans), and the 1999 Tantau Stock Plan (the Tantau Plan, which
plan governs the stock options granted prior to our acquisition of Tantau in
January 2001 which options were converted into options to purchase shares in the Company connection with the acquisition).

Upon completion of our initial public offering in 2000, no further grants were
made and no further grants will be made under the Pre-IPO Plans.  The Stock
Option Committee administered grants under the Amended and Restated 2000 Stock
Option Plan and continues to administer grants under the 2005 Stock Option Plan,
subject to guidelines determined by the Governance, Nomination, Human Resources
and Compensation Committee.

Stock Option Plans

Our Stock Option Plans are designed to motivate, attract and retain our
directors, officers, key employees and consultants and to align their interests
with those of our shareholders.

78



Canadian
Stock Option Plan.  The Canadian Stock Option Plan was adopted in
September 1997 and provides for the grant of options to our employees,
officers, directors, consultants and advisors.  All options granted under
the plan have a maximum term of 10 years and have an exercise price per share of
no less than the fair market value of the common shares on the date of the
option grant, as determined by the Board of Directors or a duly authorized
committee on that date.  If an optionees employment, directorship or
consulting relationship with us is terminated without cause, the vested portion
of any grant will remain exercisable until the expiration date of the stock
option.  In the event of termination for cause, the vested portion of any
grant will remain exercisable for a period of 30 days after the date of
termination.  Unvested options will expire on termination unless the
options would have vested within six months or within the required statutory
notice period following a termination without cause, whichever is earlier, or
within one year if termination is due to death or disability.  If a change
of control of our company occurs, all options become immediately vested and
exercisable.  If an optionee under the Canadian Stock Option Plan ceases to
be our employee or consultant, we are entitled to exercise our call right to
repurchase all options beneficially owned by the optionee.

U.S. Stock
Option Plan.  The U.S. Stock Option Plan was adopted in October 1999
and provides for the grant of options and restricted shares to our employees,
officers, directors and consultants.  The plan provides for the grant of
both incentive stock options and non-qualified stock options. Non-qualified
stock options granted under the plan have a maximum term of 10 years and an
exercise price of no less than 85% of the fair market value of the common shares
on the date of the grant, as determined by the Board of Directors or a duly
authorized committee on such date, or 110% of the fair market value for those
optionees who own common shares representing more than 10% of the aggregate
voting power of our outstanding securities.  The rights of an optionee upon
the termination of his or her employment, directorship or consulting
relationship with us and upon a change of control are identical to those rights
discussed in the Canadian Stock Option Plan above.  We are entitled to
exercise our call right to repurchase all options beneficially owed by an
optionee under the U.S. Option Plan should an optionee cease to be our employee
or consultant.

The Tantau
Plan.  We assumed the Tantau Plan on January 17, 2001, upon completion of our acquisition of Tantau. 
The Tantau Plan provided for the grant of options for the purchase of shares of
common stock of Tantau to employees, officers, directors and consultants of
Tantau.  The plan provided for the grant of both incentive stock options
and non-qualified stock options.  We assumed the options granted under the
Tantau Plan, which became options to purchase an aggregate of 351,324 of our
common shares, which include a limited number of options granted outside of the
Tantau Plan, but which contain comparable economic terms.  We have not
granted any additional options under this plan, nor will we in the future. If a
change of control of the Company occurs, all outstanding options under this plan
become immediately vested and exercisable.

Amended
and Restated 2000 Stock Option Plan.The 2000 Stock Option Plan was
adopted in December 1999 and amended and restated in January 2002. 
The stock options granted under the Canadian and U.S. Stock Option Plans prior
to the date of completion of the IPO continued to be effective and governed by
the terms of the plans under which they were granted.  The maximum number
of our common shares available for issuance upon exercise of options granted
under the Amended and Restated 2000 Stock Option Plan, including incentive

79



stock options and non-qualified stock options, is currently 1,050,000
million.  The options granted under the Amended and Restated 2000 Stock
Option Plan have a maximum term of 10 years and an exercise price no less than
the fair market value of the common shares on the date prior to the date of the
grant as determined by the Board of Directors or duly authorized
committee.  Options held by any person under the Amended and Restated 2000
Stock Option Plan, together with any other options granted to that person may
not at any time exceed 5% of the aggregate number of common shares
outstanding.  If a change of control of the Corporation occurs, all options
granted under this plan will become immediately vested and exercisable with
respect to options granted prior to January 23, 2002 and one year after the
change of control (or earlier in certain circumstances, including involuntary
termination) in the case of options granted on or after January 23, 2002.
With the approval of the 2005 Stock Option Plan at the Annual and Special
Meeting of the Corporation on April 28, 2005, no further options have been
granted under the Amended and Restated 2000 Stock Option Plan.

2005 Stock Option Plan.  The 2005 Stock Option Plan was adopted by
the Corporations Shareholders on April 28, 2005.   The stock
options granted under the Canadian, U.S. and Amended and Restated 2000 Stock
Option Plans continued to be effective and governed by the terms of the plans
under which they were granted.  Common shares were reserved for
issuance under the 2005 Stock Option Plan, subject to adjustment only in the
event of a stock split, stock or other extraordinary dividend, or other similar
change in the common shares or capital structure of the Corporation.  The
maximum aggregate number of common shares which may be issued pursuant to 2005
Stock Option Plan to directors who are not also employees is 190,000 common
shares.  The maximum number of common shares with respect to which options
and stock appreciation rights may be granted to a participant during a calendar
year is 250,000 common shares.  For awards of restricted stock, restricted
stock units and deferred share units that are intended to be performance-based
compensation under Section 162(m) of the Internal Revenue Code of 1986, as
amended, the maximum number of common shares subject to such awards that may be
granted to a participant during a calendar year is 250,000 common shares. 
In the event of a change in control (as defined in the 2005 Plan and which does
not include an acquisition of more than 50% of our common shares by Austin
Ventures) and if the Corporation terminates a participants continuous
service without cause or a participant voluntarily terminates continuous service
for good reason within twelve months after a change in control, the awards held
by such participant shall automatically become fully vested and exercisable for
all of the shares at the time represented by the award.

Summary Information Concerning Stock Option Plans

Please see chart above under the heading SECURITIES AUTHORIZED FOR
ISSUANCE UNDER EQUITY COMPENSATION PLANS for summary information with
respect to our stock option plans as of December 31, 2005.

Indebtedness of Directors, Officers and Others

Our directors, senior officers, and their associates were not indebted to the
Corporation or to any of the Corporations subsidiaries at any time during
the last completed fiscal year.

80



Employment Contracts

In November 2000, in connection with our acquisition of TANTAU, we entered into
an employment agreement with John J. Sims, our Chief Executive Officer. 
The employment agreement was restated in February 2005 in order to reflect his
current salary, which was agreed upon in 2003.  In 2005, Mr. Sims
received an annual base salary of $330,000.  Additionally, we have
established a performance related bonus for Mr. Sims.  Either we or
Mr. Sims may terminate Mr. Sims employment at any time and for
any reason.  However, if we exercise this right, we must pay Mr. Sims
a lump sum severance payment in an amount equal to 12 or 18 months current
base salary and target bonus, determined by the period of time after termination
during which Mr. Sims agrees to be bound to non-competition and
non-solicitation covenants.  Mr. Sims will receive an identical lump
sum severance payment in the same two possible amounts in the event that he terminates his employment for good reason.

Stephen Morrison, our Chief Financial Officer and Senior Vice President
Corporate Services, is employed under an offer of employment letter that was
entered into on November 29, 2005, which amended and restated his previous
employment agreement with us.  Mr. Morrison currently receives an annual
salary of $180,000 per annum.  Either we or Mr. Morrison may terminate
Mr. Morrisons employment at any time and for any reason. 
However, if we exercise this right, we must pay Mr. Morrison a lump sum
severance payment in an amount equal to nine months current base salary
and nine months historic bonus (calculated based on a monthly average of
bonus amounts paid to him over the 12 months prior to the date of his
termination).  Mr. Morrison will also receive a lump sum severance
payment based on the same calculation in the event that he terminates his
employment for good reason. However, this right to this right to receive the
lump sum payment will be limited if a change in control of the Corporation has
occurred and the acquirer offers Mr. Morrison employment or continues his
employment in a position that is, when taken as a whole, comparable in all
significant respects to his position, authority, duties and responsibilities
with us prior to such change in control and the acquirer does not terminate his
employment within 12 months after the change of control.

Michael Luna, our Chief Technology Officer, is employed under an offer of
employment letter that was entered into on October 7, 2004.  Mr. Luna
currently receives an annual salary of $220,000 per annum.  Either we or
Mr. Luna may terminate Mr. Lunas employment at any time and for
any reason.  However, if we exercise this right, we must pay Mr. Luna
a lump sum severance payment in an amount equal to nine months current
base salary and nine months historic bonus (calculated based on a monthly
average of bonus amounts paid to him over the 12 months prior to the date of his
termination).  Mr. Luna will also receive a lump sum severance payment
based on the same calculation in the event that he terminates his employment for
good reason. However, this right to this right to receive the lump sum payment
will be limited if a change in control of the Corporation has occurred and the
acquirer offers Mr. Luna employment or continues his employment in a position
that is, when taken as a whole, comparable in all significant respects to his
position, authority, duties and responsibilities with us prior to such change in
control and the acquirer does not terminate his employment within 12 months
after the change of control.

81



Alan Prenoveau, our Senior Vice President, MNO Consulting & Delivery
Services, is employed under an offer of employment letter that was entered into
in November 2000 and amended in March, 2003. Mr. Prenoveau currently
receives an annual salary of $180,000.  Either we or Mr. Prenoveau may
terminate Mr. Prenoveaus employment at any time and for any
reason.  However, if we exercise this right, we must pay Mr. Prenoveau
a lump sum severance payment in an amount equal to nine months current
base salary and nine months historic bonus (calculated based on a monthly
average of bonus amounts paid to him over the 12 months prior to the date of his
termination).  Mr. Prenoveau will also receive a lump sum severance
payment based on the same calculation in the event that he terminates his
employment for good reason. However, this right to this right to receive the lump sum payment will be limited if a change in control of the Corporation has
occurred and the acquirer offers Mr. Prenoveau employment or continues his
employment in a position that is, when taken as a whole, comparable in all
significant respects to his position, authority, duties and responsibilities
with us prior to such change in control and the acquirer does not terminate his
employment within 12 months after the change of control.

Elda Rudd, our Vice President, Corporate Marketing is employed under an offer of
employment letter that was entered into in October 2002 and restated in March
2005. Ms. Rudd currently receives an annual salary of $175,000. Either we or Ms.
Rudd may terminate Ms. Rudds employment at any time and for any reason.
However, if we exercise this right, we must pay Ms. Rudd a lump sum severance
payment in an amount equal to nine months current base salary and nine
months historic bonus (calculated based on a monthly average of bonus
amounts paid to her over the 12 months prior to the date of her termination).
Ms. Rudd will also receive the lump sum severance payment based on the same
calculation in the event that she terminates her employment for good reason.
However, this right to receive the lump sum payment will be limited if a change
in control of the Corporation has occurred and the acquirer offers Ms. Rudd
employment or continues her employment in a position that is, when taken as a
whole, comparable in all significant respects to her position, authority, duties
and responsibilities with us prior to such change in control and the acquirer
does not terminate her employment within 12 months after the change of
control.

Pursuant to each employment agreement described above, we retain proprietary
rights in all intellectual property assets created, developed or conceived of by
the officers while they are employed by us.  Additionally, the officers are
bound by non-competition and non-solicitation covenants during their term of
employment and for varying periods of time thereafter.

The officers are entitled to participate in plans maintained from time to time
by us for the benefit of our employees, including those pertaining to group
life, accident, dental, prescription, sickness and medical, and long term
disability insurance.

COMPENSATION OF DIRECTORS

In 2005, we compensated directors who are not also executive officers for serving on the Board of Directors (independent directors) on the following basis:

| |  | annual Board   retainer of $20,000;                                           
| | - | ------------------------------------------------------------------------------
| |   |                                                                               
| |  | the Chairman   of the Board received an additional annual retainer of $10,000;

82



| |  | the Chairman   of the Audit Committee received an additional annual retainer of $10,000;                                                                     
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                              
| |  | each of the   other committee chairpersons received an additional annual retainer of   $5,000; and                                                           
| |   |                                                                                                                                                              
| |  | the Chairman   of the Special Committee received a retainer of $7,500, and each of the other   members of the Special Committee received a retainer of $5,000

We expect that outside directors will be compensated on the same basis in 2006.
In addition, under our current compensation arrangements, outside directors are
granted options to purchase common shares upon joining the Board and receive
subsequent annual grants of options in such number as is deemed appropriate by
the Governance, Nomination, Human Resources and Compensation Committee. 
These options have an exercise price that is equal to the fair market value of
our common shares on the date prior to the date of the grant.  In 2005, we
did not grant any options to purchase common shares to our directors who are not
also executive officers.  Outside directors are also reimbursed for their
reasonable out-of-pocket expenses for attending board and committee
meetings.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act, requires our directors, executive
officers and persons who own more than 10% of our common shares (collectively,
Reporting Persons) to file reports of ownership and changes in
ownership of our common shares with the SEC.  We believe, based solely on our review of the copies of such
reports received or written representations from certain Reporting Persons, that
during the fiscal year ended December 31, 2005, all of these reports were filed
by the Reporting Persons on a timely basis, other than a Form 4 report of a
stock option grant that was not filed by Patrick Engel (our Vice President,
Development) on the date required for filing.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
|-------- | ---------------------------------------------------------------

To the knowledge of our directors and officers, as at March 1, 2006, the only
shareholders beneficially owning, directly or indirectly, or exercising control
or direction over more than 5% of the common shares are set forth in the
Principal Shareholders Table below.  In addition, the table sets forth the
beneficial common share ownership for each of our directors and each of our
executive officers named in the Summary Compensation Table, above, who were still
executive officers as of

83



March 1, 2006, as well as all of our current directors and executive officers as
a group.  Percentage ownership is based upon 6,074,703 common shares
outstanding as of March 1, 2006 plus the dilution factor for that particular
shareholders beneficially owned shares as described in the following
sentence.  For purposes of this table, the term beneficial
ownership includes outstanding common shares, as well as common shares
issuable upon exercise of vested options, and options that vest within sixty
(60) days of March 1, 2006.

Principal Shareholders Table

|Name of Shareholder                                                      |  |  | Number of common shares |         |  | Percent of Class |  
|------------------------------------------------------------------------ |  |  | ----------------------- | ------- |  | ---------------- | -
|                                                                         |  |  |                         |         |  |                  |  
|Austin Ventures (1)300 West 6th   Street, Suite 2300 Austin, Texas 78701 |  |  | 3,452,145               | (2)     |  | 38.45            | %
|J. Ian Giffen                                                            |  |  | 16,250                  | (3)     |  | <1               | %
|John J. Sims                                                             |  |  | 192,597                 | (4)     |  | 3.10             | %
|James D. Dixon                                                           |  |  | 19,600                  | (5)     |  | <1               | %
|Barry J. Reiter                                                          |  |  | 17,500                  | (6)     |  | <1               | %
|Joseph  C. Aragona                                                       |  |  | 3,457,145               | (7)(8)  |  | 38.48            | %
|Benjamin L. Scott                                                        |  |  | 11,250                  | (9)     |  | <1               | %
|Tamara Steffens (10)                                                     |  |  | 22,500                  | (11)    |  | <1               | %
|Michael Luna                                                             |  |  | 22,500                  | (12)    |  | <1               | %
|Alan Prenoveau                                                           |  |  | 22,443                  | (13)    |  | <1               | %
|Elda Rudd                                                                |  |  | 26,250                  | (14)    |  | <1               | %
|Stephen Morrison                                                         |  |  | 3,997                   | (15)    |  | <1               | %
|All directors and executive officers as a group (11 persons)             |  |  | 3,811,032               | (2)(16) |  | 41.17            | %

|                                        
|----------------------------------------
|Notes to   Principal Shareholders Table:
|                                        
|(1)                                     

84



|(2)  | Includes an aggregate of 2,904,291 common
shares issuable to Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund,
L.P., and Austin Ventures VIII, L.P. upon the conversion of $8,000,000 aggregate
principal amount of Notes and $916,173.30 accrued interest thereon at March 1,
2006.                   
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                    
|(3)  | Includes   16,250 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(4)  | Includes   111,375 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                    
|(5)  | Includes   19,100 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(6)  | Includes   17,500 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(7)  | The   3,452,145 common shares issued to or beneficially owned by Austin Ventures   may be deemed to be beneficially owned by Mr. Aragona due to his   affiliation with these funds; however, Mr. Aragona disclaims beneficial   ownership of these shares except to the extent of his pecuniary interest   therein.
|     |                                                                                                                                                                                                                                                                                                                    
|(8)  | Includes   5,000 common shares issuable upon the exercise of presently vested options or   options that vest within 60 days from    March 1, 2006.                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                    
|(9)  | Includes   11,250 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(10) | Ms. Steffens   resigned   from her position as Senior Vice President, Sales effective March 17, 2006.   Her outstanding stock options will be cancelled on April 17, 2006.                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                    
|(11) | Includes   22,500 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(12) | Includes   22,500 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(13) | Includes   22,443 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(14) | Includes   26,250 common shares issuable upon the exercise of presently vested options   or options that vest within 60 days from    March 1, 2006.                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                    
|(15) | Includes   3,997 common shares issuable upon the exercise of presently vested options or   options that vest within 60 days from    March 1, 2006.                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                    
|(16) | Includes an   aggregate of 278,165 common shares issuable upon the exercise of presently   vested options or options that vest within 60 days from March 1, 2006.                                                                                                                                                  

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------

None of our directors or officers, or any
shareholder of record as of the date of this Report who owned, of record or to our knowledge, more than 5% of the
outstanding common shares, or any affiliate or associate thereof, had any
material interest, direct or indirect, in any transaction during the last three
fiscal years, or since the commencement of our current financial year, in any
completed or proposed transaction which has materially affected or will
materially affect us or any of our subsidiaries, other than the following:

85



Torys LLP

In 2005, we obtained legal services relating to corporate/commercial/securities
matters from Torys LLP, a New York/Toronto law firm.  Mr. Reiter, a
member of the Board of Directors, is a partner of that firm.

Austin Ventures

On May 14, 2004, we entered into a series of agreements, including a Secured
Convertible Note Purchase Agreement (the Purchase Agreement) between
724 Solutions Inc. and our wholly owned subsidiary 724 Solutions Software Inc.,
and Austin Ventures VI, L.P. (AV VI), Austin Ventures VI Affiliates
Fund, L.P. (AV VI A), and Austin Ventures VIII, L.P. (AV
VIII), (collectively, the Lenders or Austin
Ventures) in connection with the private placement of up to $8,000,000 of
Secured Convertible Promissory Notes for cash. The
non-brokered private placement of Notes was completed in two tranches. The first
tranche of the financing involved the issuance of $3,044,000 of Notes and was
completed on May 14, 2004. The second tranche of the financing involved the
issuance of $4,956,000 of Notes and was completed on June 29, 2004 after we
obtained shareholder approval of the transactions.

The Notes have a 3-year term and accrue interest at a rate of 2.5% per quarter,
of which 1.25% is payable in arrears at the beginning of each quarter and the
remainder of which is due at maturity. The principal amounts of the Notes and
all interest owing at maturity are convertible at the option of the Lenders into
common shares at a conversion price of $3.07 per share. The interest payable
quarterly is convertible at our option into common shares at a conversion price
of $3.07 per share. The conversion price was based on the volume weighted
average trading price of the our common shares on the TSX for the five trading
days prior to May 14, 2004. Subject to certain exceptions, if we issue any
common shares or securities convertible into common shares at a price that is
less than the conversion price of the Notes then in effect, then such conversion
price shall be subject to a weighted average anti-dilution adjustment, whereby
the conversion price will be reduced based on the weighted average price of the
additional securities issued. The conversion price will not be lowered by more
than 15% of the initial conversion price of $3.07.

Austin Ventures is our largest beneficial shareholder. Assuming that all of the
Notes are converted into common shares at the lowest possible conversion price
on the maturity date, all accrued interest on the Notes is paid with common
shares, and that no additional common shares are issued, Austin Ventures could
be deemed to beneficially own up to 44.23% of our issued and outstanding common
shares.

Joseph C. Aragona is currently a member of our Board of Directors.  He is
also a general partner of AV Partners VI, L.P., which serves as the general
partner of both AV VI and AV VI A.  In addition, Mr. Aragona is a general
partner of AV Partners VIII, L.P., which serves as the general partner of AV
VIII.  As a general partner of AVP VI and AVP VIII, Mr. Aragona may have a
limited pecuniary interest in the private placement transactions.  Mr.
Aragona did not participate in the deliberations or voting of our Board with
respect to the approval of the private placement transactions.

86



We granted the Lenders a blanket security interest in all of our assets to
secure the timely payment and performance in full of all of the obligations
under the Notes. The security interest ranks senior to all of our indebtedness
other than fully-funded indebtedness of up to $1,500,000.

The Corporation granted the Lenders certain registration rights, pursuant to the
terms and provisions of a registration rights agreement, to enable the resale of
common shares issuable upon conversion of the Notes and the interest payable
thereon and other common shares held by the Lenders.  In accordance with
the terms of the registration rights agreement, the Lenders may, at any time,
require us to file a registration statement with the SEC, registering these common shares.

The Notes are subject to customary events of default, including the failure to
pay interest or principal, and specified types of bankruptcy events. Additional
events of default include the issuance of certain capital securities that, if
not for the limitation noted above, would cause the conversion price of the
Notes to be lowered by more than 15% of the initial conversion price and our
entering into specified types of merger or acquisition transactions.  An
event of default would require us to repay all amounts owing under the
Notes.

In January 2005, we issued 33,549 common shares to Austin Ventures in connection
with the repayment of interest owing on the Notes.   In January 2006,
we issued 35,259 common shares to Austin Ventures in connection with the
repayment of interest owing on the Notes.

On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to
acquire all of our outstanding common shares not then-owned by Austin Ventures
for cash consideration of $3.34 per common share, an increase from the original
offer by Austin Ventures of $3.07 per share. After careful consideration and
evaluation by our Special Committee of independent directors, which had been
previously constituted in order to consider potential value enhancing strategic
transactions for our shareholders, we accepted the proposal.

|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

KPMG LLP has audited our consolidated balance sheets as at December 31, 2005 and
December 31, 2004, and the consolidated statements of
operations, shareholders equity and cash flows for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003, as stated in their
report appearing herein.  KPMG LLP has been our auditor since
March 1999.

Audit Fees

KPMG LLP billed us CDN$195,000 (approximately US$160,661) in 2005 and
CDN$168,000 (approximately US$134,615) in 2004 for professional services
rendered for the audit of our annual financial statements and the review of
financial statements included in statutory and regulatory filings.

Audit-Related Fees

There were no additional fees, outside of the audit fees described above,
charged by KPMG LLP to us which related to audit issues.  These would
include items such as Sarbanes-Oxley Section 404 advisory services, audits of
employee benefit plans, transaction due diligence and other services related to
dispositions and acquisitions.

87



Tax Fees

KPMG LLP billed us CDN$38,165 (approximately US$31,445) in 2005 and CDN$35,325
(approximately US$28,305) in 2004 for professional services rendered for tax
compliance, tax advice, and tax planning.  The taxation advisory services
provided related primarily to payroll taxation matters, taxation of stock
options and preparation of corporate tax returns.

All Other Fees

KPMG LLP billed us nil in 2005 and CDN$50,600 (approximately US$40,545) in 2004
for professional services rendered in connection with statutory audits and other
matters.

The Audit Committee has considered whether the provision of these services is
compatible with maintaining KPMG LLPs independence and is of the opinion
that the provision of these services does not compromise KPMG LLPs
independence.  The Audit Committee, in accordance with the Audit
Committees policy for the engagement of our independent auditor to provide
non-audit services, must pre-approve all non-audit services provided by KPMG
LLP. The policy restricts the type of non-audit services that the auditors may
provide to our subsidiaries and us. It includes a mechanism for the
consideration and pre-approval by the Audit Committee of all services to be
provided by the auditors as well as the associated fees. In 2005, all non-audit
services that were performed by the auditors were pre-approved by the Audit
Committee.

PART IV

|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|-------- | -------------------------------------------

| |     |                                                             |                        
| | --- | ----------------------------------------------------------- | -----------------------
| | (a) | The   following documents are filed as part of this Report:
| |     |                                                            
| |     | 1.                                                          | Financial   Statements.

Incorporated
by reference from the financial statements and notes thereto that are set forth
beginning on page F-1 of this Report.

| |       | 2.                                                                                         | Financial   Statement Schedules.
| | ----- | ------------------------------------------------------------------------------------------ | --------------------------------
| |       |                                                                                            |                                 
| | None. |                                                                                            |                                 
| |       |                                                                                            |                                 
| | (b)   | The exhibits   included in this Report or incorporated herein by reference are as follows:

88



|EXHIBIT NUMBER |  | NAME OF DOCUMENT                                                                                                                                                                                                                     
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                                                      
|3.1(1)         |  | Articles of   the Registrant                                                                                                                                                                                                         
|               |  |                                                                                                                                                                                                                                      
|3.2(2)         |  | Articles of   Continuance                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                      
|3.3(2)         |  | CBCA By-Laws                                                                                                                                                                                                                         
|               |  |                                                                                                                                                                                                                                      
|3.4(2)         |  | Articles of   Amendment                                                                                                                                                                                                              
|               |  |                                                                                                                                                                                                                                      
|4.1(3)         |  | Shareholder   Rights Plan Agreement dated as of February 10, 2003, between 724 Solutions   Inc. and Computershare Trust Company of Canada, as Rights Agent, including   the Form of Rights Certificate attached thereto as Exhibit A.
|               |  |                                                                                                                                                                                                                                      
|4.2(4)         |  | Secured   Convertible Note Purchase Agreement, dated May 14, 2004, among the   Registrant, 724 Solutions Software Inc., Austin Ventures VI, L.P.,   Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII,    L.P.      
|               |  |                                                                                                                                                                                                                                      
|4.3(4)         |  | Registration   Rights Agreement, dated May 14, 2004, among the Registrant, Austin Ventures   VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII,   L.P.                                                    
|               |  |                                                                                                                                                                                                                                      
|4.4(4)         |  | Form of   Secured Convertible Promissory Note.                                                                                                                                                                                       
|               |  |                                                                                                                                                                                                                                      
|10.1.1(5)      |  | 724   Solutions Inc. 1997 Stock Option Plan, as amended and restated.                                                                                                                                                                
|               |  |                                                                                                                                                                                                                                      
|10.1.2(5)      |  | Form of   Stock Option Agreement pursuant to the 724 Solutions Inc. 1997 Stock Option   Plan, as amended and restated.                                                                                                               
|               |  |                                                                                                                                                                                                                                      
|10.1.3(5)      |  | 724   Solutions Inc. 2000 Stock Option Plan, as amended and restated.                                                                                                                                                                
|               |  |                                                                                                                                                                                                                                      
|10.1.4(5)      |  | Forms of Canadian and U.S. Stock Option
Agreements pursuant to the 724 Solutions Inc. 2000 Stock Option Plan, as amended
and restated, for option grants prior to January 24, 2002.                                                  
|               |  |                                                                                                                                                                                                                                      
|10.1.5(5)      |  | Forms of Canadian and U.S. Stock Option
Agreements pursuant to the 724 Solutions Inc. 2000 Stock Option Plan, as amended
and restated (for option grants after January 24, 2002).                                                    
|               |  |                                                                                                                                                                                                                                      
|10.1.6(6)      |  | Registrants   Tantau Software Inc. 1999 Stock Option Plan, as amended and restated for   options granted prior to January 2001.                                                                                                     
|               |  |                                                                                                                                                                                                                                      
|10.1.7(5)      |  | Registrants   Tantau Software Inc. 1999 Stock Option Plan, as amended and restated for   options granted in January 2001.                                                                                                           
|               |  |                                                                                                                                                                                                                                      
|10.1.8(6)      |  | Registrants   Form of Stock Option Agreement pursuant to the Tantau Software Inc. 1999   Stock Option Plan for options granted prior to January 2001.                                                                               
|               |  |                                                                                                                                                                                                                                      
|10.1.9(5)      |  | Registrants   Form of Stock Option Agreement pursuant to the Tantau Software Inc. 1999   Stock Option Plan for options granted in January 2001.                                                                                     
|               |  |                                                                                                                                                                                                                                      
|10.1.10(9)     |  | Registrants   2005 Stock Incentive Plan                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                      
|10.1.11(9)     |  | Registrants   Form of Stock Option Agreement pursuant to the 2005 Stock Incentive Plan.   (U.S. Optionees.)                                                                                                                         
|               |  |                                                                                                                                                                                                                                      
|10.1.12(9)     |  | Registrants   Form of Stock Option Agreement pursuant to the 2005 Stock Incentive Plan.   (Canadian Optionees.)                                                                                                                     
|               |  |                                                                                                                                                                                                                                      
|10.2.1(7)      |  | Employment   Agreement of John J. Sims, dated November 28, 2000.                                                                                                                                                                     
|               |  |                                                                                                                                                                                                                                      
|10.2.2(9)      |  | Restatement   Amendment to Employment Agreement of John J. Sims, dated February 25, 2005.                                                                                                                                            
|               |  |                                                                                                                                                                                                                                      
|10.2.3(9)      |  | Employment   Agreement of Elda Rudd, dated October 24, 2002.                                                                                                                                                                         
|               |  |                                                                                                                                                                                                                                      
|10.2.4(9)      |  | Amendment to   Employment Agreement of Elda Rudd, dated March 10, 2005.                                                                                                                                                              

89



|10.2.5(8)  |  | Employment   Agreement of Alan Prenoveau, dated November 22, 2000 and March 5, 2003.                                                                                                                                                                               
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  |                                                                                                                                                                                                                                                                    
|10.2.6(10) |  | Employment   Agreement between the Registrant and Stephen Morrison, dated November 29,   2005                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                    
|10.2.7*    |  | Employment   Agreement between the Registrant and Michael Luna, dated October 7, 2004                                                                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                    
|10.2.8*    |  | Form of Indemnification Agreement for Directors and Officers.                                                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                    
|10.3.1(4)  |  | Security   Agreement, dated May 14, 2004, among the Registrant, 724 Solutions Software,   Inc., 724 Solutions (US), Inc., 724 Solutions International, Inc., Austin   Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin   Ventures VIII, L.P.
|           |  |                                                                                                                                                                                                                                                                    
|10.3.2(4)  |  | Guaranty,   dated May 14, 2004, among 724 Solutions (US), Inc., 724 Solutions   International, Inc., Austin Ventures VI, L.P., Austin Ventures VI Affiliates   Fund, L.P., and Austin Ventures VIII, L.P.                                                          
|           |  |                                                                                                                                                                                                                                                                    
|14.1*      |  | Code of   Ethics                                                                                                                                                                                                                                                   
|           |  |                                                                                                                                                                                                                                                                    
|21.1*      |  | List of   Subsidiaries.                                                                                                                                                                                                                                            
|           |  |                                                                                                                                                                                                                                                                    
|23.1*      |  | Consent of   KPMG LLP, Toronto.                                                                                                                                                                                                                                    
|           |  |                                                                                                                                                                                                                                                                    
|31.1*      |  | Rule   13a-14(a)/15d-14(a) Certification of the Chief Executive Officer                                                                                                                                                                                            
|           |  |                                                                                                                                                                                                                                                                    
|31.2*      |  | Rule   13a-14(a)/15d-14(a) Certification of the Chief Financial Officer                                                                                                                                                                                            
|           |  |                                                                                                                                                                                                                                                                    
|32.1*      |  | Section 1350   Certification of the Chief Executive Officer                                                                                                                                                                                                        
|           |  |                                                                                                                                                                                                                                                                    
|32.2*      |  | Section 1350   Certification of the Chief Financial Officer                                                                                                                                                                                                        
|           |  |                                                                                                                                                                                                                                                                    
|99.1*      |  | Audit   Committee Charter                                                                                                                                                                                                                                          

| |     
| | ----
| | (1) 
| |     
| | (2) 
| |     
| | (3) 
| |     
| | (4) 
| |     
| | (5) 
| |     
| | (6) 
| |     
| | (7) 
| |     
| | (8) 
| |     
| | (9) 
| |     
| | (10)
| |     
| | *   

90



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                        | 724 SOLUTIONS INC.
|----------------------- | ------------------
|                        |                   
|                        | By:               
|                        |                   
|                        |                   
|                        |                   
|                        |                   
|Date:  March 31,   2006 |                   

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|SIGNATURE            |  | TITLES                                                                                                               |  | DATE          
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | --------------
|                     |  |                                                                                                                      |  |               
|/s/ John J. Sims     |  | Chief   Executive Officer and Director    (principal executive officer)                                              |  | March 31, 2006
|                     |  |                                                                                                                      | 
|John J. Sims         |  |                                                                                                                      | 
|                     |  |                                                                                                                      |  |               
|/s/ Stephen Morrison |  | Chief   Financial Officer, Senior Vice President, Corporate Services  (principal financial and accounting   officer) |  | March 31, 2006
|                     |  |                                                                                                                      | 
|Stephen Morrison     |  |                                                                                                                      | 
|                     |  |                                                                                                                      |  |               
|/s/ J. Ian Giffen    |  | Chairman and   Director                                                                                              |  | March 31, 2006
|                     |  |                                                                                                                      |  |               
|J. Ian Giffen        |  |                                                                                                                      |  |               
|                     |  |                                                                                                                      |  |               
|                     |  |                                                                                                                      |  |               
|/s/ James D. Dixon   |  | Director                                                                                                             |  | March 31, 2006
|                     |  |                                                                                                                      |  |               
|James D. Dixon       |  |                                                                                                                      |  |               
|                     |  |                                                                                                                      |  |               
|                     |  | Director                                                                                                             |  |               
|                     |  |                                                                                                                      |  |               
|Joseph Aragona       |  |                                                                                                                      |  |               
|                     |  |                                                                                                                      |  |               
|/s/ Barry J. Reiter  |  | Director                                                                                                             |  | March 31, 2006
|                     |  |                                                                                                                      |  |               
|Barry J. Reiter      |  |                                                                                                                      |  |               
|                     |  |                                                                                                                      |  |               
|                     |  | Director                                                                                                             |  |               
|                     |  |                                                                                                                      |  |               
|Benjamin L. Scott    |  |                                                                                                                      |  |               

91



Message

| | KPMG LLP                | Telephone | (416) 228-7000
| | ----------------------- | --------- | --------------
| | Chartered   Accountants | Fax       | (416) 228-7123
| | Yonge Corporate Centre  | Internet  | www.kpmg.ca   
| | 4100 Yonge St.          |           |               
| | Suite 200               |           |               
| | North York, ON M2P 2H3  |           |               

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders 724 Solutions Inc.:

We have audited the accompanying consolidated balance sheets of 724 Solutions Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes 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 724 Solutions Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

As described in note 2 to the consolidated financial statements, in 2003 the Company changed its method of accounting for stock-based compensation

Message

Chartered Accountants

Toronto, Canada  March 30, 2006

KPMG, a Canadian limited liability partnership is the Canadian  member firm of KPMG International, a Swiss cooperative.

F-1



724 SOLUTIONS INC.Consolidated Balance Sheets (In thousands of U.S. dollars)

December 31, 2005 and 2004

|                                                                                           |  | 2005 |          | 2004 |  
|------------------------------------------------------------------------------------------ |  | ---- | -------- | ---- | -
|                                                                                           |  |      |          |      |  
|Assets                                                                                     |  |      |          |      |  
|Current assets:                                                                            |  |      |          |      |  
|Cash and cash   equivalents (note 3)                                                       |  | $    | 5,272    |      | $
|Short-term investments   (note 3)                                                          |  |      | 4,009    |      |  
|Restricted cash (note   3)                                                                 |  |      | 219      |      |  
|Accounts receivable,   net of allowance for doubtful accounts of $19 (2004 - $18) (note 4) |  |      | 2,471    |      |  
|Prepaid expenses and   other receivables                                                   |  |      | 522      |      |  
|                                                                                           |  |      |          |      |  
|Total current assets                                                                       |  |      | 12,493   |      |  
|Deferred charges                                                                           |  |      | 167      |      |  
|Fixed assets (note 5)                                                                      |  |      | 836      |      |  
|                                                                                           |  |      |          |      |  
|Total assets                                                                               |  | $    | 13,496   |      | $
|                                                                                           |  |      |          |      |  
|Liabilities and Shareholders   Equity                                                     |  |      |          |      |  
|Current liabilities:                                                                       |  |      |          |      |  
|Accounts payable                                                                           |  | $    | 358      |      | $
|Accrued liabilities   (note 17)                                                            |  |      | 1,622    |      |  
|Interest payable to   related parties                                                      |  |      | 108      |      |  
|Deferred revenue                                                                           |  |      | 289      |      |  
|                                                                                           |  |      |          |      |  
|Total current   liabilities                                                                |  |      | 2,377    |      |  
|Long-term liabilities                                                                      |  |      |         |      |  
|Convertible notes payable to related parties in 2007   (note 8)                            |  |      | 7,969    |      |  
|Long-term interest payable to related parties in   2007 (note 8)                           |  |      | 768      |      |  
|                                                                                           |  |      |          |      |  
|Total liabilities                                                                          |  |      | 11,114   |      |  
|Shareholders equity (note 9):                                                             |  |      |          |      |  
|Unlimited common shares   authorized, no par value:                                        |  |      |          |      |  
|6,039,444 common shares   issued and outstanding (2004 - 5,989,300)                        |  |      | 764,859  |      |  
|Additional paid-in   capital                                                               |  |      | 1,312    |      |  
|Accumulated deficit                                                                        |  |      | (763,996 | )    |  
|Accumulated other   comprehensive income                                                   |  |      | 207      |      |  
|                                                                                           |  |      |          |      |  
|Total shareholders   equity                                                               |  |      | 2,382    |      |  
|Lease commitments (note 11)                                                                |  |      |          |      |  
|Contingent liabilities (note 12)                                                           |  |      |          |      |  
|                                                                                           |  |      |          |      |  
|Total liabilities and shareholders equity                                                 |  | $    | 13,496   |      | $
|                                                                                           |  |      |          |      |  

See accompanying notes to consolidated financial statements.

F-2



724 SOLUTIONS INC.Consolidated Statements of Operations (In thousands of U.S. dollars, except shares and per share amounts)

Years ended December 31, 2005, 2004 and 2003

|                                                                                                      |  | 2005 |        | 2004 |   | 2003   |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                                                                      |  |      |        |      |   |        |  
|Revenue:                                                                                              |  |      |        |      |   |        |  
|Product                                                                                               |  | $    | 7,445  |      | $ | 8,844  |  
|Services                                                                                              |  |      | 10,820 |      |   | 6,228  |  
|                                                                                                      |  |      |        |      |   |        |  
|Total revenue                                                                                         |  |      | 18,265 |      |   | 15,072 |  
|Operating expenses:                                                                                   |  |      |        |      |   |        |  
|Cost of product revenue                                                                               |  |      |        |      |   |        |  
|Amortization of   intangible assets                                                                   |  |      |       |      |   |       |  
|Other                                                                                                 |  |      | 28     |      |   | 26     |  
|Cost of service revenue                                                                               |  |      | 7,430  |      |   | 6,614  |  
|Research and   development                                                                            |  |      | 6,982  |      |   | 6,271  |  
|Sales and marketing                                                                                   |  |      | 4,036  |      |   | 4,985  |  
|General and   administrative                                                                          |  |      | 3,362  |      |   | 3,074  |  
|Depreciation                                                                                          |  |      | 597    |      |   | 595    |  
|Stock-based   compensation:                                                                           |  |      |        |      |   |        |  
|Cost of revenue                                                                                       |  |      | 53     |      |   | 15     |  
|Research and   development                                                                            |  |      | 122    |      |   | 40     |  
|Sales and marketing                                                                                   |  |      | 136    |      |   | 34     |  
|General and   administrative                                                                          |  |      | 720    |      |   | 63     |  
|Restructuring charges   (note 16(a))                                                                  |  |      |       |      |   | 993    |  
|Write-down of goodwill,   intangible and other assets (note 16(b))                                    |  |      |       |      |   |       |  
|                                                                                                      |  |      |        |      |   |        |  
|Total operating   expenses                                                                            |  |      | 23,466 |      |   | 22,710 |  
|                                                                                                      |  |      |        |      |   |        |  
|Loss from operations                                                                                  |  |      | (5,201 | )    |   | (7,638 | )
|Interest income (expense), net                                                                        |  |      | (709   | )    |   | (396   | )
|Loss on settlement of liability                                                                       |  |      | (165   | )    |   |       |  
|Gain on sale of investments                                                                           |  |      |       |      |   |       |  
|                                                                                                      |  |      |        |      |   |        |  
|Loss for the year                                                                                     |  | $    | (6,075 | )    | $ | (8,034 | )
|                                                                                                      |  |      |        |      |   |        |  
|Basic and diluted loss per share                                                                      |  | $    | (1.01  | )    | $ | (1.34  | )
|                                                                                                      |  |      |        |      |   |        |  
|Weighted average number of shares used in computing   basic and diluted loss per share (in thousands) |  |      | 6,034  |      |   | 5,984  |  
|                                                                                                      |  |      |        |      |   |        |  

See accompanying notes to consolidated financial statements.

F-3



724 SOLUTIONS INC.Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) (In thousands of U.S. dollars, except number of shares)

Years ended December 31, 2005, 2004 and 2003

|                                                    |  |                 |           | Additional   paid in   capital |   | Deferred   stock-based   compensation   related to   stock options |  | Accumulated   deficit |       | Accumulated   other   comprehensive   income (loss) |   | Total   shareholders   equity |  
|--------------------------------------------------- |  | --------------- | --------- | ------------------------------ | - | ------------------------------------------------------------------ |  | --------------------- | ----- | --------------------------------------------------- | - | ------------------------------ | -
|                                                    |  |                 |           |                                |   |                                                                    |  |                      
|                                                    |  | Common   shares |           |                                |   |                                                                    |  |                      
|                                                    |  |                 |           |                                |   |                                                                    |  |                      
|                                                    |  | Number          |           | Amount                         |   |                                                                    |  |                       |       |                                                    
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Balances December 31, 2002                          |  |                 | 5,983,349 |                                | $ | 764,508                                                            |  | $                     |      |                                                     | $ | (1,616                         | )
|Loss for the year                                   |  |                 |          |                                |   |                                                                   |  |                       |      |                                                     |   |                               |  
|Cumulative translation   adjustment                 |  |                 |          |                                |   |                                                                   |  |                       |      |                                                     |   |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Total comprehensive loss                            |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Amortization of deferred   stock-based compensation |  |                 |          |                                |   |                                                                   |  |                       |      |                                                     |   | 1,616                          |  
|Paid in capital                                     |  |                 |          |                                |   |                                                                   |  |                       | 62    |                                                     |   |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Balances, December 31, 2003                         |  |                 | 5,983,349 |                                | $ | 764,508                                                            |  | $                     | 62    |                                                     | $ |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Loss for the year                                   |  |                 |          |                                |   |                                                                   |  |                       |      |                                                     |   |                               |  
|Cumulative translation   adjustment                 |  |                 |          |                                |   |                                                                   |  |                       |      |                                                     |   |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Total comprehensive loss                            |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Issuance on exercise of options                     |  |                 | 5,951     |                                |   | 22                                                                 |  |                       |      |                                                     |   |                               |  
|Stock-based compensation   expense                  |  |                 |          |                                |   |                                                                   |  |                       | 217   |                                                     |   |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Balances, December 31, 2004                         |  |                 | 5,989,300 |                                | $ | 764,530                                                            |  | $                     | 279   |                                                     | $ |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Loss for the year                                   |  |                 |          |                                |   |                                                                   |  |                       |      |                                                     |   |                               |  
|Issuance on exercise of   options                   |  |                 | 16,595    |                                |   | 61                                                                 |  |                       |      |                                                     |   |                               |  
|Issuance of common shares                           |  |                 | 33,549    |                                |   | 268                                                                |  |                       |      |                                                     |   |                               |  
|Stock-based compensation   expense                  |  |                 |          |                                |   |                                                                   |  |                       | 1,033 |                                                     |   |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  
|Balances, December 31, 2005                         |  |                 | 6,039,444 |                                | $ | 764,859                                                            |  | $                     | 1,312 |                                                     | $ |                               |  
|                                                    |  |                 |           |                                |   |                                                                    |  |                       |       |                                                     |   |                                |  

See accompanying notes to consolidated financial statements.

F-4



724 SOLUTIONS INC.Consolidated Statements of Cash Flows (In thousands of U.S. dollars)

Years ended December 31, 2005, 2004 and 2003

|                                                            |  | 2005 |         | 2004 |   | 2003    |  
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                            |  |      |         |      |   |         |  
|Cash flows from (used in) operating activities:             |  |      |         |      |   |         |  
|Loss for the year                                           |  | $    | (6,075  | )    | $ | (8,034  | )
|Items not involving   cash:                                 |  |      |         |      |   |         |  
|Accretion on   convertible notes payable to related parties |  |      | 22      |      |   | 12      |  
|Depreciation and   amortization                             |  |      | 597     |      |   | 595     |  
|Amortization of   deferred charges                          |  |      | 119     |      |   | 66      |  
|Stock-based   compensation                                  |  |      | 1,031   |      |   | 152     |  
|Loss on settlement of   liability                           |  |      | 165     |      |   |        |  
|Other non-cash items                                        |  |      |        |      |   | 21      |  
|Gain on sale of   investments                               |  |      |        |      |   |        |  
|Write-down of goodwill,   intangible and other assets       |  |      |        |      |   |        |  
|Change in operating   assets and liabilities:               |  |      |         |      |   |         |  
|Accounts receivable                                         |  |      | 360     |      |   | (534    | )
|Prepaid expenses and   other receivables                    |  |      | 61      |      |   | 65      |  
|Accrued interest on   short-term investments                |  |      |        |      |   | 40      |  
|Accounts payable                                            |  |      | (255    | )    |   | 202     |  
|Interest payable to   related parties                       |  |      | 5       |      |   | 103     |  
|Long-term liabilities                                       |  |      | (92     | )    |   | 92      |  
|Long-term interest   payable to related parties             |  |      | 425     |      |   | 343     |  
|Accrued liabilities                                         |  |      | (479    | )    |   | (1,301  | )
|Deferred consideration                                      |  |      |        |      |   |        |  
|Deferred revenue                                            |  |      | 116     |      |   | (237    | )
|                                                            |  |      |         |      |   |         |  
|Net cash flows from   (used in) operating activities        |  |      | (4,000  | )    |   | (8,415  | )
|Cash flows from (used in) financing activities:             |  |      |         |      |   |         |  
|Issuance (principal   repayment) of notes payable           |  |      |        |      |   |        |  
|Issuance of convertible   notes payable to related parties  |  |      |        |      |   | 8,000   |  
|Deferred charges                                            |  |      |        |      |   | (352    | )
|Issuance of common   shares on exercise of options          |  |      | 61      |      |   | 22      |  
|                                                            |  |      |         |      |   |         |  
|Net cash flows from   (used in) financing activities        |  |      | 61      |      |   | 7,670   |  
|Cash flows from (used in) investing activities:             |  |      |         |      |   |         |  
|Purchase of fixed assets,   net                             |  |      | (345    | )    |   | (1,017  | )
|Maturity of short-term   investments                        |  |      | 14,402  |      |   | 7,233   |  
|Purchases of short-term   investments                       |  |      | (10,415 | )    |   | (13,490 | )
|Restricted cash                                             |  |      |        |      |   |        |  
|Proceeds on sale of   investments                           |  |      |        |      |   |        |  
|                                                            |  |      |         |      |   |         |  
|Net cash flows from   (used in) investing activities        |  |      | 3,642   |      |   | (7,274  | )
|                                                            |  |      |         |      |   |         |  
|Effect of exchange rate changes on cash                     |  |      | 152     |      |   |        |  
|                                                            |  |      |         |      |   |         |  
|Net decrease in cash and cash equivalents                   |  |      | (145    | )    |   | (8,019  | )
|Cash and cash equivalents, beginning of year                |  |      | 5,417   |      |   | 13,436  |  
|                                                            |  |      |         |      |   |         |  
|Cash and cash equivalents, end of year                      |  | $    | 5,272   |      | $ | 5,417   |  
|                                                            |  |      |         |      |   |         |  

Supplemental disclosure of cash flow information (note 15)

See accompanying notes to consolidated financial statements.

F-5



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|1. | Organization of the Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 724 Solutions Inc. designs, develops, markets and   supports software products for use by mobile network operators worldwide.   Mobile network operators are telecommunications companies that provide a   range of mobile voice and data communications services to their consumer and   business customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company was incorporated in 1997 and
introduced its first products in 1999.  Initially, the Company focused on
creating wireless software products that would assist financial services
companies in making their traditional services available to their customers
wirelessly from mobile phones and other handheld computing devices.  In
January 2001, the Company acquired Tantau Software with a view to expanding its
customer base, and utilizing Tantaus software products to strengthen its
products offered to financial services customers, and also to expand its sales
to the mobile network operator market.  In 2001, the Company began offering
its mobile alerting software products and mobile Internet gateway product
(software that enables internet connectivity to mobile devices) to mobile
network operators.  In October 2002, the Companys products and
solutions for mobile network operators and other customers were re-branded as
the X-treme Mobility Suite of products (XMS).  The Company no
longer offers products developed specifically for financial institutions,
although it continues to provide services to a small number of financial
services customers and continues to support earlier sales to these
customers.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|2. | Significant accounting policies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | These consolidated financial statements are expressed   in U.S. dollars and are prepared in accordance with accounting principles   generally accepted in the United States (U.S. GAAP).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | During 2003, the Company completed a 10-for-1   reverse split of its common stock.    All share and per share data in the consolidated financial statements   presented herein reflect the split.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | (a) | Basis of consolidation:                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                
| |     | These consolidated financial statements include the   accounts of 724 Solutions Inc. and its subsidiaries, all of which are   wholly owned.  All intercompany   balances and transactions have been eliminated.

F-6



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| | (b) | Revenue recognition:                                                                                                                                                                                                                                                
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                     
| |     | The Company recognizes revenue in accordance with   Statement of Position (SOP) 97-2, Software Revenue Recognition, issued by   the American Institute of Certified Public Accountants (AICPA) in October   1997 as amended by SOP 98-9 issued in December 1998.
| |     |                                                                                                                                                                                                                                                                     
| |     | The Company derives revenue from licensing its   products and providing related services, including installation, integration,   maintenance and managed alerts services.                                                                                           

| |  | (i) | License revenue:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |     | The Company recognizes product revenue when it has   an executed license agreement with the customer, the software product has   been delivered, the amount of the fees to be paid by the customer is fixed and   determinable, and collection of these fees is deemed probable.  The Company considers fees related to   arrangements with significant payments due beyond its normal trading terms   not to be fixed or determinable.  If   the fee is not fixed or determinable, revenue is recognized as the payments   become due from the customer.  If   collectibility is not considered probable, revenue is recognized when the fee   is collected.         
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |     | The Company enters into software license agreements   that provide for future license payments to be made based on the number of   users or the level of transaction capacity.    Transaction capacity is typically measured as the average number of   transactions per second processed by the licensed software.  Customers who exceed their licensed fixed   level of users or transaction capacity are required to pay additional license   fees to increase their licensed user or transaction capacity. Revenue   associated with additional users or additional capacity is recognized when   the amount becomes determinable, generally on a quarterly basis.

F-7



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| |  |      | The Company enters into arrangements with original   equipment manufacturers (OEM) and resellers.  Under these arrangements, the Company grants the OEM or   reseller rights to sell products, which incorporate the Companys products,   for a specific period of time.  The   Companys primary obligation to the OEM and reseller is to deliver a product   master and any bug fixes under warranty provisions in order to maintain the product   master in accordance with published specifications.  Under these arrangements, the Companys revenue is not   contingent, in any manner, on the OEM or resellers subsequent   activities.  In some arrangements, the   Company receives prepaid, non-refundable minimum license fees from the OEM or   reseller.  As the Companys primary   obligation to an OEM or reseller is fulfilled upon delivery of the product   master, the Company recognizes the prepaid, non-refundable minimum
license   fees as revenue upon delivery of the product master and upon meeting all   other product revenue recognition criteria.
| |  | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | (ii) | Service revenue:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |      | Typically, software license agreements are multiple   element arrangements as they also include consulting, related maintenance   and/or implementation services fees.    Arrangements that include consulting services are evaluated to   determine whether those services are essential to the functionality of other   elements of the arrangements. The Companys software products are generally   fully functional upon delivery and implementation and do not require any   significant modification or alteration for customer use, however, for larger   customers, customization services may be significant.  Customers generally purchase consulting   services to facilitate the adoption of the Companys technology and may   contract with the Company to have dedicated personnel to participate in the   services being performed, but the customer may also decide to use their own   resources or appoint other professional service organizations to provide   these
services.                                                                                   

F-8



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| |  |  | In determining whether the services are essential to   the functionality of its software, the Company applies the criteria in SOP   97-2. When the services are considered essential to the functionality of the   software, the Company recognizes both the software product revenue and   services revenue under the percentage of completion method using the input   method based on the ratio of direct labor hours incurred to date to total   projected labor hours. When services are not considered essential, the entire   arrangement fee is allocated to each element in the arrangement based on the   respective vendor specific objective evidence (VSOE) of the fair value of   each element.  VSOE used in   determining the fair value of license revenue is based on the price charged   by the Company when the same element is sold in similar quantities to a   customer of similar size and nature.    VSOE used in determining fair value for installation,
integration and   training is based on the standard daily rates for the type of service being   provided multiplied by the estimated time to complete the task.  VSOE used in determining the fair value of   maintenance and technical support is based on the annual renewal rates.  The revenue allocable to the software   license is recognized when the product revenue criteria are met.  The revenue allocable to the consulting   services is recognized as the services are performed.  In instances where VSOE exists for   undelivered elements but does not exist for delivered elements of a software   arrangement, the Company uses the residual method of allocation of the   arrangement fees for revenue recognition purposes.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | Consulting, implementation and training revenues are   recognized as the services are performed, generally on a time and materials   basis. Consulting revenues attributed to fixed price arrangements are   recognized using the proportional performance method based on direct labor   costs incurred to date as a percentage of total estimated direct labor costs   to complete the project as this better reflects the pattern in which the   Companys obligations to its customers are fulfilled and revenue is   earned.  When total cost estimates   exceed revenues in a fixed price arrangement, the estimated losses are   recognized immediately based upon an average fully burdened daily cost rate   applicable to the consulting individuals delivering the services.  Maintenance and support revenues paid in   advance are non-refundable and are recognized ratably over the term of the   agreement, which typically is twelve months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-9



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   | (c)                                           
|   |                                               
|   |                                               

F-10



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| | (d) | Financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The carrying value of financial instruments,   including cash and cash equivalents, short-term investments, restricted cash,   accounts receivable, accounts payable, interest payable and accrued   liabilities, approximates fair value due to the short-term nature of these   financial instruments. The Company determines the fair values of its financial   instruments based on quoted market values or discounted cash flow analyses.                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | It was not practicable to estimate the fair value of   the convertible notes carrying an interest rate of 10% per annum since they   are not publicly traded and they were issued to a related party. Additional   information pertinent to the value of an unquoted investment is provided in   Note 8 to the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | Financial instruments that potentially expose the   Company to concentrations of credit risk consist primarily of cash and cash   equivalents, short-term investments, restricted cash and accounts   receivable.  Cash and cash equivalents   and restricted cash consist primarily of deposits with major commercial   banks, corporate debt and government treasury bills, the maturities of which   are three months or less from the date of purchase.  Short-term investments and restricted cash consist of corporate   debt and government treasury bills with maturities of more than three months   but less than one year.  The Company   performs periodic credit evaluations of the financial condition of its   customers.  Allowances are maintained   for potential credit losses consistent with the credit risk of specific   customers.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (e) | Investment tax credits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The Company is entitled to Canadian federal and   provincial investment tax credits, which are earned as a percentage of   eligible research and development expenditures incurred in each taxation   year.  Investment tax credits are   accounted for as a reduction of the related expenditure for items of a   current nature and a reduction of the related asset cost for items of a   long-term nature, provided that the Company has reasonable assurance that the   tax credits will be realized.                                                                                                                                                                                                                                                                                                                                                

F-11



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| | (f) | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | Effective   January 1, 2003, the Company prospectively adopted fair value accounting for   employee stock-based awards as prescribed by SFAS 123, Accounting for   Stock-based Compensation.  Prior to   January 1, 2003, the Company elected not to apply fair value accounting to   stock-based awards to employees, other than for direct awards of stock and   awards settleable in cash, which required fair value accounting.  Prior to January 1, 2003, for awards not   elected to be accounted for under the fair value method, the Company   accounted for stock-based compensation in accordance with Accounting   Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB   25).  APB 25 is based upon an   intrinsic value method of accounting for stock-based compensation.  Under this method, compensation cost is   measured as the excess, if any, of the quoted market price of the stock   issuance at the measurement date over the
amount to be paid by the employee.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The   Company adopted fair value accounting for stock-based awards using the   prospective application transitional alternative available in SFAS 148,   Accounting for Stock-based Compensation - Transition and Disclosure.  Accordingly, the fair value method is   applied to all awards granted, modified or settled on or after January 1,   2003.  Under the fair value method,   compensation cost is measured at fair value at the date of grant and is   expensed on a straight-line basis over the service period, that is the   awards vesting period.  When awards   are exercised, share capital is credited by the sum of the consideration paid   together with the related portion previously credited to additional paid-in   capital when compensation costs were charged against income or acquisition   consideration.                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | Stock-based   awards that are settled in cash or may be settled in cash at the option of   employees are recorded as liabilities.    The measurement of the liability and compensation cost for these   awards is based on the intrinsic value of the award, and is recorded into   operating income over the service period, that is the vesting period of the   award.  Changes in the Companys   payment obligation subsequent to vesting of the award and prior to the   settlement date are recorded as compensation cost over the service period in   operating income.                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-12



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| |  | Stock-based   awards that are settleable in cash or equity at the option of Company are   recorded at fair value on the date of grant and recorded as additional   paid-in capital.  The fair value   measurement of the compensation cost for these awards is based on the   Black-Scholes option pricing model, and is recorded into operating income   over the service period, that is the vesting period of the award.  When awards are exercised, share capital   is credited with the related portion previously credited to additional   paid-in capital.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | During   the year ended December 31, 2005, the Company recorded stock-based   compensation expense of $1,031,000 (2004, - $152,000; 2003 -   $1,678,000).  The 2003 amount   primarily relates to the amortization of the deferred stock-based   compensation arising on prior year business acquisitions.                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The   Black-Scholes option pricing model was used to estimate the fair value of the   options at grant date based on the following assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                  

|                        |  | 2005 |      | 2004 |  | 2003 |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | -
|                        |  |      |      |      |  |      |  
|Volatility              |  |      | 76   | %    |  | 58   | %
|Risk-free interest rate |  |      | 3.64 | %    |  | 3.79 | %
|Expected life in years  |  |      | 5    |      |  | 5    |  
|Dividend yield          |  |      |     |      |  |     |  

| |  | The   Company has assumed no forfeiture rate and recognizes adjustments for actual   forfeitures in the year they occur.    The weighted average grant date fair value of options issued in the   year ended December 31, 2005 was $5.64 (2004 - $1.84; 2003 - $1.62).                                                                                                
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                       
| |  | For   options issued prior to January 1, 2003, the Company is required to disclose   the pro forma information as if it had accounted for stock options issued   from inception on July 28, 1997 to December 31, 2002 under the fair value   method.  The following table presents   the required disclosure of pro forma loss and basic and diluted loss per   share.

|                                                                                                  |  | 2005 |        | 2004 |   | 2003   |  
|------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                                                                  |  |      |        |      |   |        |  
|Loss for the year                                                                                 |  | $    | (6,075 | )    | $ | (8,034 | )
|Compensation expense related to the fair value of   stock options in excess of amounts recognized |  |      | (228   | )    |   | (580   | )
|                                                                                                  |  |      |        |      |   |        |  
|Pro forma loss for the year                                                                       |  | $    | (6,303 | )    | $ | (8,614 | )
|                                                                                                  |  |      |        |      |   |        |  
|Pro forma loss per share:                                                                         |  |      |        |      |   |        |  
|Basic and diluted                                                                                 |  | $    | (1.04  | )    | $ | (1.44  | )

F-13



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------

| | (g) | Fixed assets:                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Fixed assets are stated at cost, net of accumulated   depreciation, and are depreciated over their estimated useful lives except   for leasehold improvements, which are depreciated over the lesser of their   useful lives and the term of the related lease.  Expenditures for maintenance and repairs are expensed as   incurred.  Depreciation is computed   using the straight-line method as follows:

|Computer equipment             |  |  | 3 years | 
|------------------------------ |  |  | ------- | 
|Computer software              |  |  | 1 year  | 
|Office furniture and equipment |  |  | 5 years | 

| | (h) | Long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | In accordance with the SFAS 144, Accounting for the   Impairment or Disposal of Long-lived Assets, a long-lived asset or asset   group is tested for recoverability whenever events or changes in   circumstances indicate that its carrying amount may not be recoverable.  When such events occur, the Company   compares the sum of the undiscounted cash flows expected to result from the   use and eventual disposition of the asset or asset group to the carrying   amount of the long-lived asset or asset group.  If this comparison indicates that there is a potential   impairment, the amount of the impairment is typically calculated using   discounted expected future cash flows where observable fair values are not   readily determinable.  The discount   rate applied to these cash flows is based on the Companys weighted average   cost of capital, risk adjusted where appropriate.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (i) | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | In accordance with SFAS 142, Goodwill and Other   Intangible Assets, goodwill is not amortized, but is periodically tested for   impairment.  Additionally, in   accordance with SFAS 141, Business Combinations, the cost of an acquired   entity is allocated to the assets acquired and liabilities assumed based on   their estimated fair values, including other identifiable intangible assets,   as applicable, such as trade names, customer relationships and client lists.                                                                                                                                                                                                                                                                                                                                                                                                                           

F-14



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------
|   |                                               
|   | (j)                                           
|   |                                               
|   |                                               
|   |                                               
|   | (k)                                           
|   |                                               
|   |                                               
|   |                                               
|   |                                               

F-15



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------
|   |                                               
|   | (l)                                           
|   |                                               
|   |                                               
|   |                                               
|   | (m)                                           
|   |                                               
|   |                                               
|   |                                               
|   | (n)                                           
|   |                                               
|   |                                               
|   |                                               
|   | (o)                                           
|   |                                               
|   |                                               

F-16



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------
|   |                                               
|   | (p)                                           
|   |                                               
|   |                                               
|   |                                               
|   | (q)                                           
|   |                                               
|   |                                               

F-17



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|2. | Significant accounting policies   (continued):
|-- | ----------------------------------------------
|   |                                               
|   | (r)                                           
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               
|   |                                               

F-18



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|3. | Cash and cash equivalents and   short-term investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | All short-term investments are classified as   held-to-maturity because the Company has the positive intent and ability to   hold the securities to maturity.    Held-to-maturity securities are stated at amortized cost, adjusted for   amortization of premiums and accretion discounts to maturity. Short-term   investments include corporate bonds and government T-bills.  The Company owns no short-term investments   that are considered to be trading securities or available-for-sale   securities.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company has entered into a letter of credit in   the amount of $219,000 (2004 - $210,000) to guarantee future payments.  Letters of credit are secured by   segregated instruments and disclosed as restricted cash on the consolidated   balance sheets.                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4. | Accounts receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|         |  | 2005 |       | 2004 |  
|-------- |  | ---- | ----- | ---- | -
|         |  |      |       |      |  
|Invoiced |  | $    | 1,383 |      | $
|Unbilled |  |      | 1,088 |      |  
|         |  |      |       |      |  
|         |  | $    | 2,471 |      | $
|         |  |      |       |      |  

|   | Unbilled accounts receivable arise when revenues   have been recorded but the amounts are not yet invoiced to the customer due   to timing of invoicing or contractual terms. These amounts are recoverable   from the customer upon invoicing for amounts currently due, achievement of   certain milestones, completion of specified units or completion of the   contract.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                              
|5. | Fixed assets:                                                                                                                                                                                                                                                                                                                                                                

|                               |  | 2005 |        | 2004 |  
|------------------------------ |  | ---- | ------ | ---- | -
|                               |  |      |        |      |  
|Computer equipment             |  | $    | 6,765  |      | $
|Computer software              |  |      | 7,285  |      |  
|Office furniture and equipment |  |      | 332    |      |  
|Leasehold improvements         |  |      | 338    |      |  
|                               |  |      |        |      |  
|                               |  |      | 14,720 |      |  
|Less accumulated depreciation  |  |      | 13,884 |      |  
|                               |  |      |        |      |  
|                               |  | $    | 836    |      | $
|                               |  |      |        |      |  

F-19



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|6. | Investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company has investments in several private   companies that are accounted for under the cost method as the Company owns   less than a 20% interest and does not exert significant influence over the   entities. The total cost of approximately $15,243,000 has been fully provided   for in prior years as the impairment was considered other than temporary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | During the year ended December 31, 2003, the Company   recorded a gain of $283,000 on the sale of its equity interest in Dexit,   which had been previously been written down to nil.  The Company purchased its interest in Dexit on November 29,   2001 for consideration of $79,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|7. | Goodwill and other intangible   assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Goodwill represents the excess of the purchase price   over the fair value of net assets acquired and until January 1, 2002, had   been amortized on a straight-line basis over varying periods of up to five   years.  For the year ended December 31,   2003, the Company recorded an impairment charge of $9,097,000 related to   goodwill (Note 16(b)). The Company recorded amortization of acquired   technology of nil in 2005, nil in 2004 and $3,468,000 in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|8. | Convertible notes payable to   related parties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | On May 14, 2004, the Company entered into a series   of agreements, including a Secured Convertible Note Purchase Agreement (the   Purchase Agreement) between 724 Solutions Inc. and its wholly owned   subsidiary, 724 Solutions Software Inc., and Austin Ventures VI, L.P. (AV   VI), Austin Ventures VI Affiliates Fund, L.P. (AV VI A), and Austin   Ventures VIII, L.P. (AV VIII), (collectively, the Lenders or Austin   Ventures) in connection with the private placement of up to $8,000,000 of   Secured Convertible Promissory Notes (the Notes) for cash.  The non-brokered private placement of   secured convertible promissory notes was completed in two tranches.  The first tranche of the financing   involved the issuance of $3,044,000 of convertible notes and was completed on   May 14, 2004.  The second tranche of   the financing involved the issuance of $4,956,000 of
convertible notes and   was completed on June 29, 2004, after the Company obtained shareholder   approval of the transactions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Notes have a three-year term and accrue interest   at a rate of 2.5% per quarter, of which 1.25% is payable in arrears at the   beginning of each quarter starting in the first quarter of 2005 and the   remainder of which is due at maturity.    The principal amounts of the Notes and all interest owing at maturity   are convertible at the option of the Lenders into common shares at a   conversion price of $3.07 per share. The interest payable quarterly is   convertible at the option of the Company into common shares at a conversion   price of $3.07 per share. The conversion price was based on the volume   weighted average trading price of the Companys common shares on the TSX for   the five trading days prior to May 14, 2004. If the Company issues any                                                                                                                                                                                                                                                       

F-20



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

| | common shares or securities convertible into common   shares at a price that is less than the conversion price of the Notes then in   effect, then such conversion price shall be subject to a weighted average   anti-dilution adjustment, whereby the conversion price will be reduced based   on the weighted average price of the additional securities issued. The   conversion price will not be lowered by more than 15% of the initial   conversion price of $3.07.                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In accordance with FASB EITF No. 00-27, Application   of EITF No. 98-5, Accounting for Convertible Securities with Beneficial   Conversion Features or Contingently Adjustable Conversion Ratios, the Company   has determined that a beneficial conversion feature existed for the second   tranche of its convertible notes.  On   the date the required shareholder approval was obtained, the Companys common   shares closed at a premium of $0.04 per share to the conversion price of   $3.07, resulting in a beneficial conversion feature on that date of   approximately $65,000.  Under issue 6   of EITF 00-27, this conversion feature is to be amortized over the period to   the stated redemption date being May 14, 2007.  The amortization in 2005 was $22,000 (2004  $12,000).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Company also analyzed the arrangement to   determine whether any accounting was required for the contingent beneficial   conversion feature that may arise if the Company where to issue additional   shares in the future at a price less than $3.07.  The Company considered EITF 00-27, Issue 7, and concluded that   since the terms of the contingent conversion option do not permit the Company   to compute the additional number of shares that it would need to issue upon   conversion of the Notes if the contingent event occurs and the conversion   price is adjusted, the Company should compute any additional beneficial   conversion feature only if the contingent event occurs.                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Austin Ventures is the Companys largest beneficial   shareholder. Assuming that all of the Notes are converted into common shares   at the lowest possible conversion price on the maturity date, all accrued   interest on the Notes is paid with common shares, and that no additional   common shares are issued, Austin Ventures could be deemed to beneficially own   up to 44.23% of the Companys issued and outstanding common shares.                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Joseph C. Aragona is currently a member of the   Companys Board of Directors.  He is   also a general partner of AV Partners VI, L.P., which serves as the general   partner of both AV VI and AV VI A.  In   addition, Mr. Aragona is a general partner of AV Partners VIII, L.P., which   serves as the general partner of AV VIII.    As a general partner of AVP VI and AVP VIII, Mr. Aragona may have a   limited pecuniary interest in the Private Placement Transactions.  Mr. Aragona did not participate in the   deliberations or voting of the Companys Board with respect to the approval   of the Private Placement Transactions.                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | As part of the financing arrangement between Austin   Ventures and the Company, the Company agreed to appoint a nominee of Austin   Ventures to the Board of Directors and to include two nominees of Austin   Ventures in any slate of directors submitted to shareholders for approval. In   July 2004, the Company appointed Ben Scott to the Board of Directors as   Austin Ventures nominee. He is associated with Austin Ventures as a venture   partner.                                                                                                                                                                                                                                                                                                                                   

F-21



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

| | The Company and its material subsidiaries granted   the Lenders a blanket security interest in all of their assets to secure the   timely payment and performance in full of all of the obligations under the   Notes.  The security interest ranks   senior to all indebtedness of the Company other than fully-funded indebtedness   of up to $1,500,000.                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Notes are subject to customary events of   default, including the failure to pay interest or principal, and specified   types of bankruptcy events. Additional events of default include the issuance   of certain capital securities that, if not for the limitation noted above,   would cause the conversion price of the notes to be lowered by more than 15%   of the initial conversion price and the Company engaging in specified types   of merger or acquisition transactions.    An event of default would require the Company to repay all amounts   owing under the Notes.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Total interest expense recorded during the year   ended December 31, 2005 was $851,000 (2004  $446,000). At December 31, 2005,   interest payable to Austin Ventures was $876,000.                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In January 2005, the Company issued 33,549 Common   Shares to Austin Ventures in connection with the repayment of interest owing   on the Notes. The Company recorded a loss on settlement of liability of   $165,000 in the first quarter of 2005 related to this transaction.                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In January 2006, the Company issued 35,259 Common   Shares to Austin Ventures in connection with the repayment of interest owing   on the Notes. The Company will record a loss on settlement of liabilities of   $19,000 in the first quarter of 2006 related to this transaction.                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Subsequent to December 31, 2005, the Company   received a proposal from Austin Ventures to acquire all of the outstanding   common shares not owned by Austin Ventures.    (see note 19)                                                                                                                                                                                                                                                                                                                                                                                                   

F-22



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|9. | Shareholders equity:                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           
|   | During 2003, the Company effected a 10-for-1 share   consolidation.  The historic common   share numbers have been adjusted to reflect this consolidation.
|   |                                                                                                                                                           
|   | (a)                                                                                                                                                       
|   |                                                                                                                                                           
|   |                                                                                                                                                           
|   |                                                                                                                                                           
|   |                                                                                                                                                           
|   |                                                                                                                                                           
|   |                                                                                                                                                           

F-23



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|9. | Shareholders equity (continued):
|-- | ---------------------------------
|   |                                  
|   |                                  
|   |                                  
|   |                                  
|   |                                  
|   |                                  
|   |                                  
|   |                                  
|   |                                  
|   |                                  

F-24



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|9. | Shareholders equity (continued):                                                                     
|-- | ------------------------------------------------------------------------------------------------------
|   |                                                                                                       
|   | The following table summarizes the status of the   Companys outstanding options at December 31, 2005:

|Exercise   price ranges |       | Number of   options |   | Weighted   average   exercise price |  | Weighted   average   remaining   contractual life   (years) |           | Number of   options   exercisable |   | Weighted   average   exercise price | 
|----------------------- | ----- | ------------------- | - | ----------------------------------- |  | ----------------------------------------------------------- | --------- | --------------------------------- | - | ----------------------------------- | 
|                        |       |                     |   |                                     |  |                                                             |           |                                   |   |                                     | 
|$                       |      |                     | $ | 3.50                                |  |                                                             | 279,496   |                                   | $ | 3.14                                | 
|                        | 3.51  |                     |   | 5.00                                |  |                                                             | 507,329   |                                   |   | 4.08                                | 
|                        | 5.01  |                     |   | 6.50                                |  |                                                             | 495,053   |                                   |   | 5.75                                | 
|                        | 6.51  |                     |   | 10.00                               |  |                                                             | 104,771   |                                   |   | 7.44                                | 
|                        | 10.01 |                     |   | 50.00                               |  |                                                             | 23,242    |                                   |   | 17.20                               | 
|                        | 50.01 |                     |   | 550.00                              |  |                                                             | 24,557    |                                   |   | 189.18                              | 
|                        |       |                     |   |                                     |  |                                                             |           |                                   |   |                                     | 
|                        |       |                     |   |                                     |  |                                                             | 1,434,448 |                                   | $ | 8.10                                | 
|                        |       |                     |   |                                     |  |                                                             |           |                                   |   |                                     | 

| | The following table summarizes the continuity of   options issued:
| | ------------------------------------------------------------------

|                                   |  | Year ended   December 31, 2005 |           | Year ended   December 31, 2004      |   | Year ended   December 31, 2003 | 
|---------------------------------- |  | ------------------------------ | --------- | ----------------------------------- | - | ------------------------------ | 
|                                   |  |                                |           |                                     |   |                                | 
|                                   |  | Number of   options            |           | Weighted   average   exercise price |   | Number of   options            | 
|                                   |  |                                |           |                                     |   |                                | 
|Outstanding, beginning of   year   |  |                                | 929,915   |                                     | $ | 9.07                           | 
|Granted                            |  |                                | 613,063   |                                     |   | 5.89                           | 
|Exercised                          |  |                                | (16,595   | )                                   |   | 3.69                           | 
|Canceled                           |  |                                | (91,935   | )                                   |   | 4.98                           | 
|                                   |  |                                |           |                                     |   |                                | 
|Outstanding, end of year           |  |                                | 1,434,448 |                                     | $ | 8.10                           | 
|                                   |  |                                |           |                                     |   |                                | 
|Options exercisable, end of   year |  |                                | 526,759   |                                     | $ | 12.28                          | 
|                                   |  |                                |           |                                     |   |                                | 

F-25



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|10. | Income taxes:                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                     
|    | The provision for income taxes differs from the   amount computed by applying the combined Canadian Federal and Provincial   statutory income tax rate of 36% (2004  36%, 2003  37%) to loss before   income taxes. The sources and tax effects of the differences are as follows:

|                                                                    |  | 2005 |        | 2004 |   | 2003   |  
|------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                                    |  |      |        |      |   |        |  
|Basic rate applied to loss before provision for   income taxes      |  | $    | (2,187 | )    | $ | (2,889 | )
|Adjustments resulting from:                                         |  |      |        |      |   |        |  
|Effect of enacted tax   rates on deferred tax asset                 |  |      |       |      |   |       |  
|Foreign losses affected   at (higher) lower rates                   |  |      | (183   | )    |   | (299   | )
|Expiry of tax losses                                                |  |      | 5,597  |      |   |       |  
|Effect of change in   foreign exchange rates on deductibles for tax |  |      | (600   | )    |   | (2,835 | )
|Stock-based compensation   not deductible for tax                   |  |      | 372    |      |   | 55     |  
|Other non-deductible   expenses                                     |  |      | 413    |      |   | 228    |  
|Adjustments to fixed   assets, tax losses and reserves              |  |      | 2,086  |      |   | (2,681 | )
|Amortization and   write-down of intangibles                        |  |      |       |      |   |       |  
|Other                                                               |  |      | 97     |      |   | 36     |  
|                                                                    |  |      |        |      |   |        |  
|                                                                    |  |      | 5,595  |      |   | (8,385 | )
|Change in valuation allowance                                       |  |      | (5,595 | )    |   | 8,385  |  
|                                                                    |  |      |        |      |   |        |  
|Income taxes                                                        |  | $    |       |      | $ |       |  
|                                                                    |  |      |        |      |   |        |  

| | Significant components of the Companys deferred tax asset are as follows:
| | --------------------------------------------------------------------------

|                                                                     |  |  |  |  | 2005 |         | 2004 |  
|-------------------------------------------------------------------- |  |  |  |  | ---- | ------- | ---- | -
|                                                                     |  |  |  |  |      |         |      |  
|Research and development expenses deferred for   income tax purposes |  |  |  |  | $    | 3,127   |      | $
|Net operating losses carried forward                                 |  |  |  |  |      | 68,965  |      |  
|Capital losses carried forward                                       |  |  |  |  |      | 6,506   |      |  
|Fixed assets                                                         |  |  |  |  |      | 7,474   |      |  
|Reserves                                                             |  |  |  |  |      | 576     |      |  
|                                                                     |  |  |  |  |      |         |      |  
|Deferred tax asset                                                   |  |  |  |  |      | 86,648  |      |  
|Less: valuation allowance                                            |  |  |  |  |      | (86,648 | )    |  
|                                                                     |  |  |  |  |      |         |      |  
|                                                                     |  |  |  |  | $    |        |      | $
|                                                                     |  |  |  |  |      |         |      |  

F-26



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|    | The net operating losses carried forward are subject   to expiry if the Company does not utilize the losses prior to the taxation   imposed date at which the losses expire.    The year in which the losses expire depends upon the year in which the   losses arose and the jurisdiction in which the losses were incurred.  Of the approximately $68,965,000 in   deferred tax assets related to operating losses carried forward, the majority   of the asset of $48,253,000 does not begin to expire until 2019.  The remaining balance of $20,712,000   expires as to approximately $1,876,000 in 2006, $7,820,000 in 2007,   $1,960,000 in 2008, $3,641,000 in 2009, $4,439,000 in 2010, $972,000 in 2011   and $4,000 in 2015.                                                                                                                                                                                                                                        
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | A subsidiary discontinued its operations during the   year and as a result can no longer utilize its net operating loss carry   forwards.  In prior years, these   operating loss carry forwards were described as not subject to expiry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In assessing the realizability of deferred tax   assets, the Company considers whether it is more likely than not that some   portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax   assets is dependent upon the generation of taxable income during the years in   which those temporary differences become deductible.  The Company considers projected taxable   income, uncertainties related to the industry in which the Company operates,   and tax planning strategies in making this assessment.  In order to fully realize the deferred tax   assets, the Company will need to generate taxable income of approximately   $225,350,000 prior to the expiration of the net operating losses carried   forward.  Due to the uncertainties   related to the industry in which the Company operates, the tax benefit of the   above carried forward amounts has been completely offset by a valuation   allowance.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|11. | Lease commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Future minimum lease payments under non-cancelable   operating leases for premises and equipment at December 31, 2005 are as   follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|2006                |  | $ | 344 |  |  |  | 
|------------------- |  | - | --- |  |  |  | 
|2007                |  |   | 135 |  |  |  | 
|2008                |  |   | 108 |  |  |  | 
|2009                |  |   | 113 |  |  |  | 
|2010                |  |   | 119 |  |  |  | 
|2011 and thereafter |  |   |    |  |  |  | 
|                    |  |   |     |  |  |  | 
|                    |  | $ | 819 |  |  |  | 
|                    |  |   |     |  |  |  | 

| | Rent expense for the year ended December 31, 2005   was $429,000 (2004 - $468,000; 2003 - $850,000).  The Company is also responsible for certain common area costs   at various leased premises.                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | As part of the restructuring charge, the Company has   recorded a liability of $93,000 (2004 - $93,000) for future lease commitments   for vacated premises.  The commitments   for these leases have been excluded from the amounts in the table above.  The liability has been estimated as the   amount the Company is contractually obligated to pay related to vacated   leased premises, less an estimated amount for sublease arrangements.

F-27



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|12. | Contingent liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | In June 2001, 724 Solutions, Inc. (the Company)   was named as a defendant in a securities class action filed in United States   District Court for the Southern District of New York related to its initial   public offering (IPO) in January 2000.    The lawsuits also named certain of the underwriters of the IPO,   including Credit Suisse First Boston Corporation and FleetBoston Robertson   Stephens, as well as certain former officers and directors of the Company as   defendants.  Approximately 300 other   issuers and their underwriters have had similar suits filed against them, all   of which are included in a single coordinated proceeding in the Southern   District of New York (the IPO Litigation).    The complaints allege that the prospectus and the registration   statement for the IPO failed to disclose that the underwriters allegedly solicited   and received excessive commissions from investors and
that some investors   in the IPO allegedly agreed with the underwriters to buy additional shares in   the aftermarket in order to inflate the price of the Companys stock.  A consolidated amended complaint was filed   April 19, 2002.  The Company and its   former officers and directors are named in the suits pursuant to Section 11   of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and   other related provisions.  The   complaints seek unspecified damages, attorney and expert fees, and other   unspecified litigation costs.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | On July 1, 2002, the underwriter defendants in the   consolidated actions moved to dismiss the IPO Litigation, including the   action involving the Company.  On July   15, 2002, the Company, along with other non-underwriter defendants in the   coordinated cases, also moved to dismiss the litigation.  On February 19, 2003, the Court ruled on   the motions.  The Court denied the   Companys motion to dismiss the claims against it under Rule 10b-5.  The motions to dismiss the claims under   Section 11 of the Securities Act were denied as to virtually all of the   defendants in the consolidated cases, including the Company.  In addition, the individual defendants in   the IPO Litigation signed a tolling agreement and were dismissed from the   action without prejudice on October 9, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | In June 2003, a proposed settlement of this   litigation was structured between the plaintiffs, the issuer defendants in   the consolidated actions, the issuer officers and directors named as defendants,   and the issuers insurance companies.    On or about July 2, 2003, a committee of the Companys Board of   Directors conditionally approved the proposed partial settlement. The   settlement would provide, among other things, a release of the Company and of   the individual defendants for the conduct alleged to be wrongful in the   amended complaint.  The Company would   agree to undertake other responsibilities under the partial settlement,   including agreeing to assign away, not assert, or release certain potential   claims the Company may have against its underwriters.  Any direct financial impact of the   proposed settlement is expected to be borne by the Companys insurance   carriers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-28



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|    | In June 2004, an agreement of settlement was   submitted to the court for preliminary approval.  The court requested that any objections to preliminary approval   of the settlement be submitted by July 14, 2004, and the underwriter   defendants formally objected to the settlement.  The plaintiffs and issuer defendants separately filed replies   to the underwriter defendants objections to the settlement on August 4,   2004.  The court granted the   preliminary approval motion on February 15, 2005, subject to certain   modifications.                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | On August 31, 2005, the court issued a preliminary   order further approving the modifications to the settlement and certifying   the settlement classes.  The court   also appointed the Notice Administrator for the settlement and ordered that   notice of the settlement be distributed to all settlement class members beginning   on November 15, 2005 and completed by January 15, 2006.  The settlement fairness hearing has been   set for April 26, 2006.  Following the   hearing, if the court determines that the settlement is fair to the class members,   the settlement will be approved. There can be no assurance that this proposed   settlement would be approved and implemented in its current form, or at all.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | If the proposed settlement is not consummated, the   Company intends to continue to vigorously defend itself against these   claims.  However, due to the inherent   uncertainties of litigation the Company cannot accurately predict the   ultimate outcome of the IPO Allocation Litigation. No amount is accrued at   December 31, 2005, as a loss is not considered probable and estimable.                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|13. | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-29



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|    |                                                                                                                                                                                                                                                                                                                                                                                             | The Companys software license agreements also   generally include a warranty that its software products will substantially   operate as described in the applicable program documentation for a specified   period after delivery.  The Company   also warrants that services it performs will be provided in a manner   consistent with industry standards and in accordance with applicable specifications   for a specified period from performance of the service.  To date, the Company has not incurred any   material costs associated with these warranties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|14. | Segmented information:                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company operates in a single reportable   operating segment, that is, the design and delivery of software products for   use by mobile network operators and other customers.  The single reportable operating segment   derives its revenue from the sale of software and related services.  Information about the Companys geographical   net revenue and assets is set forth below.
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | Net revenue by geographic location:                                                                                                                                                                                                                                                                                                                                                        

|              |  | 2005 |        | 2004 |   | 2003   | 
|------------- |  | ---- | ------ | ---- | - | ------ | 
|              |  |      |        |      |   |        | 
|Canada        |  | $    |       |      | $ |       | 
|United States |  |      | 8,966  |      |   | 10,604 | 
|Europe        |  |      | 7,923  |      |   | 4,257  | 
|Asia Pacific  |  |      | 1,376  |      |   | 211    | 
|              |  |      |        |      |   |        | 
|              |  | $    | 18,265 |      | $ | 15,072 | 
|              |  |      |        |      |   |        | 

| | Fixed assets by geographic location:
| | ------------------------------------

|              |  |  |  | 2005 |   | 2004 | 
|------------- |  |  |  | ---- | - | ---- | 
|              |  |  |  |      |   |      | 
|Canada        |  |  |  |      | $ | 621  | 
|United States |  |  |  |      |   | 74   | 
|Europe        |  |  |  |      |   | 133  | 
|Asia Pacific  |  |  |  |      |   | 8    | 
|              |  |  |  |      |   |      | 
|              |  |  |  |      | $ | 836  | 
|              |  |  |  |      |   |      | 

| | For the year ended December 31, 2005, three   customers accounted for 32%, 19% and 18% of revenue. For the year ended   December 31, 2004, three customers accounted for 51%, 16% and 12% of revenue.   For the year ended December 31, 2003, one customer accounted for 52% of   revenue.                 
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                            
| | At December 31, 2005, three customers accounted for   23%, 14% and 14% of the accounts receivable balance.  At December 31, 2004, one customer   accounted for 63% of the accounts receivable balance.  At December 31, 2003, two customers   accounted for 50% and 17% of the accounts receivable balance.

F-30



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|15. | Supplemental disclosure of cash   flow information:                                 
|--- | ------------------------------------------------------------------------------------
|    |                                                                                     
|    | The following table presents the supplemental   disclosure of cash flow information:

|                                    |  | 2005 |     | 2004 |   | 2003 | 
|----------------------------------- |  | ---- | --- | ---- | - | ---- | 
|                                    |  |      |     |      |   |      | 
|Supplemental cash flow information: |  |      |     |      |   |      | 
|Interest paid                       |  | $    | 317 |      | $ |     | 
|Interest received                   |  |      | 288 |      |   | 107  | 

|16. | Restructuring and other charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | For the years ended December 31, 2004 and 2003, the   Company recorded charges for restructuring activities and goodwill. There   were no charges in the year ended December 31, 2005.                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | At December 31, 2005, included in accrued   liabilities is the remaining restructuring provision of $93,000, which   relates to a restructuring activity undertaken in 2002, specifically to costs   associated with an office in Europe that the Company has vacated. Although   the space was sublet, the Company is obligated to refurbish the space at the   end of the lease. The Company expects to pay out the remaining balance by the   end of the first quarter of 2006.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                             |  | Severance |       | Lease exit   costs |   | Total |  
|---------------------------- |  | --------- | ----- | ------------------ | - | ----- | -
|                             |  |           |       |                    |   |       |  
|Restructuring charges        |  | $         | 1,600 |                    | $ | 500   |  
|Reversals                    |  |           | (926  | )                  |   |      |  
|Cash payments                |  |           | (674  | )                  |   | (500  | )
|                             |  |           |       |                    |   |       |  
|Provision, December 31, 2004 |  | $         |      |                    | $ |      |  
|                             |  |           |       |                    |   |       |  

| | In the first quarter of 2004, the Company completed   a plan to reduce its overall operating costs and to realign its operating   expenses and investments by reducing its worldwide workforce by approximately   40 people and consolidating facilities.    As a result of these decisions, the Company recorded $2,100,000 in   restructuring charges related to severance and lease exit costs. Due to the   asset purchase completed in the three months ended June 30, 2004, the Company   determined that it would not carry out some employee terminations planned as   of the end of the prior quarter.  Therefore,   in the three months ended June 30, 2004, the Company reversed $900,000 in   severance costs included in restructuring charges.  This amount had been part of the restructuring charge of   $2,100,000 recognized in the first quarter of 2004. Employee terminations not   related to the asset purchase and the consolidation of facilities proceeded   as planned
in 2004.  The Company   reversed $26,000 in the fourth quarter when it determined that certain cost   estimates related to terminations were too high.  All amounts provided for were settled or reversed in the year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-31



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

| | (ii) | Activities in 2003:
| | ---- | -------------------

|                             |  | Severance |      | Lease exit   costs |   | Total |  
|---------------------------- |  | --------- | ---- | ------------------ | - | ----- | -
|                             |  |           |      |                    |   |       |  
|Restructuring charges        |  | $         | 775  |                    | $ | 175   |  
|Cash payments                |  |           | (483 | )                  |   | (175  | )
|                             |  |           |      |                    |   |       |  
|Provision, December 31, 2003 |  |           | 292  |                    |   |      |  
|Activity during 2004         |  |           |      |                    |   |       |  
|Cash payments                |  |           | (292 | )                  |   |      |  
|                             |  |           |      |                    |   |       |  
|Provision, December 31, 2004 |  | $         |     |                    | $ |      |  
|                             |  |           |      |                    |   |       |  

| | During 2003, the Company reduced its worldwide   workforce by approximately 40 people and closed redundant facilities in an   effort to reduce its overall operating costs and to realign operating   expenses and investments with a view to achieving operational profitability.   The restructuring activities were completed within the year shortly after the   reduction in the workforce occurred in the second and fourth quarters of the   year.  All amounts provided for were   settled in the year except for severance amounts that were provided for in   December 2003.  The remaining   severance amounts were paid out in the first half of 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                        |  | Severance |        | Lease exit   costs |   | Hosting   exit   costs |   | Total |       
|--------------------------------------- |  | --------- | ------ | ------------------ | - | ---------------------- | - | ----- | ------
|                                        |  |           |        |                    |   |                        |   |       |       
|Restructuring charges                   |  | $         | 7,991  |                    | $ | 2,472                  |   | $     | 7,438 
|Cash payments                           |  |           | (7,024 | )                  |   | (364                   | ) |       | (4,951
|Non-cash charges                        |  |           |       |                    |   | (580                   | ) |       |      
|                                        |  |           |        |                    |   |                        |   |       |       
|Provision, December 31,   2002          |  |           | 967    |                    |   | 1,528                  |   |       | 2,487 
|Activity during 2003:                   |  |           |        |                    |   |                        |   |       |       
|Restructuring   charge reversal         |  |           |       |                    |   |                       |   |       | (900  
|Cash   payments                         |  |           | (967   | )                  |   | (1,388                 | ) |       | (996  
|                                        |  |           |        |                    |   |                        |   |       |       
|Provision, December 31,   2003          |  |           |       |                    |   | 140                    |   |       | 591   
|Activity during 2004:                   |  |           |        |                    |   |                        |   |       |       
|Restructuring   charge reversal         |  |           |       |                    |   |                       |   |       | (181  
|Cash   payments                         |  |           |       |                    |   | (47                    | ) |       | (410  
|                                        |  |           |        |                    |   |                        |   |       |       
|Provision, December 31,   2004 and 2005 |  | $         |       |                    | $ | 93                     |   | $     |      
|                                        |  |           |        |                    |   |                        |   |       |       

F-32



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

| |     | During 2002, the Company reduced its worldwide   workforce by approximately 198 people, closed redundant facilities, wrote   down inventory assets that were no longer part of its future strategy and   wrote down unused fixed assets.  The   Company realigned its workforce following this reduction to allow it to focus   on delivering software applications and infrastructure software to MNOs   while servicing its global installed base of financial services clients.  In addition, as part of the restructuring,   the Company formalized a three-year arrangement with Computer Sciences   Corporation (CSC), an unrelated party, whereby CSC will provide application   hosting services to support the Companys current hosting agreements until   such time as the agreements expire or are assigned to CSC.  The Company does not intend to enter into   any further hosting agreements and will promote CSC as its preferred supplier   of such
services.                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The restructuring activities undertaken in 2002 were   completed within the year, shortly after the reductions in the workforce   occurred in the first and fourth quarters of the year. All amounts provided   for were settled in the year except for: (i) severance in the amount of   $967,000 which was settled in the first half of 2003; (ii) lease exit costs   related to abandoned premises in the amount of $1,528,000, $1,388,000 of   which was settled in 2003 and $47,000 of which was settled in 2004 leaving   $93,000 at December 31, 2004 and December 31, 2005 that the Company expects   will be settled by the end of the first quarter of 2006; and (iii) hosting   exit costs in the amount of $2,487,000, $996,000 of which was paid out in   2003, $900,000 of which was reversed in 2003 upon the re-negotiation of   certain agreements, $410,000 of which was paid out in 2004 and $181,000 of   which was reversed in 2004 because certain costs were lower than the Company   had
estimated.  The Company has now   fully exited all hosting arrangements related to legacy customers.                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (b) | 2003 write-down of goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | As required by generally accepted accounting   principles, the Company performed an annual impairment review of   goodwill.  The annual impairment   review was performed on December 31, 2003, resulting in a reduction of   $9,097,000 in the carrying value of goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | As the Company operates in one business segment and   has designated this business segment as its only reporting unit, the Company   used a trailing average of its market capitalization to determine if there   was an indication of impairment.  As   the trailing average market capitalization was less than the carrying value   of its net assets, the Company performed a second test to assess the amount   of the impairment.  For purposes of   performing this second step, the estimated fair value of the Company was   allocated to all the assets and liabilities of the Company including those   assets that may not have an accounting carrying value such as customer   relationships, customer contracts, technology and other intellectual   property.  This fair value allocation   is performed in a manner similar to a business acquisition purchase price   allocation.  As a result of this   assessment, the Company determined that the excess of its estimated
fair   value over the carrying value of its net assets was attributable to its   intangible assets, leaving no remaining value to be allocated to   goodwill.  As a result, the remaining   goodwill was written down to nil.

F-33



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|17. | Accrued liabilities:
|--- | --------------------

|                                 |  | 2005 |       | 2004 |  
|-------------------------------- |  | ---- | ----- | ---- | -
|                                 |  |      |       |      |  
|Compensation and benefits        |  | $    | 694   |      | $
|Professional and consulting fees |  |      | 572   |      |  
|Travel                           |  |      | 116   |      |  
|Other                            |  |      | 240   |      |  
|                                 |  |      |       |      |  
|                                 |  | $    | 1,622 |      | $
|                                 |  |      |       |      |  

|18. | Related parties:                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company obtains legal services
relating to corporate, commercial and securities matters from Torys LLP, a law
firm with offices in Toronto, Canada and New York.  Barry Reiter, a member
of the Board of Directors, is a partner of that firm. The Board of Directors of
the Company has determined that legal services provided by Torys LLP to us do
not interfere with Mr. Reiters ability to act in the Companys best
interests.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | During the year ended December 31, 2005
the Company recorded approximately $55,000 in legal expenses related to work
performed by Torys (2004  $91,000, 2003  $178,000). At December 31,
2005, $11,000 is due to Torys LLP (2004  $12,000, 2003 
nil).                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|19. | Subsequent events:                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-34



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | On March 9, 2006, Austin Ventures submitted a   revised non-binding proposal to acquire all of the Companys outstanding   common shares not owned by Austin Ventures for cash consideration of $3.34   per common share.  The Company   accepted the revised proposal after careful consideration and evaluation by   its Special Committee of independent directors in conjunction with its   financial and legal advisors.                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The arrangement is also dependent upon receipt of a   satisfactory fairness opinion and valuation report and completion by Austin   Ventures of its due diligence.  The revised   and accepted proposal is set to terminate on April 6, 2006 in the event a   definitive arrangement agreement is not reached by that date.                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Nasdaq notice of non-compliance:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | On March 8, 2006 the Company received a Nasdaq Staff   Deficiency Letter indicating that it fails to comply with the Nasdaqs   Marketplace Rule 4310(c)(2)(B).    Marketplace Rule 4310(c)(2)(B) requires companies listed on the Nasdaq   Capital Market to have a minimum of $2,500,000 in stockholders equity, or   $35,000,000 market value of listed securities, or $500,000 of net income from   continuing operations for the most recently completed fiscal year or two of   the three most recently completed fiscal years.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The Company submitted a response to Nasdaq and   Nasdaq staff is reviewing its eligibility for continued listing on the Nasdaq   Capital Market. If Nasdaq is not satisfied with the Companys proposal, they   will issue a delisting notice, which can be appealed. In the event such an   appeal was not successful, the Companys shares would be delisted from   Nasdaq.                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|20. | Reconciliation to Canadian GAAP:                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Under Canadian securities requirements, the Company   is required to provide a reconciliation setting out differences between U.S.   and Canadian GAAP as applied to the Companys financial statements.  This note sets out the differences between   U.S. and Canadian GAAP for the years ended December 31, 2005 and 2004.  There were no differences between the   Companys financial statements as prepared under U.S. and Canadian GAAP for   the year ended December 31, 2003.   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The consolidated financial statements of the Company   have been prepared in accordance with U.S. GAAP, which conform in all   material respects with Canadian generally accepted accounting principles   (Canadian GAAP), except for the treatment of the secured convertible notes   to related parties.                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Under U.S. GAAP, the secured convertible notes   payable to related parties are classified entirely as debt except for the   beneficial conversion feature, which was recorded as additional paid-in   capital. The difference between the amounts allocated to the liability and   the principal amount of the notes of $8,000,000 is being amortized as   non-cash imputed interest expense over the period to maturity and the   liability is being accreted up to its maturity value.

F-35



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

| | Under Canadian GAAP, the secured convertible notes   to related parties are considered compound instruments that are required to   be separated into liability and equity components. The Company has calculated   the liability component of the secured convertible notes as the present value   of the future obligation using a discount rate of 15%, representing the   estimated rate that it would be required to pay for similar borrowings with   no conversion feature. The liability component amounted to $7,067,000. The   residual amount of $933,000 represents the estimated equity component for the   conversion option and is included under Canadian GAAP in equity portion of   convertible notes payable to related parties.  In addition, under Canadian GAAP the issue costs of $352,000   are allocated between equity and liability components on a proportionate   basis while under U.S. GAAP the entire amount is treated as deferred charge.   Accordingly, $41,000


of the deferred charge has been shown as an offset to   equity for Canadian GAAP purposes, therefore the net equity portion of   convertible notes payable to related parties is $892,000. The difference   between the amounts allocated to the liability and the principal amount of   the notes of $8,000,000 is being amortized as non-cash imputed interest expense   over the period to maturity and the liability is being accreted up to its   maturity value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | For U.S. GAAP purposes, the costs related to the   issuance of the secured convertible notes payable was recorded as a long-term   asset and are being amortized over the term of the Notes.  For Canadian GAAP purposes, these costs   have been allocated on a pro rata basis between the debt and equity   components of the compound instruments.    The amount allocated to the debt component has been recorded as a   long-term asset and amortized over the term of the notes and the amount   allocated to the equity component has been recorded as a reduction to   shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-36



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|20. | Reconciliation to Canadian GAAP   (continued):                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                       
|    | The following tables present the adjustments   required to reconcile the 2005 and 2004 consolidated financial statements   presented under U.S. GAAP to Canadian GAAP.
|    |                                                                                                                                                                       
|    | Balance sheet at December 31, 2005                                                                                                                                    

|                                                                 |  | U.S. GAAP |          | Adjustments |   | Canadian   GAAP |  
|---------------------------------------------------------------- |  | --------- | -------- | ----------- | - | --------------- | -
|                                                                 |  |           |          |             |   |                 |  
|Assets                                                           |  |           |          |             |   |                 |  
|Current assets:                                                  |  |           |          |             |   |                 |  
|Cash   and cash equivalents                                      |  | $         | 5,272    |             | $ |                |  
|Short-term   investments                                         |  |           | 4,009    |             |   |                |  
|Restricted   cash                                                |  |           | 219      |             |   |                |  
|Accounts   receivable, net of allowance                          |  |           | 2,471    |             |   |                |  
|Prepaid   expenses and other receivables                         |  |           | 522      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current assets                                             |  |           | 12,493   |             |   |                |  
|Deferred charges                                                 |  |           | 167      |             |   | (19             | )
|Fixed assets                                                     |  |           | 836      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total assets                                                     |  | $         | 13,496   |             | $ | (19             | )
|                                                                 |  |           |          |             |   |                 |  
|Liabilities   and shareholders equity                           |  |           |          |             |   |                 |  
|Current liabilities:                                             |  |           |          |             |   |                 |  
|Accounts   payable                                               |  | $         | 358      |             | $ |                |  
|Accrued   liabilities                                            |  |           | 1,622    |             |   |                |  
|Interest   payable to related parties                            |  |           | 108      |             |   |                |  
|Deferred   revenue                                               |  |           | 289      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current liabilities                                        |  |           | 2,377    |             |   |                |  
|Convertible notes payable   to related parties in 2007           |  |           | 7,969    |             |   | (422            | )
|Long-term interest payable   to related parties in 2007          |  |           | 768      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities                                                |  |           | 11,114   |             |   | (422            | )
|Shareholders equity:                                            |  |           |          |             |   |                 |  
|Common   shares                                                  |  |           | 764,859  |             |   |                |  
|Additional   paid-in capital                                     |  |           | 1,312    |             |   | (65             | )
|Equity   portion of convertible notes payable to related parties |  |           |         |             |   | 892             |  
|Accumulated   deficit                                            |  |           | (763,996 | )           |   | (424            | )
|Accumulated   other comprehensive income                         |  |           | 207      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total shareholders equity                                       |  |           | 2,382    |             |   | 403             |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities and   shareholders equity                     |  | $         | 13,496   |             | $ | (19             | )
|                                                                 |  |           |          |             |   |                 |  

F-37



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|20. | Reconciliation to Canadian GAAP   (continued):
|--- | ----------------------------------------------
|    |                                               
|    | Balance sheet at December 31, 2004            

|                                                                 |  | U.S. GAAP |          | Adjustments |   | Canadian   GAAP |  
|---------------------------------------------------------------- |  | --------- | -------- | ----------- | - | --------------- | -
|                                                                 |  |           |          |             |   |                 |  
|Assets                                                           |  |           |          |             |   |                 |  
|Current assets:                                                  |  |           |          |             |   |                 |  
|Cash   and cash equivalents                                      |  | $         | 5,417    |             | $ |                |  
|Short-term   investments                                         |  |           | 8,005    |             |   |                |  
|Restricted   cash                                                |  |           | 210      |             |   |                |  
|Accounts   receivable, net of allowance                          |  |           | 2,831    |             |   |                |  
|Prepaid   expenses and other receivables                         |  |           | 583      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current assets                                             |  |           | 17,046   |             |   |                |  
|Deferred charges                                                 |  |           | 286      |             |   | (33             | )
|Fixed assets                                                     |  |           | 1,135    |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total assets                                                     |  | $         | 18,467   |             | $ | (33             | )
|                                                                 |  |           |          |             |   |                 |  
|Liabilities   and shareholders equity                           |  |           |          |             |   |                 |  
|Current liabilities:                                             |  |           |          |             |   |                 |  
|Accounts   payable                                               |  | $         | 613      |             | $ |                |  
|Accrued   liabilities                                            |  |           | 2,101    |             |   |                |  
|Interest   payable to related parties                            |  |           | 103      |             |   |                |  
|Deferred   revenue                                               |  |           | 173      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current liabilities                                        |  |           | 2,990    |             |   |                |  
|Long-term liabilities                                            |  |           | 92       |             |   |                |  
|Convertible notes payable   to related parties in 2007           |  |           | 7,947    |             |   | (711            | )
|Long-term interest payable   to related parties in 2007          |  |           | 343      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities                                                |  |           | 11,372   |             |   | (711            | )
|Shareholders equity:                                            |  |           |          |             |   |                 |  
|Common   shares                                                  |  |           | 764,530  |             |   |                |  
|Additional   paid-in capital                                     |  |           | 279      |             |   | (65             | )
|Equity   portion of convertible notes payable to related parties |  |           |         |             |   | 892             |  
|Accumulated   deficit                                            |  |           | (757,921 | )           |   | (149            | )
|Accumulated   other comprehensive income                         |  |           | 207      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total shareholders equity                                       |  |           | 7,095    |             |   | 678             |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities and   shareholders equity                     |  | $         | 18,467   |             | $ | (33             | )
|                                                                 |  |           |          |             |   |                 |  

F-38



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|20. | Reconciliation to Canadian GAAP   (continued):                 
|--- | ---------------------------------------------------------------
|    |                                                                
|    | Statement of operations for the year ended December   31, 2005:

|                                                                                                |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------------------------------------------------- |  | --------- | ------ | ----------- | - | --------------- | -
|                                                                                                |  |           |        |             |   |                 |  
|Revenue:                                                                                        |  |           |        |             |   |                 |  
|Product                                                                                         |  | $         | 7,445  |             | $ |                |  
|Services                                                                                        |  |           | 10,820 |             |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|                                                                                                |  |           | 18,265 |             |   |                |  
|Operating expenses:                                                                             |  |           |        |             |   |                 |  
|Cost   of product revenue, other                                                                |  |           | 28     |             |   |                |  
|Cost   of service revenue                                                                       |  |           | 7,430  |             |   |                |  
|Research   and development                                                                      |  |           | 6,982  |             |   |                |  
|Sales   and marketing                                                                           |  |           | 4,036  |             |   |                |  
|General   and administrative                                                                    |  |           | 3,362  |             |   |                |  
|Depreciation                                                                                    |  |           | 597    |             |   |                |  
|Stock-based   compensation:                                                                     |  |           |        |             |   |                 |  
|Cost   of revenue                                                                               |  |           | 53     |             |   |                |  
|Research   and development                                                                      |  |           | 122    |             |   |                |  
|Sales   and marketing                                                                           |  |           | 136    |             |   |                |  
|General   and administrative                                                                    |  |           | 720    |             |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|Total operating expenses                                                                        |  |           | 23,466 |             |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|Loss from operations                                                                            |  |           | (5,201 | )           |   |                |  
|Interest expense, net                                                                           |  |           | (709   | )           |   | (275            | )
|Loss on settlement of   liability                                                               |  |           | (165   | )           |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|Loss for the year                                                                               |  | $         | (6,075 | )           | $ | (275            | )
|                                                                                                |  |           |        |             |   |                 |  
|Basic and diluted loss per   share                                                              |  | $         | (1.01  | )           | $ | (0.04           | )
|                                                                                                |  |           |        |             |   |                 |  
|Weighted average number of   shares used in computing basic and diluted loss  per share (000s) |  |           | 6,034  |             |   | 6,034           |  
|                                                                                                |  |           |        |             |   |                 |  

F-39



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|20. | Reconciliation to Canadian GAAP   (continued):                 
|--- | ---------------------------------------------------------------
|    |                                                                
|    | Statement of operations for the year ended December   31, 2004:

|                                                                                                |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------------------------------------------------- |  | --------- | ------ | ----------- | - | --------------- | -
|                                                                                                |  |           |        |             |   |                 |  
|Revenue:                                                                                        |  |           |        |             |   |                 |  
|Product                                                                                         |  | $         | 8,844  |             | $ |                |  
|Services                                                                                        |  |           | 6,228  |             |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|                                                                                                |  |           | 15,072 |             |   |                |  
|Operating expenses:                                                                             |  |           |        |             |   |                 |  
|Cost   of product revenue, other                                                                |  |           | 26     |             |   |                |  
|Cost   of service revenue                                                                       |  |           | 6,614  |             |   |                |  
|Research   and development                                                                      |  |           | 6,271  |             |   |                |  
|Sales   and marketing                                                                           |  |           | 4,985  |             |   |                |  
|General   and administrative                                                                    |  |           | 3,074  |             |   |                |  
|Depreciation                                                                                    |  |           | 595    |             |   |                |  
|Stock-based   compensation:                                                                     |  |           |        |             |   |                 |  
|Cost   of revenue                                                                               |  |           | 15     |             |   |                |  
|Research   and development                                                                      |  |           | 40     |             |   |                |  
|Sales   and marketing                                                                           |  |           | 34     |             |   |                |  
|General   and administrative                                                                    |  |           | 63     |             |   |                |  
|Restructuring charges                                                                           |  |           | 993    |             |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|Total operating expenses                                                                        |  |           | 22,710 |             |   |                |  
|                                                                                                |  |           |        |             |   |                 |  
|Loss from operations                                                                            |  |           | (7,638 | )           |   |                |  
|Interest expense, net                                                                           |  |           | (396   | )           |   | (149            | )
|                                                                                                |  |           |        |             |   |                 |  
|Loss for the year                                                                               |  | $         | (8,034 | )           | $ | (149            | )
|                                                                                                |  |           |        |             |   |                 |  
|Basic and diluted loss per   share                                                              |  | $         | (1.34  | )           | $ | (0.03           | )
|                                                                                                |  |           |        |             |   |                 |  
|Weighted average number of   shares used in computing basic and diluted loss  per share (000s) |  |           | 5,984  |             |   | 5,984           |  
|                                                                                                |  |           |        |             |   |                 |  

F-40



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|20. | Reconciliation to Canadian GAAP   (continued):                              
|--- | ----------------------------------------------------------------------------
|    |                                                                             
|    | Cash flows from operating activities for the year   ended December 31, 2005:

|                                                            |  | U.S. GAAP |         | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------------- |  | --------- | ------- | ----------- | - | --------------- | -
|                                                            |  |           |         |             |   |                 |  
|Cash flows from (used in)   operating activities:           |  |           |         |             |   |                 |  
|Loss   for the year                                         |  | $         | (6,075  | )           | $ | (275            | )
|Items   not involving cash:                                 |  |           |         |             |   |                 |  
|Accretion   on convertible notes payable to related parties |  |           | 22      |             |   | 289             |  
|Depreciation and   amortization                             |  |           | 597     |             |   |                |  
|Amortization of   deferred charges                          |  |           | 119     |             |   | (14             | )
|Stock-based   compensation                                  |  |           | 1,031   |             |   |                |  
|Loss on settlement of   liability                           |  |           | 165     |             |   |                |  
|Changes   in operating assets and liabilities:              |  |           |         |             |   |                 |  
|Accounts receivable                                         |  |           | 360     |             |   |                |  
|Prepaid expenses and   other receivables                    |  |           | 61      |             |   |                |  
|Accounts payable                                            |  |           | (255    | )           |   |                |  
|Interest payable to   related parties                       |  |           | 5       |             |   |                |  
|Long-term liabilities                                       |  |           | (92     | )           |   |                |  
|Long-term interest   payable to related parties             |  |           | 425     |             |   |                |  
|Accrued liabilities                                         |  |           | (479    | )           |   |                |  
|Deferred revenue                                            |  |           | 116     |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net   cash flows (used in) operating activities             |  |           | (4,000  | )           |   |                |  
|Cash flows from (used in)   financing activities:           |  |           |         |             |   |                 |  
|Issuance   of common shares on exercise of options          |  |           | 61      |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net   cash flows from financing activities                  |  |           | 61      |             |   |                |  
|Cash flows used in   investing activities:                  |  |           |         |             |   |                 |  
|Purchase   of fixed assets, net                             |  |           | (345    | )           |   |                |  
|Maturity   of short-term investments                        |  |           | 14,402  |             |   |                |  
|Purchases   of short-term investments                       |  |           | (10,415 | )           |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net   cash flows (used in) investing activities             |  |           | 3,642   |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Effect of exchange rate   changes on cash                   |  |           | 152     |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net decrease in cash and   cash equivalents                 |  |           | (145    | )           |   |                |  
|Cash and cash equivalents,   beginning of year              |  |           | 5,417   |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Cash and cash equivalents, end of year                      |  | $         | 5,272   |             | $ |                |  
|                                                            |  |           |         |             |   |                 |  

F-41



724 SOLUTIONS INC.Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

|20. | Reconciliation to Canadian GAAP   (continued):                              
|--- | ----------------------------------------------------------------------------
|    |                                                                             
|    | Cash flows from operating activities for the year   ended December 31, 2004:

|                                                            |  | U.S. GAAP |         | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------------- |  | --------- | ------- | ----------- | - | --------------- | -
|                                                            |  |           |         |             |   |                 |  
|Cash flows from (used in)   operating activities:           |  |           |         |             |   |                 |  
|Loss   for the year                                         |  | $         | (8,034  | )           | $ | (149            | )
|Items   not involving cash:                                 |  |           |         |             |   |                 |  
|Accretion   on convertible notes payable to related parties |  |           | 12      |             |   | 157             |  
|Depreciation   and amortization                             |  |           | 595     |             |   |                |  
|Amortization   of deferred charges                          |  |           | 66      |             |   | (8              | )
|Stock-based   compensation                                  |  |           | 152     |             |   |                |  
|Other   non-cash items                                      |  |           | 21      |             |   |                |  
|Changes   in operating assets and liabilities:              |  |           |         |             |   |                 |  
|Accounts   receivable                                       |  |           | (534    | )           |   |                |  
|Prepaid   expenses and other receivables                    |  |           | 65      |             |   |                |  
|Accrued   interest on short-term investments                |  |           | 40      |             |   |                |  
|Accounts   payable                                          |  |           | 202     |             |   |                |  
|Interest   payable                                          |  |           | 103     |             |   |                |  
|Long-term   liabilities                                     |  |           | 92      |             |   |                |  
|Long-term   interest payable                                |  |           | 343     |             |   |                |  
|Accrued   liabilities                                       |  |           | (1,301  | )           |   |                |  
|Deferred   revenue                                          |  |           | (237    | )           |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net   cash flows used in operating activities               |  |           | (8,415  | )           |   |                |  
|Cash flows from (used in)   financing activities:           |  |           |         |             |   |                 |  
|Issuance   of convertible notes payable to related parties  |  |           | 8,000   |             |   |                |  
|Note   payable issue costs                                  |  |           | (352    | )           |   |                |  
|Issuance   of common shares on exercise of options          |  |           | 22      |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net   cash flows from financing activities                  |  |           | 7,670   |             |   |                |  
|Cash flows used in   investing activities:                  |  |           |         |             |   |                 |  
|Purchase   of fixed assets, net                             |  |           | (1,017  | )           |   |                |  
|Maturity   of short-term investments                        |  |           | 7,233   |             |   |                |  
|Purchases   of short-term investments                       |  |           | (13,490 | )           |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net   cash flows used in investing activities               |  |           | (7,274  | )           |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Net decrease in cash and   cash equivalents                 |  |           | (8,019  | )           |   |                |  
|Cash and cash equivalents,   beginning of year              |  |           | 13,436  |             |   |                |  
|                                                            |  |           |         |             |   |                 |  
|Cash and cash equivalents, end of year                      |  | $         | 5,417   |             | $ |                |  
|                                                            |  |           |         |             |   |                 |  

F-42