# 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, 2004
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------

OR

| | [   ] |  | TRANSITION  REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----- |  | -----------------------------------------------------------------------------------------

| | For
the transition period from ______________ to ______________
| | ---------------------------------------------------------------

Commission file number
0-28968

MDSI MOBILE DATA SOLUTIONS
INC.
(Exact name of
registrant as specified in its charter)

|CANADA(Jurisdiction of incorporation or organization) | NOT APPLICABLE
(I.R.S. Employer Identification No.)
|----------------------------------------------------- | ---------------------------------------------------

10271 Shellbridge Way 
Richmond, British Columbia, 
Canada V6X 2W8(Address of principal executive offices)

# Registrants
telephone number: (604) 207-6000

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

|Title of each class
None | Name of each exchange on which registeredNone
|------------------------ | ---------------------------------------------

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

Common Shares, no par value(Title of Class)

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 ____

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 the 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.   [X]

Indicate
by check mark whether the registrant is an  accelerated  filer (as defined in Rule 12b-2
of the Act).  Yes  _____    No [X]

The
aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold on NASDAQ as
of the last business day of the registrants most recently completed second fiscal
quarter, which was June 30, 2004: $53,744,597

The
number of shares of the Registrants Common Shares outstanding as of March 15, 2005
was 8,402,163.

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# TABLE OF CONTENTS

|                                                                              
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|Item 1:  Business                                                             
|
|Item 2:  Properties                                                           
|
|Item 3:  Legal Proceedings                                                    
|
|Item 4:  Submission of Matters to a Vote of Security Holders                  
|
|Item 5:  Market for Registrant's Common Equity And Related Stockholder Matters
|
|Item 6, 7 and 7A: Selected Financial Data; Managements Discussion and        
|Analysis of Financial Condition Results of Operations; Quantitative and       
|Qualitative Disclosures About Market Risk                                     
|
|Item 8:  Financial Statements and Supplementary Data                          
|
|Item 9:  Changes in and Disagreements with Accountants on Accounting and      
|Financial Disclosure                                                          
|
|Item 9A:  Controls and Procedures                                             
|
|Item 9B.  Other Information                                                   
|
|Item 10:  Directors and Executive Officers of the Registrant                  
|
|Item 11:  Executive Compensation                                              
|
|Item 12:  Security Ownership of Certain Beneficial Owners and Management      
|
|Item 13:  Certain Relationships and Related Transactions                      
|
|Item 14:  Principal Accountant Fees and Services                              
|
|Item 15:  Exhibits and Financial Statement Schedules                          
|
|SIGNATURES                                                                    

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# Forward-Looking
Statements

Certain
statements in this Annual Report on Form 10-K constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of MDSI Mobile Data
Solutions Inc. (MDSI or the Company), or developments in the
Companys industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such factors
include, but are not limited to: lengthy sales cycles, the Companys dependence upon
large contracts and relative concentration of customers, the failure of MDSI to maintain
anticipated levels of expenses in future periods and the risk that cost reduction efforts
adversely affect the ability of MDSI to achieve its business objectives the failure of
MDSI to successfully execute its business strategies, the effect of volatile United States
and international economies generally, the threat or reality of war, as well as economic
trends and conditions in the vertical markets that MDSI serves, the effect of the risks
associated with technical difficulties or delays in product introductions, improvements,
implementations, product development, product pricing or other initiatives of MDSIs
competitors, the possibility that our potential customers will defer purchasing decisions
due to economic or other conditions or will purchase products offered by our competitors,
risks associated with litigation and the protection of intellectual property, risks
associated with the collection of accounts receivable, and the other risks and
uncertainties described under Business  Risk Factors in Part I of this
Annual Report on Form 10-K. Certain of the forward-looking statements contained in this
Report are identified with cross-references to this section and/or to specific risks
identified under Business  Risk Factors.

Any
statements that express or involve discussions with respect to predictions, expectations,
beliefs, plans, projections, objectives, assumptions or future events or performance
(often, but not always, using words or phrases such as expects or does
not expect, is expected, anticipates or does not
anticipate, plans, estimates or intends, or
stating that certain actions, events or results may, could,
would, might or will be taken, occur or be achieved)
are not statements of historical fact and may be forward-looking statements.

# Exchange Rates

The
following table sets forth, for each period presented, the exchange rates at the end of
such period, the average of the exchange rates on the last day of each month during the
period and the high and low exchange rates for one Canadian dollar, expressed in U.S.
dollars, based on the noon buying rate in New York City for cable transfers payable in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New
York.

U.S. Dollars Per Canadian Dollar

|           | 2004 | 2003      | 2002 | 2001      | 2000
|---------- | ---- | --------- | ---- | --------- | ----
|Period End |      | US$0.8310 |      | US$0.7724 |     
|Average    |      | 0.7682    |      | 0.7138    |     
|High       |      | 0.8493    |      | 0.7749    |     
|Low        |      | 0.7158    |      | 0.6329    |     

On
March 15, 2005 the noon buying rate was CDN$1.00 = US$0.8289 The Canadian dollar is
convertible into U.S. dollars at freely floating rates, and there are currently no
restrictions on the flow of Canadian currency between Canada and the United States. Unless
stated otherwise, all financial information is expressed in United States dollars.

1

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# Part I

# Item 1:  Business

# The Company

MDSI
Mobile Data Solutions Inc. is a leading provider of mobile workforce management solutions.
MDSIs suite of software applications improves customer service and relationships and
reduces operating costs by empowering service companies to effectively manage their mobile
field resources. The Company also provides all of the professional services necessary to
implement and support its solutions. Founded in 1993, MDSI has over 100 major customers
worldwide, with operations and support offices in the United States, Canada, Europe and
Africa. MDSI markets its solutions to a variety of companies that have substantial field
workforces and focuses primarily upon utilities (electric, gas and water companies),
telecommunications companies, and cable/broadband companies. MDSIs products are used
by such companies in conjunction with various public and private wireless data
communications networks, mobile devices and server hardware to provide comprehensive
solutions for the automation of business processes associated with the scheduling,
dispatching and management of a mobile workforce.

Unless
the context otherwise requires, references herein to MDSI or the
Company refer to MDSI Mobile Data Solutions Inc. and its subsidiaries. The
Companys principal executive offices are located at 10271 Shellbridge Way, Richmond,
British Columbia, Canada V6X 2W8, and its telephone number at that location is (604)
207-6000. The Companys web site is www.mdsi.ca. Information contained on the
Companys web site is not part of this report. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments, if any, to
such reports are available, free of charge on our website after we electronically file or
furnish such material with the Securities and Exchange Commission and the British Columbia
Securities Commission.

# Background

Field
operations, whether involved in installation, repair, emergency, inspection, maintenance,
construction, or other work, are confronted on a daily basis with the difficult task of
optimally assigning work requests to mobile workforces, dispatching the work to the field,
monitoring the progress of the work, responding to changing conditions and measuring
workforce performance. Common workforce management problems include:

| |  |  | missed
appointments;
| | - |  | --------------------

| |  |  | unnecessary
overtime;
| | - |  | ---------------------

| |  |  | repeat
customer visits to get the job done right;
| | - |  | -------------------------------------------------

| |  |  | jobs
that take too long to complete;
| | - |  | ------------------------------------

| |  |  | delayed
status reports;
| | - |  | -----------------------

| |  |  | inadequate
information collected from/supplied to the field;
| | - |  | ------------------------------------------------------------

| |  |  | redundant
data entry work; and
| | - |  | ------------------------------

| |  |  | excessive
driving time.
| | - |  | -----------------------

Historically,
these organizations have managed and supported their mobile workers by communicating
information on paper, through wireline solutions, or through voice radio systems.
Although voice radio systems are mobile, such systems rely on heavily used portions of
the radio spectrum and are subject to frequent periods of congestion. Mobile data
communication systems that addressed certain limitations of voice communications systems
were first developed for a limited number of vertical markets, such as utility, public
safety, taxi, courier and commercial field service. Businesses in these markets
recognized certain productivity benefits associated with wireless data applications.
Although such mobile data communications systems were introduced in a number of vertical
markets, these systems failed to achieve widespread adoption. The Company believes that
this initial low rate of adoption was attributable to a number of factors, including the
high cost of establishing private radio networks; the difficulty of obtaining radio
spectrum for such networks; the high cost and limited functionality of early mobile
computing devices; the regulatory environment in certain industries, such as utilities
and telecommunications, which diminished competitive pressures; and a lack of
industry-specific

2

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application software which
effectively addressed the needs of mobile workers. MDSI was formed to address this last
limitation. The Company now provides industry-specific mobile workforce management
solutions for the utility, telecommunications, cable/broadband and other markets with
significant field operations.

The
Company believes that the other limitations to adoption in its markets are also being
addressed, to an increasing extent. Trends in the regulatory environment, numerous
technological advances and competitive pressures have provided, and will continue to
provide, a compelling case for mobile workforce management solutions. For example,
deregulation has exposed the utility and telecommunications markets to new competitive
pressures, driving businesses within those markets to seek ways to reduce costs, improve
operations, efficiently allocate resources and increase the quality of customer service.
In addition, the availability of powerful mobile computing devices has permitted the
development of sophisticated software applications. Finally, public data networks
providing services at lower costs than ever are now widely available in North America, and
similar networks are available in Europe, Austral-Asia and Africa. Consequently, the
Company believes that mobile workforce management solutions may now be implemented without
the difficulty and expense of establishing a private radio network, thereby increasing the
cost-effectiveness of such systems. The Company believes that these trends will continue
to increase the likelihood of adoption of mobile workforce management solutions by
companies with large field workforces.

# The MDSI Solution

MDSI
has combined its expertise in software application development and mobile data
communications technology with its understanding of the unique needs of field operations
in targeted vertical markets to develop mobile workforce management solutions that address
the specific needs of businesses within those markets. MDSIs products enable these
organizations to effectively communicate with, manage and support their mobile workers in
their execution and completion of work orders.

MDSIs
products are designed to interface with a variety of public and private data networks,
both terrestrial and satellite-based, are compatible with a variety of operating platforms
and can be integrated to a wide variety of applications, including those built in-house
and can operate on a variety of mobile devices, such as a laptop, personal digital
assistant, pager or web phone.

To
effectively address a customers mobile workforce management requirements, MDSI
combines its products with professional services, such as systems implementation and
integration, training and documentation, workforce management assessments, consulting,
ongoing technical support and software maintenance. Where appropriate, MDSI also provides
third party products and services as part of a complete mobile workforce management
solution.

Advantex r7

Advantex
r7, the latest version of MDSIs mobile workforce management product, is
comprehensive, feature-rich and offered as a market-specific solution for customers in
MDSIs target markets. Advantex efficiently manages mobile workers and the work
orders they execute. It schedules work requests and, using complex business rules, assigns
them to the best available mobile worker. Advantex then dispatches work order details to
mobile workers who use the solution to efficiently process their work throughout the day
and send status updates and order completion information back to the office all
wirelessly, in real-time. Advantex provides dispatchers, supervisors and enterprise
applications, such as call center, billing and customer information systems, with
up-to-date information to enable improved customer service and effective monitoring and
management of field service operations at all times.

Advantex
is the result of more than ten years of development and extensive field validation by
MDSIs international customer base. Advantex uses global standards, such as CORBA
(Common Object Request Broker Architecture), Java, HTML, XML, WAP and Unicode, and
industry standard products, such as Oracle Corporations database tools, BEA
Systems application infrastructure tools, Ascential Software Corporations
enterprise application integration tools, ESRIs mapping tools and Cognos
Incorporateds business intelligence tools, to deliver a solution that meets
customers needs for a scalable, open and interoperable solution. Advantex has been
implemented, or is in the process of being implemented, for customers supporting as few as
70 and as many as 13,000 users. The primary components of Advantex are:

| |  |  | Advantex
Scheduling  Books and manages appointments with customers, automatically assigns
work orders to mobile workers based on skill and equipment match, location, availability,
and priority, and provides street level routing to reduce driving time. Administrators
can define mobile resources as individual technicians or crews and assign attributes to
them, such as skills and work areas, manage their composition, define their shifts, and
manage their availability.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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| |  |  | Advantex
Dispatch  Allows dispatchers to monitor work orders and workers. Allows dispatchers
to view the field service information that is most critical to them at any given moment,
to manage work orders (e.g., cancel, modify, dispatch), and to receive alerts for unusual
situations requiring dispatcher intervention (e.g., worker in jeopardy of missing an
appointment).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex  Dispatchs
complex order management feature coordinates mobile workers working on related orders. It
parcels orders into individual tasks, manages task assignment and dispatch, ensures that
precedence relationships are maintained, and monitors task status. The common cause
feature allows dispatchers and managers to recognize related trouble work orders and
manage them as individual dispatched work orders.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Mobile  Enables mobile workers to receive work orders, view work order information,
report their status, enter work results, and query company applications for additional
information needed to complete work. Promotes efficient workflow by providing the
information mobile workers need to do their work when they need it. A time reporting
feature allows mobile workers to allocate time to job codes and to record time spent on
other activities, replacing paper-based time reporting. A software distribution feature
allows an administrator to manage the automatic distribution of software updates and
configuration changes to remote mobile computers over high bandwidth wireless networks
and corporate LANs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Wireless  Provides wireless connectivity across public and private networks,
wireless compression, encryption, and store and forward features that enable
working offline in out of coverage situations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Business Intelligence  Collects and archives data in a historical database and
allows it to be presented for easy-to-understand reporting and trend analysis via a
web-browser. Lets managers prepare customized reports on key performance indicators to
measure mobile workforce performance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Compose  A configuration tool used to define a customers work practices and
generate a configured Advantex system. Defines the types of work the customer performs,
the work order details, how the work orders are presented to dispatchers and mobile
workers, the forms to be completed in the field, and the validation rules that apply to
work results entered in the field.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Mobile Mapping  Mobile Mapping allows technicians to review electronic street maps
to find addresses, view work order locations, manipulate order states, and request route
and driving directions to navigate to work sites. Customers can configure maps and GIS
and CAD drawing layers to provide key asset and facility information related to work
orders.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Vehicle Tracking  Allows dispatchers to use maps and GPS (Global Positioning
System)-equipped vehicles to track in real-time the location of mobile workers and their
work orders and to execute a wide variety of tasks directly from the map interface.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Maintenance Management  Allows a planner to create a maintenance or inspection
schedule for an asset. For example, a gas company might establish a bi-annual inspection
schedule for its regulator stations. Maintenance Management automatically creates
corresponding work orders, which are assigned and distributed to the field workforce in
the usual way. Once the work is done, the completion information remains associated with
the asset and is accessible to the planner through the application.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Resources  Allows administrators to define resources that perform work (e.g.,
mobile workers and crews) and their attributes (e.g., work areas, skills, equipment),
manage crew composition, define shift rotations, and manage day-to-day technician
availability (e.g., ad hoc adjustments for absences).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advantex
Enterprise Connector  Integrates Advantex with the customers enterprise
applications (e.g., SAP, Siebel). Bundled with Advantex when MDSI provides application
integration services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Advantex in a Box

Advantex
version r7.7, or Advantex in a Box, is a highly configurable, off the
shelf mobile workforce management solution that is deployable by customers or third
party integrators, and offers customers a scheduled upgrade plan and online support.
Advantex in a Box simplifies installation, deployment and maintenance of the Advantex
baseline solution, and in doing so allows customers to take greater ownership of their
system and reduce their total cost of ownership.

4

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Advantex
in a Box comprises packaged and unpackaged software elements. Packaged software can simply
be installed from a DVD supplied by MDSI or downloaded from an MDSI ftp (file transfer
protocol) Internet site. Packaged software is configured using a combination of
installation scripts, Advantex Compose, the Advantex System Administration application and
system tuning, which sets application parameters in Advantexs database
and files. Unpackaged software is configured using Advantex Compose, the Advantex System
Administration application, system tuning and MDSIs professional
services. MDSI or an MDSI channel partner must install unpackaged software.

MDSI ideligo

For
companies outside of MDSIs traditional markets that employ substantial field
workforces, such as security companies, office equipment companies and home appliance
companies, MDSI offers a wireless enablement product called MDSI ideligo. MDSI ideligo is
primarily comprised of the Advantex Wireless and Advantex Mobile components of Advantex.
The product wirelessly communicates data in real-time between the field and enterprise
applications, automates workflow, and lets field workers be more efficient and productive.
In 2003, the Company integrated MDSI ideligo with Siebel Systems Field Service
application for Texas-based Key Energy Services, and in the future the Company expects to
integrate MDSI ideligo with products from other independent software vendors. The Company
is also adapting its current product roadmap to provide a broader set of functionality to
address this growing market.

# Professional and
Customer Support Services

Contracts
for the sale of MDSIs software typically require MDSI to provide certain
professional services. Additionally, customers typically sign a separate customer support
and maintenance agreement, which requires MDSI to provide after-sales support of its
products. The Company believes that providing these services facilitates effective
implementation and use of its products and fosters a strong relationship with the customer
that often leads to future sales of MDSI products and services.

# Professional Services

A
professional services engagement for the Companys flagship product, Advantex r7,
typically lasts for six to twelve months, though the Company has entered into much longer
engagements for some of its larger customers. During this time, MDSI works with the
customer in defining, configuring, and installing Advantex, as well as providing complete
training services and systems documentation that address the implementation and operation
of Advantex. Whenever industry solutions such as customer information systems, customer
relationship management systems, billing systems and outage management systems, among
others, are the source of work orders or the destination for work results, MDSI offers
application integration services.

MDSIs
depth of experience in the utility, telecommunications and cable/broadband industries
allows the Company to offer additional mobile workforce management services to help
customers improve customer satisfaction and increase operational efficiency by making the
most effective use of Advantex in their organizations.

Advantex
in a Box is designed to be ready off the shelf. It comes with a starter
kit of professional servicesthe basic services needed for a successful
deployment, including training, and assistance with requirements, design, installation and
roll-out. Additional professional services can be contracted from MDSI or channel partners
for additional training, assistance with Advantex configuration and host integration, as
well as help with system and business process optimization, maintenance releases and
upgrades. Because Advantex in a Box is designed to be ready off the shelf,
MDSI expects that implementation of the product will take significantly less time than the
six to twelve months required for a traditional professional services engagement.

# Customer Support

The
Company believes that its ability to offer a high level of after-sale customer support is
critical to its success. The Companys customer support group provides MDSI customers
with telephone and on-line technical support as well as product updates. Most MDSI
customers enter into separate customer support agreements, which may be on an annual or
multi-year basis.

# Markets

MDSI
has combined its expertise in software application development and mobile data
communications technology with its understanding of the unique needs of targeted vertical
markets to develop mobile workforce applications targeted at customers in the utilities
(electric, gas and water), telecommunications and cable/broadband markets with more than
100 mobile workers. The

5

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Companys solutions have
primarily targeted mobile workers who provide intra-day work, such as meter services
(reading, connections and investigations), emergency work and account collections.

MDSI
believes that there are approximately 1.8 million mobile workers worldwide in its
traditional utility, telecommunications and cable/broadband markets. The Companys
products have historically best addressed the needs of the approximately one-half of these
workers who are engaged in intra-day service and repair work in these markets. Through
product development, potential acquisitions and partnerships, the Company is executing on
initiatives to broaden its target market to address the full spectrum of field workers and
work in its traditional markets, including multi-day maintenance and inspection work
(asset management) and major repairs and construction (work
management). MDSI has taken certain initiatives to address the needs of mobile
workers in additional vertical markets.

Utilities.
          The utilities market targeted by the Company consists of electric, gas and
water           companies. MDSIs products have been implemented or are being
implemented           in over 70 such companies in the United States, Canada, Europe and
Austral-Asia.           MDSI believes that the total number of utilities with more than
100 mobile           workers (MDSIs typical target market) exceeds 900 worldwide
(source: D.F.           Blumberg Associates and MDSI). According to data from IDC (Dec.
2003) and META           Group (June 2004), for the period 2004 to 2007, utilities in the
United States           expect to focus their software spending on mobile computing and
asset management           and optimization solutions. MDSI believes that this trend, if
realized, will           benefit the Company. In general, the Company believes that the
market offers           opportunity for revenue growth both from existing and new
customers.

Telecommunications
and Cable/Broadband. MDSI sells its Advantex product into the telecommunications and
cable/broadband markets worldwide. The telecommunications market consists of wireline
providers of local, and long-distance services, wireless communication service providers
and ISPs (Internet service providers). The wireline market in North America is comprised
of IXCs (Inter-exchange carriers), ILECs (Incumbent Local Exchange Carriers), and CLECs
(Competitive Local Exchange Carriers). In Europe, the national telecommunication providers
are referred to as PTTs (Post, Telephone & Telegraph). MDSI believes that the
total number of telecommunications companies and cable/broadband companies with more than
100 mobile workers (MDSIs typical target market) exceeds 300 and 100, respectively,
worldwide (source: D.F. Blumberg Associates and MDSI).

Cable/broadband
services consist of basic cable television services and new digital interactive broadband
services, including digital cable TV services, cable data and Internet services, cable
telephony services, and other interactive broadband data and multimedia services. The
market is comprised of traditional cable MSOs (Multiple System Operators) and independent
cable system operators, satellite service operators, new broadband divisions of
traditional telecommunication firms, and new broadband entrants. Currently, in North
America, approximately 80% of the subscriber base is under the control of the ten largest
MSOs although changes in the regulatory environment and technological developments, such
as satellite television, have led to the introduction of significant competition in the
cable market. MDSI sees this enhanced level of competition as being very positive for its
business as the market is relatively unsaturatedfew operators have rolled out mobile
workforce management systems across all sites in their enterprise. Additionally, MDSI has
extended its product functionality to serve MSOs as they increasingly outsource some of
their field technician work to specialty contractors.

MDSI
believes that, as deregulation of the telecommunications and cable/broadband markets
continues, and as these markets converge, with companies that used to provide traditional
voice telecommunications services now permitted to provide data services, basic cable and
other broadband services, and companies that provided traditional cable TV service now
also providing cable telephony services and Internet services, companies in these markets
will be required to implement new technology to improve their competitiveness, efficiency
and service levels. In addition, MDSI believes that the telecommunications and
cable/broadband markets have begun to show signs of recovery from difficult economic
times. MDSI believes that these trends will benefit the Company. However, these markets
have also shown a recent trend toward consolidation, particularly in the United States,
which the Company believes could postpone purchase decisions within the industry and could
have an adverse impact on the Companys software and services revenues from these
markets in the short term.

Other
Markets. The Company evaluates new target markets for mobile workforce management based
upon their similarity to existing vertical markets in which the Company has been
successful, and upon the ability of the Company to utilize its core competencies and
proven technology to meet the needs of companies in these new markets. There are a large
number of companies outside MDSIs traditional markets that employ field workforces,
serving security, energy maintenance, office equipment, home appliance, medical/scientific
equipment, industrial equipment, and HVAC (Heating, Ventilation and Air Conditioning)
markets, amongst others. MDSI believes that the total number of such companies with more
than 100 mobile workers (MDSIs typical target market) exceeds 3,500 in the United
States alone (source: D.F. Blumberg Associates). In addition, MDSI believes that there are
approximately 2.1 million mobile workers in all field service markets in the United States
alone (source: D.F. Blumberg Associates). MDSI ideligo is an initial step in the
Companys strategy to address the generalized field service market.

6

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Public
Safety. The Public Safety market consists of federal, state and local agencies that
provide police, fire, medical and other emergency services. During 2001, MDSI ceased
pursuing opportunities in the market and in 2002 reached an agreement with Datamaxx
Applied Technologies, Inc. of Tallahassee, Florida, granting Datamaxx exclusive license
rights to MDSIs Public Safety products in the North American public safety market
and non-exclusive license rights for such products outside North America. MDSI had
installed solutions for a limited number of customers, and the market never represented a
material portion of MDSIs revenues.

# Market Drivers

The
Company believes that there are several market drivers that will continue to drive demand
for the Companys products and services and provide additional market opportunities
for MDSI.

| |  |  | Regulated
Rates of Return  Utilities that operate in a regulated market continue to heavily
emphasize cost reduction and to expand their mobile infrastructure to manage a wider
variety of their assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Telecommunication
and Cable/Broadband Market convergence  The Company believes that the introduction
of new services will lead operators to adopt mobile workforce management solutions to
improve their competitiveness, efficiency and level of customer service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Increased
Competition  As competition within our customers target markets continue to
increase, increased focus will be applied to improving overall cost of operations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Enterprise-wide
Adoption  Companies are looking to expand mobile workforce management beyond the
traditional customer service and repair functions, to include all field activities across
the entire enterprise, including complex construction, asset maintenance and inspection.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Reduced
Total Cost of Ownership Companies are striving to reduce their overall cost
of ownership, including third party supplied elements such as mobile devices, server
hardware and wireless communication airtime, in providing an integrated
solution for their mobile workers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Aging
Workforce and Assets As the asset base and workforce ages within MDSIs
target markets, customers are increasingly looking to maximize work that can be done by
one technician as well as ensuring that asset maintenance is properly managed and
tracked.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Geographic Markets

MDSI
believes that there are approximately 1.8 million mobile workers worldwide in its
traditional utility, telecommunications and cable/broadband markets, split approximately
evenly amongst North America, Western Europe, and certain other commercially viable
geographical markets in the rest of the world. The Company primarily targets opportunities
in the United States, Europe and Canada, and, to a lesser extent, Austral-Asia and South
Africa.

# Sales and Marketing

The
Company markets its products through a direct sales force in its key North American and
European markets as well as through strategic marketing arrangements with independent
software vendors and systems integrators. While historically MDSI viewed Western Europe as
one homogenous market, it has since localized its sales and marketing strategy to more
effectively deal with local language, regulatory and wireless considerations. The Company
also expects to develop value added reseller channels to address market opportunities in
certain geographic regions.

Direct
Sales Force.MDSIs sales personnel are knowledgeable about the Companys
products and current industry and enterprise-specific application issues. The Company
organizes its sales personnel by both vertical and geographic market. The Companys
sales personnel employ their expertise to develop long-term consultative relationships
with customers in order to identify the needs of the customer and provide specific and
effective solutions. To date, substantially all of the Companys revenue has been
generated by direct sales activities.

Independent
Software Vendors. MDSI establishes relationships with other independent software
vendors that sell complementary products, such as billing, customer relationship
management, or outage management solutions, into MDSIs markets.

7

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The relationships typically involve
MDSI and the vendors establishing a standard integration of their products, then jointly
identifying and executing on sales prospects for the integrated solution. The Company has
established a variety of such relationships, which are usually formalized through a
written agreement.

Systems
Integrators. MDSI also establishes strategic relationships with systems integrators
that work in the Companys markets to provide end-to-end solutions on a
customer-by-customer basis or as an integrated product offering for the vertical market.
In either case, MDSI works with the integrator to assist in the sales process and to
integrate MDSIs products with the other component software applications. To date,
MDSI has worked with Cap Gemini Ernst & Young LLP, Accenture LLP and IBM Business
Consulting Services, among others. In some cases the relationships have been formalized
through written agreements, while others remain informal.

Value
Added Resellers. MDSI is establishing relationships with independent third party
vendors who will license from MDSI its products and provide the necessary integration
services to implement these solutions for end customers within their geographic region.
MDSI expects that these relationships will be formalized through written agreements. In
the future, MDSI intends to involve value added resellers in providing the implementation
work surrounding customer installations.

# Customers

MDSI
has sold its solutions to over 100 customers worldwide, comprising over 80,000 user
licenses.

|Sample Customers:                    |  |   | 
|------------------------------------ |  | - | 
|       CenterPoint Energy           |  |  | 
|         Consumers Energy           |  |  | 
|         Keyspan Energy             |  |  | 
|         Pacific Gas & Electric     |  |  | 
|         National Grid Transco (UK) |  |  | 

During
the year ended December 31, 2004 the Company generated approximately 60.7% of its revenue
from North America, approximately 38.3% of its revenue from Europe, Middle East and Africa
and the remaining 1.0% of its revenue from other parts of the world.

The
Companys customers vary in size from small local companies to large regional,
national and international organizations. During the year ended December 31, 2004, Telkom
South Africa Limited accounted for 19.3% of MDSIs overall revenue and Transco PLC
accounted for 10.6% of MDSIs overall revenue. The Company anticipates that revenue
from each of these two customers will account for a lesser percentage of MDSIs
overall revenue in 2005. During the year ended December 31, 2003, Telkom South Africa
Limited accounted for 18.0% of MDSIs overall revenue and Transco PLC accounted for
17.1% of MDSIs overall revenue. During the year ended December 31, 2002, no
individual customer accounted for 10% or more of MDSIs overall revenue.

In
the years ended December 31, 2004, 2003, and 2002, approximately 47%, 44%, and 29%,
respectively, of the Companys consolidated revenue was attributable to five or fewer
customers. The Company believes that this percentage will decrease in 2005, but that
revenue derived from a limited number of customers will continue to represent a
significant portion of its consolidated revenue.

In
the years ended December 31, 2004, 2003, and 2002, revenue derived from sales outside of
North America accounted for 39.3%, 44.5%, and 30.9% of the Companys total revenue,
respectively. See Note 10, Segmented Information, of the Companys Consolidated
Financial Statements. Because the Companys revenue outside North America has been
dependent, in large part, on significant contracts with a limited number of customers, the
percentage of the Companys revenues that is derived from sales outside of North
America has fluctuated, and may continue to fluctuate, from period-to-period.

8

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# Product Development

Mobile
workforce management applications must adapt to rapid technological change and increasing
user requirements. Accordingly, the Company must be able to provide new functionality and
to modify and enhance existing functionality on a timely and continuing basis in order to
be competitive. To accomplish this objective, the Companys strategy is to utilize
proven technology to further enhance its existing products and to create new products.
Where appropriate, the Company may acquire or license complementary technology developed
by third parties for integration into the Companys products.

The
Company believes that its highly qualified software development personnel provide MDSI
with a competitive advantage. MDSI personnel have considerable experience and expertise in
the development of mobile workforce management applications specifically designed for use
with a wireless data network, as well as in the integration of these applications with a
customers corporate information system. MDSIs product development personnel
employ modular software architecture, object-oriented software development and graphical
user interface design technologies to develop scaleable, modular, configurable products.
MDSI personnel have expertise in software technology, wireless and wireline communications
technologies, computer environments and corporate information systems integration. They
also have considerable expertise in radio frequency system design and implementation. MDSI
believes that this combination of expertise in multiple disciplines has allowed, and will
continue to allow, the Company to design and develop mobile workforce management solutions
that can be implemented in a timely and cost-effective manner. Management believes that
timely and continuing product development is critical to the Companys success and
plans to continue to allocate significant resources to product development.

During
the fiscal years ended December 31, 2004, 2003, and 2002, the Companys research and
development expenses were $6.9 million, or 13.8% of revenue, $5.5 million, or 11.6% of
revenue, and $5.5 million, or 14.4% of revenue, respectively. The Company intends to
continue committing a significant portion of its revenues to enhance existing products and
develop new products. The Company expects that its research and development expenditures
will be relatively consistent with those of 2004 during 2005.

# Backlog

We
are contracted to provide products and services that are provided over several months and
sometimes even years. Our backlog has fluctuated in the past and is likely to continue to
fluctuate from period to period depending on a number of factors including the timing of
receipt of significant orders, the timing of completion of contracts, increased
competition, regulatory and other developments in our vertical markets, changes in the
demand for our products and services, the cancellation of contracts, the timing of new
product announcements and introduction, changes in pricing policies by the Company and its
competitors, delays in the introduction of products or enhancements by the Company, the
mix of sales of our products and services, seasonality of customer purchases, the mix of
international and North American revenues and foreign currency exchange rates. During
2004, one of our largest contracts was substantially completed and during 2005 another
large contract will draw to completion. Accordingly, our backlog at any given time is not
necessarily a meaningful indicator of future long-term revenues.

# Competition

The
markets for MDSIs Advantex and MDSI ideligo applications are highly competitive.
Numerous factors affect the Companys competitive position, including price, product
features, product performance and reliability, ease of use, product scalability, product
availability on multiple platforms (both server and mobile workstation), ability to
implement solutions domestically and internationally while meeting customer schedules,
integration of products with other enterprise solutions, availability of project
consulting services and timely ongoing customer service and support.

MDSI
has a number of competitors, both small companies attempting to establish a business in
the Companys markets and large companies attempting to diversify their product
offerings. In addition, some of the Companys potential customers develop software
solutions internally, which may delay or eliminate the requirement for suppliers such as
the Company. Current or potential competitors may establish cooperative arrangements among
themselves or with third parties to increase the ability of their products to address
customer requirements. In general, the Company expects competition to intensify as
acceptance and awareness of the benefits of such applications and their associated
enabling wireless technologies continue.

Certain
of the Companys competitors have substantially greater financial, technical,
marketing and distribution resources than the Company. As a result, they may be able to
respond more quickly to new or emerging technologies and changing customer requirements,
or to devote greater resources to the development and distribution of existing products.
There can be no assurance that the Company will be able to compete successfully against
current or future competitors or alliances of such competitors, or that

9

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competitive pressures faced by the
Company will not have a material adverse effect on its business, financial condition,
operating results and cash flows.

The
Company believes that in the utilities, telecommunications and cable/broadband industry
segments the most important competitive factors are the reputation of the supplier, its
implementation track record and the quality and breadth of functionality of its products.
MDSI believes that its reputation, its long, successful track record in these markets and
its product, Advantex r7, which reflects that experience, gives it a competitive advantage
in this regard.

The
Company primarily competes in the utilities market with Intergraph Corporation, Accenture
(through its FFE Workforce Management solution), SPL WorldGroup, ViryaNet Inc. and
ClickSoftware, Inc. The Companys primary competitors for telecommunications
customers are Telcordia Technologies, Inc., a company that has historical relationships
with certain of the large telecommunications companies, and ClickSoftware, Inc. Less
frequently, the Company encounters Vidus Ltd., a company recently acquired by At Road Inc.
In the cable/broadband market, the Companys primary competitors are Telcordia
Technologies Inc., C-Cor Inc. and CSG Systems International Inc.

The
Company believes that the principal competitive factors in other field service markets are
the ability to improve the customer service aspects of an organizations business and
reduce its costs through increased productivity of field service representatives. The
Company competes in these markets with other suppliers of wireless enablement products,
such as Antenna Software, Inc., Dexterra, Everypath Inc and Extended Systems, enterprise
application solution providers, such as Astea, Metrix and Fieldcentrix, and larger
enterprise software companies, such as Oracle Corporation and Siebel Systems. MDSI
believes that these application vendors offer less comprehensive wireless solutions than
MDSI. Further, as has been demonstrated through MDSIs alliance with Siebel Systems,
enterprise application vendors like Siebel and Oracle are potential sales channel partners
for MDSI ideligo.

# Hosting and IT Services

In
June 2002, as part of managements strategy to return MDSIs focus to mobile
workforce management in the Companys traditional markets, MDSI entered into an
Exchange Agreement to return ownership of Connectria, a company MDSI acquired in June
2000, to its former principal shareholders. The services of MDSIs Hosting and IT
Services comprised outsourcing, hosting and consulting and ranged from complete
outsourcing of an IT department to providing turnkey IT projects. Connectrias
results of operations for 2002 are summarized in MDSIs Consolidated Statements of
Operations as Income (Loss) From Discontinued Operations. See Note 2, Discontinued
Operations, of the Companys Consolidated Financial Statements for more detail
regarding this transaction. Except as otherwise indicated, the financial information in
this Annual Report on Form 10-K excludes the results of discontinued operations. The
Company now operates in a single business segment.

# Employees

As
of December 31, 2004, the Company had 333 full-time employees, including 144 in operations
(including project management, customer support, the Companys solutions group and
certain overhead), 86 in product development and the Companys product group, 57 in
sales and marketing and 46 in finance, information technology, human resources, legal and
general administration. None of the Companys employees is represented by a labor
union and the Company believes its employee relations to be good.

# Financial Information
About Geographic Markets

For
certain information regarding the Companys geographic markets, see Note 10,
Segmented Information, to the Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K.

# Risk Factors

The
Companys business is subject to the following risks. These risks could cause actual
results to differ materially from results projected in any forward-looking statement in
this report.

10

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Potential fluctuations in revenues
and/or costs affect quarterly operating results.

The
Companys results of operations have fluctuated in the past and are likely to
continue to fluctuate from period to period depending on a number of factors, including
the timing and receipt of significant orders, the timing of completion of contracts,
fluctuations in costs in the completion of contracts, increased competition, regulatory
and other developments in the Companys vertical markets, changes in the demand for
the Companys products and services, the cancellation of contracts, difficulties in
collection of receivables, the timing of new product announcements and introductions,
difficulties encountered in the protection of intellectual property rights, changes in
pricing policies by the Company and its competitors, delays in the introduction of
products or enhancements by the Company, expenses associated with the acquisition of
products or technology from third parties, the mix of sales of the Companys products
and services and third party products, seasonality of customer purchases, personnel
changes, the mix of international and North American revenue, tax policies, foreign
currency exchange rates and general economic and political conditions.

The
Company believes that economic and political developments and trends have adversely
affected levels of capital spending by companies in a variety of industries, including
companies in the vertical markets that the Company serves. While such economic and
political conditions are likely to continue to affect demand for the Companys
products and services in 2005, MDSI believes that the telecommunications and
cable/broadband markets have begun to show signs of recovery from such difficult times and
that these trends will benefit the Company. However, these markets have also shown a
recent trend toward consolidation, particularly in the United States, which the Company
believes could postpone purchase decisions within the industry and could have an adverse
impact on the Companys software and services revenues from these markets in the
short term.

The
Company relies upon its ability to implement and integrate mobile workforce management
solutions on schedule and to the satisfaction of its customers. The Company from time to
time has experienced certain implementation and other problems that have delayed the
completion of certain projects, including the failure of third parties to deliver products
or services on a timely basis, delays caused by customers and development delays. Because
the Company currently recognizes revenue on a percentage of completion method, delays in
completion of certain contracts have caused delays in recognition of revenue and,
consequently, unanticipated fluctuations in quarterly results. There can be no assurance
that the Company will be able to complete current projects or implement future systems on
a timely and cost effective basis or that delays will not result in cancellations of
contracts or result in the imposition of substantial penalties. Any such material delay,
cancellation or penalty could have a material adverse effect upon the Companys
business, financial condition, operating results and cash flows.

Because
the Company is unable to forecast with certainty the receipt of orders for its products
and services and the Companys expense levels are relatively fixed and are based, in
part, upon its expectation of future revenue, if revenue levels fall below expectations as
a result of a delay in completing a contract, the inability to obtain new contracts, the
cancellation of an existing contract or otherwise, operating results are likely to be
adversely affected. As a result, net income may be disproportionately affected because a
relatively small amount of the Companys expenses vary with its revenue.

Based
upon all of the foregoing factors, the Company believes that its quarterly revenue, direct
expenses and operating results are likely to vary significantly in the future, that
period-to-period comparisons of the results of operations are not necessarily meaningful
and that such comparisons should not be relied upon as an indication of future
performance. The Company may also choose to reduce prices or increase spending in response
to competition, or to pursue new market opportunities. If new competitors, technological
advances by existing competitors or other competitive factors require the Company to
reduce its prices or invest significantly greater resources in research and development
efforts, the Companys operating results in the future may be adversely affected.
There can be no assurance that the Company will be able to grow in future periods or that
it will be able to sustain its level of total revenue or achieve revenue growth on a
quarterly or annual basis. It is likely that in some future quarter the Companys
operating results will be below published Company forecasts and/or the expectations of
public market analysts and investors. In such event, the market price of the
Companys Common Shares would likely be materially adversely affected.

Dependence on third party products
and services may cause fluctuations in operating results.

Since
1996, the Company has been, and anticipates that from time to time it will be, engaged to
provide, in addition to its own products and services, third party hardware, software and
services, which the Company purchases from vendors and sells to its customers. For the
years ended December 31, 2004, 2003 and 2002, 4.7%, 9.5% and 6.5%, respectively, of the
Companys revenue was attributable to third party products and services. As the
revenue generated from the supply of third party products and services may represent a
significant portion of certain contracts and the installation and rollout of third party
products is generally at the discretion of the customer, the Company may, depending on
the level of third party products and services provided during a period, experience large
quarterly fluctuations in revenue. In addition, because the Companys gross margins
on third party products and

11

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services are substantially below
gross margins historically achieved on revenue associated with MDSI products and
services, large fluctuations in quarterly revenue from the sale of third party products
and services will result in significant fluctuations in direct costs, gross profits,
operating results, cash flows and other items expressed as a percentage of revenue.

Certain
functionality of the Companys software solutions rely on software developed,
provided and licensed by third party vendors. If MDSI fails to reach a commercially
acceptable agreement with respect to the licensing of such software, or reaches an
agreement under commercially onerous terms, or such third-party software fails to operate
effectively, MDSIs products, reputation and/or financial results could be materially
affected.

We experience various
non-recurring costs.

Over
the past few years the Company has recorded material strategic expenses in connection with
due diligence related to investigations of potential business combinations, restructuring
costs in connection with downsizing, as well as a large write-off of an account receivable
balance with respect to a legal dispute with a former customer. While the Company does not
anticipate material strategic expenses or restructuring costs in 2005, nor does it
currently foresee any legal disputes, there can be no assurance that costs of this nature
will not arise again nor that such charges will not be material. Significant non recurring
changes could have an adverse effect on our business, financial condition, operating
results and cash flow.

Lengthy sales cycles for Advantex
products may affect operating results.

The
purchase of a mobile workforce management solution is often a significant purchase
decision for prospective customers and requires the Company to engage in sales efforts
over an extended period of time and to provide a significant level of education to
prospective customers regarding the use and benefits of such systems. Due in part to the
significant impact that the application of mobile workforce management solutions has on
the operations of a business and the significant commitment of capital required by such a
system, potential customers tend to be cautious in making acquisition decisions. As a
result, the Companys products generally have a lengthy sales cycle ranging from
several months to several years. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, the Company may not be
able to generate revenue from alternative sources in time to compensate for the shortfall.
The loss or delay of a large contract could have a material adverse effect on the
Companys quarterly financial condition, operating results and cash flows, which may
cause such results to be less than the Companys or analysts expectations.
Moreover, to the extent that significant contracts are entered into and required to be
performed earlier than expected, operating results for subsequent quarters may be
adversely affected. In particular, due to economic conditions and developments in the
Companys core markets, the Company has experienced an increase in the time necessary
to complete the negotiation and signing of contracts with some of its customers.

A significant portion of our
revenue is derived from significant contracts from a limited number of customers.

The
Companys revenue is dependent, in large part, on significant contracts from a
limited number of customers. During the years ended December 31, 2004, 2003 and 2002,
approximately 47%, 44% and 29%, respectively, of the Companys consolidated revenue
was attributable to five or fewer customers. During the year ended December 31, 2004,
Telkom South Africa Limited accounted for 19.3% of the Companys consolidated revenue
and Transco PLC accounted for 10.6% of the Companys consolidated revenue. During the
year ended December 31, 2003, Telkom South Africa Limited accounted for 18.0% of the
Companys consolidated revenue and Transco PLC accounted for 17.1% of the
Companys consolidated revenue. During the year ended December 31, 2002, no
individual customer accounted for 10% or more of MDSIs overall revenue. The Company
believes that revenue derived from current and future large customers will continue to
represent a significant portion of its total revenue. The inability of the Company to
continue to secure and maintain a sufficient number of large contracts would have a
material adverse effect on the Companys business, financial condition, operating
results and cash flows. Moreover, the Companys success will depend in part upon its
ability to obtain orders from new customers, as well as the financial condition and
success of its customers and general economic conditions.

The
size of a contract for a particular customer can vary substantially depending on whether
the Company is providing only its own products and services or is also responsible for
supplying third party products and services. The Company recognizes revenue using the
percentage of completion method, which the Company calculates based on total man-days
incurred compared to total man-days estimated by the Company for completion. Therefore,
any significant increase in the costs required to complete a project, or any significant
delay in a project implementation schedule, driven either by the customer or MDSI, could
have a material adverse effect on that contracts profitability and because of the
size of each contract, on the Companys overall results of operations. The Company
from time to time has also experienced certain implementation and other problems that
have delayed the completion of certain projects, including the failure of third parties
to deliver products or services on a timely basis and delays caused by customers.

12

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The Companys contracts
generally provide for payments upon the achievement of certain milestones. Therefore, any
significant delay in the achievement of milestones on one or more contracts would affect
the timing of the Companys cash flows and could have a material adverse effect on
the Companys business, financial condition, operating results and cash flows. Any
significant failure by the Company to accurately estimate the scope of work involved,
plan and formulate a contract proposal, effectively negotiate a favorable contract price,
effectively negotiate the specifications for a workforce management system, properly
manage a project or efficiently allocate resources among several projects could have a
material adverse effect on the Companys business, financial condition, operating
results and cash flows.

A large portion of our backlog is
derived from a limited number of customers.

A
large portion of the Companys backlog consists of a relatively small number of large
contracts relating to sales of its software and related equipment and services, and sales
of third party products and services. Due to the long, complex sales process and the mix
of sales of the Companys products and services and third party products and
services, the Companys backlog may fluctuate significantly from period to period. In
addition, under the terms of some of the Companys contracts, the Companys
customers may elect to terminate their contracts with the Company at any time after notice
to the Company or to delay certain aspects of installation. Due to the relative size of a
typical contract compared to the Companys annual and quarterly revenue, a
termination or installation delay of one or more contracts could have a material adverse
effect on the Companys business, financial condition, operating results and cash
flows. Contracts for software maintenance and support are generally renewable every year
and are subject to renegotiation upon renewal. There can be no assurance that the
Companys customers will renew their maintenance contracts or that renewal terms will
be as favorable to the Company as existing terms.

The
Company believes that volatile economic conditions and reduced capital spending by
existing and prospective customers have and may continue to adversely affect demand for
the Companys products and services in 2005. In particular, service providers,
utilities companies, cable/broadband and telecommunications companies in North America
have been impacted since the latter half of 2000. While the Company believes that economic
conditions in certain of its vertical markets show signs of improvement, the Company
believes that economic conditions and general trends are likely to continue to delay
purchasing and implementation decisions. If the economic conditions in the United States
and Canada worsen or if a global economic slowdown occurs, the Company may experience
reduced revenues, increased costs, reduced margins and increased risks associated with the
collection of customer receivables, any of which may have a material adverse impact on its
business, operating results, cash flows and financial condition.

# Demand for our product
varies on a seasonal basis.

Certain of
the vertical markets targeted by the Company include industries with implementation
requirements that vary seasonally. For example, utility companies in North America
generally have decreased implementation activity in winter months when such utilities face
their greatest consumer demand. As a result, the Companys results of operations may
also vary seasonally, and such variation may be significant.

# We have a history of
losses and fixed operating expenses.

As
of December 31, 2004, the Company had an accumulated deficit of $29.4 million. While we
were profitable in 2004, losses were incurred in 2003 and 2002. There can be no assurance
that the Company will realize revenue growth or be profitable on a quarterly or annual
basis. The Company plans to continue to allocate significant resources to its operating
expenses related to sales and marketing operations, to fund significant levels of research
and development, to broaden its customer support capabilities and to maintain its
administrative resources. A relatively high percentage of the Companys expenses are
fixed in the short term and the Companys expense levels are based, in part, on its
expectations of future revenue. To the extent that such expenses precede or are not
subsequently followed by increased revenue, the Companys business, financial
condition, operating results and cash flows could be materially adversely affected. In
addition, due to the rapidly evolving nature of its business and markets, the Company
believes that period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.

# We may undertake an
acquisition or other business transaction.

The
Company may, when and if the opportunity arises, acquire other products, technologies or
businesses involved in activities, or having product lines, that are complementary to the
Companys business. Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations, technologies and products of the acquired companies,
the diversion of managements attention from other business concerns, risks
associated with entering markets or conducting operations with which the Company has no
or limited direct prior experience and the potential loss of key employees of the
acquired company. Moreover, there can be no

13

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assurance that any anticipated
benefits of an acquisition will be realized. Future acquisitions by the Company could
result in potentially dilutive issuances of equity securities, the use of cash, the
incurrence of debt and contingent liabilities, and write-off of acquired research and
development costs, all of which could materially and adversely affect the Companys
financial condition, results of operations and cash flows.

# Future revenue streams
will be derived from newly developed products.

The
Company expects that a significant portion of its future revenue will be derived from the
sale of newly introduced products and from enhancement of existing products, including
Advantex r7 and Advantex r7.7, Advantex in a Box. The Companys success
will depend in part upon its ability to enhance its current products on a timely and
cost-effective basis and to develop new products that meet changing market conditions,
including changing customer needs, new competitive product offerings and enhanced
technology. There can be no assurance that the Company will be successful in developing
and marketing on a timely and cost-effective basis new products and enhancements that
respond to such changing market conditions. If the Company is unable to anticipate or
adequately respond on a timely or cost-effective basis to changing market conditions, to
develop new software products and enhancements to existing products, to correct errors on
a timely basis or to complete products currently under development, or if such new
products or enhancements do not achieve market acceptance, the Companys business,
financial condition, operating results and cash flows could be materially adversely
affected. In light of the difficulties inherent in software development, the Company
expects that it may experience delays in the completion and introduction of new software
products.

# We have experienced
significant growth.

Since
its inception, the Company has experienced periods of rapid growth in product sales,
personnel, research and development activities, number and complexity of products, the
number and geographic focus of its targeted vertical markets and product distribution
channels. The total number of employees of the Company has grown from 9 employees in
Canada in February 1993 to 333 employees located in Canada, the United States and other
international locations at December 31, 2004. The Company also expanded the geographical
areas in which it operates. Such growth may place strains on its management,
administrative, operational and financial resources, as well as increased demands on its
internal systems, procedures and controls. There can be no assurance that the Company will
be able to effectively manage its operations or future growth and expansion into new
markets. Failure to do so could have a material adverse effect on the Companys
business, financial condition, operating results and cash flows.

# We are dependent upon
certain key personnel.

The
Companys performance and future operating results are substantially dependent on the
continued service and performance of its senior management and key technical and sales
personnel. Competition for qualified personnel is intense, and there can be no assurance
that the Company can retain its key technical, sales and managerial employees or that it
will be able to attract or retain additional highly qualified technical and managerial
personnel. The loss of the services of any of the Companys senior management or
other key employees or the inability to retain the necessary technical, sales and
managerial personnel could have a material adverse effect upon the Companys
business, financial condition, operating results and cash flows.

# We are dependent upon
selected vertical markets.

Since
its inception, substantially all of the Companys revenue has been derived from the
sale of products and services to customers in the utility, telecommunications and
cable/broadband markets. The Company anticipates that a significant portion of its revenue
will continue to be generated by sales of products and services to these markets. Demand
for the Companys services in these markets has fluctuated and is likely to fluctuate
in the future. In addition, the Company believes that recent economic developments and
trends have adversely affected and may continue to adversely affect levels of capital
spending by companies in a variety of industries, including the vertical markets MDSI
serves. The Company believes that these and other factors may cause potential and existing
customers to delay or defer purchasing decisions or seek to terminate or delay payment
under existing contracts for the Companys products and services. Such factors may
also increase the amount of doubtful accounts or adversely affect the likelihood of
collection of such accounts. A decline in demand for the Companys products in these
markets as a result of economic conditions, competition, technological change or
otherwise, would have a material adverse effect on the Companys business, financial
condition, operating results and cash flows. There can be no assurance that the Company
will be able to diversify its product offerings or revenue base by entering into new
vertical markets or continue to earn revenue in current markets.

14

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# We are dependent upon
our marketing relationships.

The
Companys products are marketed by the Companys direct field sales force as
well as by third parties that act as lead generators or with whom the Company acts
together as a co-marketer or co-seller. The Companys existing agreements with such
partners are nonexclusive and may be terminated by either party without cause. Such
organizations are not within the control of the Company, are not obligated to purchase
products from the Company and may also represent and sell competing products. There can be
no assurance that the Companys existing partners will continue to provide the level
of services and technical support necessary to provide a complete solution to the
Companys customers or that they will not emphasize their own or third-party products
to the detriment of the Companys products. The loss of these partners, the failure
of such parties to perform under agreements with the Company or the inability of the
Company to attract and retain new resellers with the technical, industry and application
experience required to market the Companys products successfully could have a
material adverse effect on the Companys business, financial condition, operating
results and cash flows. The Company may enter into certain joint ventures in order to
facilitate its expansion into other vertical markets and geographic areas. To the extent
that such joint ventures are not successful, there could be a material adverse effect on
the Companys business, financial condition, operating results and cash flows.

# We operate in a
competitive environment.

The
markets for mobile workforce management applications, wireless connectivity software,
mobile data network equipment and mobile computing devices are highly competitive.
Numerous factors affect MDSIs competitive position, including price, product
features, product performance and reliability, ease of use, product scalability, product
availability on multiple platforms (server, wireless carrier, and mobile workstation),
ability to implement mobile workforce management solutions domestically and
internationally while meeting customer schedules, integration of products with other
enterprise solutions, availability of project consulting services and timely ongoing
customer service and support. Within these markets, there are a small number of new
ventures, either small companies attempting to establish a business in this market or
large companies attempting to diversify their product offerings. MDSI expects such
competition to intensify as acceptance and awareness of mobile workforce management
solutions continue. In addition, a small number of MDSIs potential customers develop
software solutions internally, thereby eliminating the requirement for suppliers such as
MDSI. Current or potential competitors may establish cooperative arrangements among
themselves or with third parties to increase the ability of their products to address
customer requirements. Certain of MDSIs competitors have substantially greater
financial, technical, marketing and distribution resources than MDSI. As a result, they
may be able to respond more quickly to new or emerging technologies and changing customer
requirements, or to devote greater resources to the development and distribution of
existing products. There can be no assurance that MDSI will be able to compete
successfully against current or future competitors or alliances of such competitors, or
that competitive pressures faced by MDSI will not materially adversely affect its
business, financial condition, operating results and cash flows.

The
Company primarily competes in the utilities market with, Intergraph Corporation, Accenture
(through its FFE Workforce Management solution), SPL WorldGroup, ViryaNet Inc. and
ClickSoftware, Inc. The Companys primary competitors for telecommunications
customers are Telcordia Technologies, Inc., a company that has historical relationships
with certain of the large telecommunications companies, and ClickSoftware, Inc. Less
frequently, the Company encounters Vidus Ltd., a company recently acquired by At Road Inc.
In the cable/broadband market, the Companys primary competitors are Telcordia
Technologies Inc., C Cor Inc. and CSG Systems International Inc.

The
Company believes that the principal competitive factors in other field service markets are
the ability to improve the customer service aspects of an organizations business and
reduce its costs through increased productivity of field service representatives. The
Company competes in these markets with other suppliers of wireless enablement products,
such as Antenna Software, Inc., Dexterra, Everypath Inc and Extended Systems, enterprise
application solution providers, such as Astea, Metrix and Fieldcentrix, and larger
enterprise software companies, such as Oracle Corporation and Siebel Systems.

15

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# We carry the risk of
product defects and implementation failure.

Software
products, including those offered by the Company, contain undetected errors or omissions.
Software products, when implemented, installed, configured and customized, may also fail
to perform according to customer expectations due to the failure by the customer to
properly specify its system requirements, failure by the customer to properly operate or
interact with the system, operator error, technical problems associated with the
customers host system, or the resistance of the customers workforce to the
adoption of new technology. In addition, software products may fail to perform according
to expectations due to the failure by the Company to properly design the system to operate
in the environment, infrastructure or communications network in which the product is to be
used. There can be no assurance that, even after testing by the Company and by current and
potential customers, the Companys products will be free of errors or will perform
according to expectations with respect to response time, ability to communicate over
multiple networks, scalability, stability and ease of use. Such errors and failures could
result in loss of or delay in market acceptance of the Companys products, the
cancellation of contracts or the imposition of substantial penalties, any of which could
have a material adverse effect on the Companys business, financial condition,
operating results and cash flows.

We are dependent on our ability to
protect our intellectual property rights.

The
Companys success is dependent on its ability to protect its intellectual property
rights. The Company relies principally upon a combination of copyright, trademark, trade
secret and patent laws, non-disclosure agreements and other contractual provisions to
establish and maintain its rights. To date, the Company has been granted trademark
registrations or has registrations pending in the United States, Canada and the European
Community for the MDSI, Advantex, Wireless@work and Compose trademarks. In addition, MDSI
has been granted several patents in the United States and internationally covering various
aspects of its technology, and has filed further patent applications, which are pending a
substantive examination. As part of its confidentiality procedures, the Company generally
enters into nondisclosure and confidentiality agreements with each of its key employees,
consultants, distributors, customers and corporate partners, to limit access to and
distribution of its software, documentation and other proprietary information. There can
be no assurance that the Companys efforts to protect its intellectual property
rights will be successful. Despite the Companys efforts to protect its intellectual
property rights, unauthorized third parties, including competitors, may be able to copy or
reverse engineer certain portions of the Companys software products, and use such
copies to create competitive products. Policing the unauthorized use of the Companys
products is difficult, and, while the Company is unable to determine the extent to which
piracy of its software products exists, the risk of software piracy can be expected to
continue. In addition, the laws of certain countries in which the Companys products
are or may be licensed may not protect its products and intellectual property rights to
the same extent as do the laws of Canada and the United States. As a result, sales of
products by the Company in such countries may increase the likelihood that the
Companys proprietary technology is infringed upon by unauthorized third parties. In
addition, because third parties may attempt to develop similar technologies independently,
the Company expects that software product developers will be increasingly subject to
infringement claims as the number of products and competitors in the Companys
industry segments grows and the functionality of products in different industry segments
overlaps. Although the Company believes that its products do not infringe on the
intellectual property rights of third parties, there can be no assurance that third
parties will not bring infringement claims (or claims for indemnification resulting from
infringement claims) against the Company with respect to copyrights, trademarks, patents
and other proprietary rights. Any such claims, whether with or without merit, could be
time consuming, result in costly litigation and diversion of resources, cause product
shipment delays or require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. A claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology could have a
material adverse effect on the Companys business, financial condition, operating
results and cash flows.

# We are dependent on
certain third parties.

Certain
contracts require the Company to supply, coordinate and install third party products and
services or employ subcontractors. The Company believes that there are a number of
acceptable vendors and subcontractors for most of its required products, but in many
cases, despite the availability of multiple sources, the Company may select a single
source in order to maintain quality control and to develop a strategic relationship with
the supplier or may be directed by a customer to use a particular product. The failure of
a third party supplier or subcontractor to provide a sufficient and reliable supply of
parts and components or products and services in a timely manner could have a material
adverse effect on the Companys results of operations. In addition, any increase in
the price of one or more of these products, components or services could have a material
adverse effect on the Companys business, financial condition, operating results and
cash flows. Additionally, under certain circumstances, the Company supplies products and
services to a customer through a larger company with a more established reputation acting
as a project manager or systems integrator. In such circumstances, the Company has a
sub-contract to supply its products and services to the customer through the prime
contractor. In these circumstances, the Company is at risk that situations may arise
outside of its control that could lead to a delay, cost over-run or cancellation of the
prime contract which could also result in a delay, cost over-run or cancellation of the
Companys sub-

16

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contract. The failure of a prime
contractor to supply its products and services or perform its contractual obligations to
the customer or MDSI in a timely manner could have a material adverse effect on the
Companys financial condition, results of operations and cash flows.

# Exchange rate
fluctuations affect our results of operations.

Because
the Companys reporting and functional currency is the United States dollar, its
operations outside the United States face additional risks, including fluctuating currency
values and exchange rates, hard currency shortages and controls on currency exchange. To
the extent the Company has operations outside the United States, the Company is subject to
the impact of foreign currency fluctuations and exchange rate changes on the
Companys reporting in its financial statements of the results from such operations
outside the United States. The Company is hedged, to some extent, from foreign exchange
risks because of its ability to purchase and sell in the local currency of the
jurisdictions in which it operates. In addition, the Company has entered into foreign
currency contracts under certain circumstances to reduce the Companys exposure to
foreign exchange risks. There can be no assurance, however, that the attempted matching of
foreign currency receipts with disbursements or hedging activities will adequately
moderate the risk of currency or exchange rate fluctuations which could have a material
adverse effect on the Companys business, financial condition, operating results and
cash flows. In certain historical periods, the relative weakness of the U.S. dollar has
contributed to an increase in direct costs as a percentage of revenue, as the majority of
the Companys direct costs are incurred in Canadian dollars. During the year ended
December 31, 2004, we did not enter into any foreign currency contracts.

# We have international
operations.

In
the years ended December 31, 2004, 2003 and 2002, revenue derived from sales outside of
North America accounted for approximately 39.3%, 44.5% and 30.9%, respectively, of the
Companys total revenue. Because the Companys revenue is dependent, in large
part, on significant contracts with a limited number of customers, the percentage of the
Companys revenues that is derived from sales outside of North America has
fluctuated, and may continue to fluctuate, from period to period. The Company believes
that its ability to grow and be profitable will require additional expansion of its sales
in foreign markets, and that revenue derived from international sales will account for a
significant percentage of the Companys revenue for the foreseeable future. This
expansion has required and will continue to require significant management attention and
financial resources. The inability of the Company to expand international sales in a
timely and cost-effective manner could have a material adverse effect on the
Companys business, financial condition, operating results and cash flows. There are
a number of risks inherent in the Companys international business activities,
including changes in regulatory requirements, tariffs and other trade barriers, costs and
risks of localizing products for foreign markets, longer accounts receivable payment
cycles, difficulties in collecting payments, reduced protection for intellectual property,
potentially adverse tax consequences, limits on repatriation of earnings, the burdens of
complying with a wide variety of foreign laws, nationalization, war, insurrection,
terrorism and other political risks and factors beyond the Companys control.
Fluctuations in currency exchange rates could adversely affect sales denominated in
foreign currencies and cause a reduction in revenue derived from sales in a particular
country. In addition, revenue of the Company earned abroad may be subject to taxation by
more than one jurisdiction, thereby adversely affecting the Companys earnings. There
can be no assurance that such factors will not materially adversely affect the
Companys future international sales and, consequently, the Companys business,
financial condition, operating results and cash flows.

As
a result of the international scope of the Companys operations, the Companys
business is carried out under an international corporate structure that has been designed
in part to optimize tax costs to the Company. The effectiveness of this international
corporate structure from a tax perspective, and the corresponding risk of any negative
financial impact on the Company from the imposition of tax liability on the Company in the
event such structure is not effective, depends on the quality of the Companys
internal compliance and implementation procedures, as well as external regulatory factors
such as investigations, audits and decisions by tax officials and changes in tax laws,
regulations and policies.

# We are exposed to
product liability claims.

The
license and support of products by the Company may entail the risk of exposure to product
liability claims. A product liability claim brought against the Company or a third party
that the Company is required to indemnify, whether with or without merit, could have a
material adverse effect on the Companys business, financial condition, operating
results and cash flows. The Company carries insurance coverage for product liability
claims, which it believes to be adequate for its operations.

17

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We are subject to Canadian laws
and regulations which may have anti-takeover effects.

An
investment in the Common Shares of the Company which results in a change of control of the
Company may, under certain circumstances, be subject to review and approval under the
Investment Canada Act if the party or parties acquiring control is not a Canadian person
(as defined therein). Therefore, the Canadian regulatory environment may have the effect
of delaying, deferring or preventing a change in control of the Company.

The
Company is organized under the laws of Canada and, accordingly, is governed by the
Canada Business Corporations Act (the CBCA). The CBCA differs in
certain material respects from laws generally applicable to United States corporations and
shareholders, including the provisions relating to interested directors, mergers and
similar arrangements, shareholders suits, indemnification of directors and
inspection of corporate records.

Our share price may be subject to
price volatility and related risks.

The
trading prices of the Common Shares have been subject to wide fluctuations since trading
of the Companys shares commenced in December 1995. There can be no assurance that
the market price of the Common Shares will not significantly fluctuate from its current
level. The market price of the Common Shares may be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in financial
estimates by securities analysts, or other events or factors. In addition, the financial
markets have experienced significant price and volume fluctuations for a number of
reasons, including the failure of the operating results of certain companies to meet
market expectations that have particularly affected the market prices of equity securities
of many high-technology companies that have often been unrelated to the operating
performance of such companies. These broad market fluctuations, or any industry-specific
market fluctuations, may adversely affect the market price of the Common Shares. In the
past, following periods of volatility in the market price of a companys securities,
securities class action litigation has often been instituted against such a company. Such
litigation, whether with or without merit, could result in substantial costs and a
diversion of management attention and resources, which would have a material adverse
effect on the Companys business, financial condition, operating results and cash
flows.

# Item 2: Properties

The
Company occupies approximately 96,000 square feet of leased office space at its
headquarters in Richmond, British Columbia for its product development, marketing,
support, administration and sales operations. The lease expires on November 30, 2008 with
two options to renew for five years each. The Company has sub-let approximately 16,000
square feet of this space until November 29, 2008. The Company also maintains offices
in Itasca, Illinois; Paris, France; Copenhagen, Denmark; Centurion, South Africa and
Reading, United Kingdom. Leases for these locations are not considered material.

# Item 3: Legal Proceedings

From
time to time, the Company is a party to other litigation and claims incident to the
ordinary course of its business. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of such matters will
not have a material adverse effect on the Companys business, results of operations,
financial condition or liquidity.

# Item 4: Submission of
Matters to a Vote of Security Holders

None.

18

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# Part II

# Item 5:  Market for
Registrants Common Equity And Related Stockholder Matters

# Price Range of Common
Shares

The
Companys Common Shares began trading on The Toronto Stock Exchange and on the
Montreal Exchange under the symbol MMD on December 20, 1995 and began trading
on the NASDAQ National Market System under the symbol MDSIF on November 26,
1996. The Company changed its NASDAQ National Market System trading symbol to
MDSI in April 1999. In December 1999, the Companys listing on the
Montreal Exchange was automatically withdrawn as part of a restructuring plan of the
Canadian stock exchanges. Prior to December 20, 1995, there was no public market for the
Common Shares. The following table sets forth, for the periods indicated, the high and low
sale prices for the Common Shares as reported on The Toronto Stock Exchange and the NASDAQ
National Market System with their equivalent US dollar amounts where applicable.

|               | The Toronto Stock Exchange | Nasdaq National Market
|-------------- | -------------------------- | ----------------------
|
|
|2003           |                            |                       
|First Quarter  |                            | 4.28                  
|Second Quarter |                            | 5.18                  
|Third Quarter  |                            | 6.07                  
|Fourth Quarter |                            | 5.60                  
|              
|2004           |                            |                       
|First Quarter  |                            | 6.07                  
|Second Quarter |                            | 8.57                  
|Third Quarter  |                            | 6.34                  
|Fourth Quarter |                            | 5.96                  

_________________

|(1) |  | US
dollar amounts have been  translated  using the average noon buying rate for Canadian
 dollars for the relevant          quarter.  See "Exchange Rates."
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

# Shareholders

As
of December 31, 2004 the Company had approximately 331 shareholders of record.

# Dividends

The
Company has never paid dividends on its Common Shares. We do not anticipate paying any
dividends in the foreseeable future. The Companys current bank credit agreement
prohibits the payment of dividends without prior consent of the lender.

# Recent Sales of
Unregistered Securities

The
Company did not issue any unregistered securities during the fiscal year ended December
31, 2004.

19

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# Exchange Controls

There
are no government laws, decrees or regulations in Canada which restrict the export or
import of capital or which affect the remittance of dividends, interest or other payments
to non-resident holders of the Companys Common Shares. Any remittances of dividends
to United States residents and to other non-residents are, however, subject to withholding
tax. See Taxation below.

# Taxation

| | Canadian
Federal Income Taxation
| | --------------------------------

The Company
considers that the following summary fairly describes in general the principal Canadian
federal income tax consequences applicable to a holder of the Companys common shares
who at all times deals at arms length with the Company, who holds all common shares
as capital property, who is resident in the United States, who is not a resident of Canada
and who does not use or hold, and is not deemed to use or hold, his common shares of MDSI
Mobile Data Solutions Inc. in connection with carrying on a business in Canada (a
non-resident holder). It is assumed that the common shares will at all
material times be listed on a stock exchange that is prescribed for purposes of the Income
Tax Act (Canada) (the ITA) and regulations thereunder. The Canadian federal
income tax consequences applicable to holders of the Companys common shares will not
change if the Company is deemed inactive by the Toronto Stock Exchange. Investors should
however be aware that the Canadian federal income tax consequences applicable to holders
of the Companys common shares will change if the Company ceases to be listed on a
prescribed stock exchange like the Toronto Stock Exchange. Accordingly, holders and
prospective holders of the Companys common shares should consult with their own tax
advisors with respect to the income tax consequences of them purchasing, owning and
disposing of the Companys common shares should the Company cease to be listed on a
prescribed stock exchange.

This
summary is based upon the current provisions of the ITA, the regulations thereunder, the
Canada-United States Tax Convention as amended by the Protocols thereto (the
Treaty) as at the date of the registration statement and the currently
publicly announced administrative and assessing policies of the Canada Revenue Agency (the
CRA). This summary does not take into account Canadian provincial income tax
consequences. This description is not exhaustive of all possible Canadian federal income
tax consequences and does not take into account or anticipate any changes in law, whether
by legislative, governmental or judicial action. This summary does, however, take into
account all specific proposals to amend the ITA and regulations thereunder, publicly
announced by the Government of Canada to the date hereof.

This
summary does not address potential tax effects relevant to the Company or those tax
considerations that depend upon circumstances specific to each investor. Accordingly,
holders and prospective holders of our common shares should consult with their own tax
advisors with respect to the income tax consequences to them of purchasing, owning and
disposing of the Companys common shares.

| | Dividends
| | ---------

The
ITA provides that dividends and other distributions deemed to be dividends paid or deemed
to be paid by a Canadian resident corporation (such as MDSI Mobile Data Solutions Inc.) to
a non-resident of Canada shall be subject to a non-resident withholding tax equal to 25%
of the gross amount of the dividend or deemed dividend. Provisions in the ITA relating to
dividend and deemed dividend payments and gains realized by non-residents of Canada, who
are residents of the United States, are subject to the Treaty. The Treaty may reduce the
withholding tax rate on dividends as discussed below.

Article
X, of the Treaty as amended by the US-Canada Protocol ratified on December 16, 1997
provides a 5% withholding tax on gross dividends or deemed dividends paid to a United
States corporation which beneficially owns at least 10% of the Companys voting
stock. In cases where dividends or deemed dividends are paid to a United States resident
(other than a corporation) or a United States corporation which beneficially owns less
than 10% of our voting stock, a withholding tax of 15% is imposed on the gross amount of
the dividend or deemed dividend paid. The Company will be required to withhold any such
tax from the dividend and remit the tax directly to CRA for the account of the investor.

The
reduction in withholding tax from 25%, pursuant to the Treaty, will not be available:

| | (a) |  | if
the shares in respect of which the dividends are paid are effectively
               connected with a permanent establishment or fixed base that the holder has
in                Canada, or
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | the
holder is a U.S. LLC, which is not subject to tax in the U.S.
| | --- |  | -----------------------------------------------------------------

20

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The
Treaty generally exempts from Canadian income tax dividends paid to a religious,
scientific, literary, educational or charitable organization or to an organization
exclusively administering a pension, retirement or employee benefit fund or plan, if the
organization is resident in the U.S. and is exempt from income tax under the laws of the
U.S.

| | Capital
Gains
| | -------------

A
non-resident holder is not subject to tax under the ITA in respect of a capital gain
realized upon the disposition of our share unless the share represents taxable
Canadian property to the holder thereof. The Companys Common shares will be
considered taxable Canadian property to a non-resident holder only if:

| | (a) |  | the
non-resident holder,
| | --- |  | ------------------------

| | (b) |  | persons
with whom the non-resident holder did not deal at arms length, or
| | --- |  | --------------------------------------------------------------------------

| | (c) |  | the
non-resident holder and persons with whom he did not deal at arms           length
| | --- |  | ---------------------------------------------------------------------------------------

owned 25% or more of the
Companys issued shares of any class or series at any time during the five year
period preceding the disposition. In the case of a non-resident holder to whom the
Companys shares represent taxable Canadian property and who is resident in the
United States, no Canadian taxes will generally be payable on a capital gain realized on
such shares by reason of the Treaty unless:

| | (a) |  | the
value of such shares is derived principally from real property (including
               resource property) situated in Canada,
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | the
holder was resident in Canada for 120 months during any period of 20
               consecutive years preceding the disposition, the holder was resident in
Canada                at any time during the 10 years immediately preceding the
disposition and the                shares were owned by him when he ceased to be a
resident of Canada,
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | they
formed part of personal property constituting business property or were
               otherwise effectively connected with a permanent establishment or fixed
base                that the holder has or had in Canada within the 12 months preceding
the                disposition, or
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | the
holder is a U.S. LLC, which is not subject to tax in the U.S.
| | --- |  | -----------------------------------------------------------------

If
subject to Canadian tax on such a disposition, the taxpayers capital gain (or
capital loss) from a disposition is the amount by which the taxpayers proceeds of
disposition exceed (or are exceeded by) the aggregate of the taxpayers adjusted cost
base of the shares and reasonable expenses of disposition. For Canadian income tax
purposes, the taxable capital gain is equal to one-half of the capital gain.

21

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# Item 6:  Selected
Financial Data (unaudited)

The
following selected consolidated financial data of the Company is qualified in its entirety
by reference to and should be read in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and notes thereto included elsewhere in this report. The
Consolidated Statements of Operations data for the years ended December 31, 2004, 2003 and
2002 and the Consolidated Balance Sheet data at December 31, 2004 and 2003 are derived
from and are qualified by reference to the Companys audited Consolidated Financial
Statements. This selected consolidated financial data is presented in conformity with
accounting principles generally accepted in the United States.

|                                    | Years ended December 31,
|----------------------------------- | ------------------------
|
|                                    |                         
|
|Statement of Operations Data:       |                         
|Revenue                             |                         
|Gross profit                        |                         
|Operating income (loss)             |                         
|Net income (loss) from continuing   |                         
|operations for the year             |                         
|Basic income (loss) per common      |                         
|share from continuing operations    |                         
|Basic net income (loss) per common  |                         
|share                               |                         
|Weighted average shares outstanding |                         

|Balance Sheet Data:       | 2004 | 2003 | 2002 | 2001   | 2000
|------------------------- | ---- | ---- | ---- | ------ | ----
|                          |      |      |      |        |     
|Cash and cash equivalents |      |      |      | 19,843 |     
|Working capital           |      |      |      | 10,447 |     
|Total assets              |      |      |      | 38,788 |     
|Non-current liabilities   |      |      |      | 43     |     
|Stockholders' equity      |      |      | $    | 17,098 |     
|                          |      |      |      |        |     

The Company has not paid or declared
any cash dividends in any period presented.

The footnotes below are expressed in thousands
of dollars.

|(1) |  | Net
income from continuing operations for the year ended December 31, 2004           includes
strategic expenses of $2,340 associated with investigating potential           corporate
transactions as well as restructuring charges of $1,616.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Net
loss from continuing operations for the year ended December 31, 2003           includes
charges related to the evaluation of strategic options for the Company           of
$1,275 and $3,070 for bad debts with respect to several doubtful accounts.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Net
loss from continuing operations for the year ended December 31, 2001           includes
charges of $6,106 with respect to restructuring of certain operations,           $2,750
for the impairment in valuation of investments in three private           companies,
$1,559 for the impairment in valuation of intangible assets acquired           on
acquisition of Alliance Systems Incorporated, $165 or the impairment in
          valuation of a commercial web site domain name, and $2,938 for bad debts with
          respect to several doubtful accounts.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Net
loss from continuing operations for the year ended December 31, 2000           includes
charges of $1,691 for costs of merger with respect to the           Companys merger
with Connectria, and $985 for bad debts with respect to           one doubtful account.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

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# Item 7:  
Managements Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of the Companys
ability to accelerate or defer operating expenses, achieve revenue in a particular period,
hire new personnel and other factors set forth under Business-Risk Factors in
Item 1 of this Annual Report on Form 10-K. Also see Forward-Looking
Statements.

Unless
otherwise noted, all financial information in this report is expressed in the
Companys functional currency, United States dollars. See Item 7A, Quantitative
and Qualitative Disclosures About Market Risk.

# Overview

MDSI
develops, markets, implements and supports mobile workforce management and wireless
connectivity software for use by a wide variety of companies that have substantial mobile
workforces, such as utilities, telecommunications and cable/broadband companies. The
current version of the Companys software is known as Advantex r7. MDSIs
products are used by such companies in conjunction with public and private wireless data
communications networks to provide comprehensive solutions for the automation of business
processes associated with the scheduling, dispatching and management of a mobile
workforce. The Companys products are designed to provide a cost-effective method for
companies with mobile workers to utilize data communications to communicate with such
workers, and for such workers to interface on a real-time basis with their corporate
information systems.

The
Companys revenue is derived from (i) software and services, consisting of the
licensing of software and provision of related services, including project management,
installation, integration, configuration, customization and training;
(ii) maintenance and support, consisting of the provision of after-sale support
services as well as quarterly, annual or extended maintenance contracts; and (iii) third
party products and services, consisting of the provision of non-MDSI products and services
as part of the total contract.

# Strategic Transaction

During
2003, the Company retained Bear, Stearns & Co. Inc. as financial advisor to the Board
of Directors, to assist the Board in evaluating potential business combinations,
financings and other strategic alternatives to help the Company offer enhanced products
and services to its customers and maximize shareholder value. As a result of this process,
on April 12, 2004, the Company signed a definitive combination agreement with At Road,
Inc. (At Road) providing for the acquisition of the Company by At Road. On
July 27, 2004 the Company announced that the Company and At Road had mutually agreed to
terminate the agreement. The termination of the agreement has not resulted in any penalty
or termination fee being payable by either party.

# Restructuring

The
Company operates in a competitive industry that is consolidating and has several vendors
offering competitive solutions. As a result, the Company must closely scrutinize costs in
order to maintain its competitive position in the market place. As part of these efforts,
the Company initiated a review of its internal structure during the three months ended
September 30, 2004 and determined that operations could be streamlined and capital
resources could be better deployed. As a result, the Board of Directors of the Company
approved a restructuring plan that was designed to reduce costs by approximately $3
million on an annual basis. As part of this plan, the Company eliminated approximately 30
positions and sought to minimize other discretionary costs including travel and
professional fees among others. The Company recorded a charge in the year ended December
31, 2004 of $1.6 million related to employee separation costs, stock based compensation
and other related costs. There can be no assurance that the workforce reductions and other
measures will not have a material adverse affect on the Companys business
operations.

# Fiscal 2001

On
March 30, 2001, the Company, in response to uncertain economic conditions and poor
financial performance, announced a restructuring plan approved by the Companys
Board of Directors designed to reduce operating costs that resulted in the elimination of
34 full time and contractor positions. On May 11, 2001, the Company announced a Board
approved update to this plan, which resulted in the elimination of an additional 115
positions. As part of this restructuring, the Company recorded a charge to earnings of
$6.1 million in the year ended December 31, 2001. The Company recorded a $1.9 million
provision in 2001 relating to surplus office space under long-term leases held by the
Company at two locations. The Company has incurred

23

---

approximately $1.6 million of cash
costs relating to this provision leaving an accrual of $255,800 remaining as at December
31, 2004. These charges were reflected in the restructuring charge line item
of the Companys Consolidated Statement of Operations. A breakdown of the nature of
the charges and the costs incurred to date is as follows:

|                   | Workforce 
Reduction | Provision for
excess office
space | Non-cash
writedown of
capital assets | Other      | Total
|------------------ | -------------------- | --------------------------------- | ------------------------------------ | ---------- | -----
|Reserve balance at |                      |                                   |                                      |            |      
|December 31, 2001  |                      |                                   | $                                    | 1,375,000  |      
|Cash payments      |                      |                                   |                                      | (1,375,000 | )    
|                   |                     
|Reserve balance at |                      |                                  
|December 31, 2002  |                      |                                   |                                      | --         |      
|Cash payments      |                      |                                   |                                      | --         |      
|                   |                     
|Reserve balance at |                      |                                  
|December 31, 2003  |                      |                                   |                                      | --         |      
|Cash payments      |                      |                                   |                                      | --         |      
|                   |                     
|Reserve balance at |                      |                                  
|December 31, 2004  |                      |                                   | $                                    | --         |      
|                   |                     

# Fiscal 2004

During the three months ended
September 30, 2004 the Company announced a restructuring plan approved by the
Companys Board of Directors to enable the Company to operate in a more effective and
efficient manner and reduce costs. The Company recorded a charge of $1.5 million in
connection with this restructuring. The $1.5 million charge relates to costs of workforce
reduction for approximately 30 affected employees, stock based compensation charges and
other related costs.

During the three months ended
December 31, 2004 the Company accrued a further $0.1 million in connection with this
restructuring.

A breakdown of the nature of the
restructuring charges and the costs incurred to date is as follows:

|                                      | Workforce
Reduction | Stock-based
compensation | Other | Total    
|------------------------------------- | ------------------- | ------------------------ | ----- | ---------
|Restructuring charges, three months   |                     |                          |       |          
|ending September 30, 2004             |                     |                          | $     | 1,385,000
|Cash payments                         |                     |                          |       | (200,000 
|Noncash charges                       |                     |                          |       | --       
|                                      |                    
|Reserve balance at September 30, 2004 |                     |                          |       | 1,185,000
|Additional charges                    |                     |                          |       | 100,000  
|Cash payments                         |                     |                          |       | (702,076 
|Noncash charges                       |                     |                          |       | --       
|                                      |                    
|Reserve balance at December 31, 2004  |                     |                          | $     | 582,924  
|                                      |                    

The
Company has recorded a charge of $1,485,000 related to employee separation costs as a
result of the elimination of approximately 30 positions made in an effort to increase
efficiency and reduce costs. As at December 31, 2004, cash disbursements of approximately
$902,076 had been made related to this charge leaving an accrual of approximately $582,924
relating to workforce reduction.

The
Company has recorded a charge of $48,921 related to the changing of vesting conditions on
one employees stock options as a result of termination.

Other
restructuring costs of $82,328 relate to outplacement and related expenses the Company
expects to incur as a result of the September 2004 restructuring. As at December 31, 2004,
no amounts had been paid in relation to these costs resulting in an accrual of $82,328 as
at December 31, 2004.

24

---

We
expect that the restructuring charges will be substantially drawn down no later than the
second quarter of 2005.

# Field Service Business

The
implementation of a complete mobile data solution requires a wireless data communications
network, mobile computing devices integrated with wireless data communication modems, host
computer equipment, industry specific application software such as MDSIs Advantex
products, wireless connectivity software and a variety of services to manage and install
these components, integrate them with an organizations existing computer systems and
configure or customize the software to meet customer requirements. Frequently, in the
Companys larger contracts only a limited number of the users are rolled out
initially, with the balance implemented over a period that may extend up to one year or
more. Where increases in mobile workforces require or where additional departments of
mobile workers are added, MDSI may be asked to supply additional user licenses and
professional services, which may result in additional revenue for the Company.

Revenue
for software and services has historically accounted for a substantial portion of the
Companys revenue. Typically, the Company enters into a fixed price contract with a
customer for the licensing of selected software products and the provision of specific
services, which historically has included a warranty period that is generally ninety days
in length. These services are generally performed within six to twelve months. Pricing for
these contracts includes license fees as well as a fee for professional services. The
Company generally recognizes total revenue for software and services associated with a
contract using a percentage of completion method based on the total man-days incurred over
the total estimated man-days to complete the contract.

The
Companys customers typically enter into ongoing maintenance agreements that provide
for maintenance and technical support services for a period commencing at delivery, or
after expiration of any warranty period. Maintenance agreements typically have a term of
one year and are invoiced either annually, quarterly, or monthly. Revenue for these
services is recognized ratably over the term of the contract.

The
Company is periodically required to provide, in addition to MDSI products and services,
certain third party products, such as host computer hardware and operating system
software, and mobile computing devices. The Company recognizes revenue on the supply of
third party hardware and software upon transfer of title to the customer. The Company
recognizes revenue on the supply of third party services using a percentage of completion
method based on the costs incurred over the total estimated cost to complete the third
party services contract or on a pro-rata basis in the case of maintenance services. Also
included in third party revenue are reimbursements to the Company for out of pocket
expenses incurred on implementation projects performed by the Company. EITF 01-14
Income Statement Characterization of Reimbursements Received for Out of Pocket
Expenses requires characterization of the reimbursement of these expenses as
revenue. An equal and offsetting amount of expense is recognized, relating to the payment
of these expenses, as direct costs.

The
Company believes that it will periodically supply third party products and services to
customers where it is successful in selling its own products and services. There can be no
assurance, however, that any contracts entered into by the Company to supply third party
products and services in the future will represent a substantial portion of revenue in any
future period. Since the revenue generated from the supply of third party products and
services may represent a significant portion of certain contracts and the installation and
rollout of third party products is generally at the discretion of the customer, the
Company may, depending on the level of third party products and services provided during a
period, experience large fluctuations in revenue.

The
Companys revenue is dependent, in large part, on significant contracts from a
limited number of customers. As a result, any substantial delay in the Companys
completion of a contract, the inability of the Company to obtain new contracts or the
cancellation of an existing contract by a customer could have a material adverse effect on
the Companys results of operations. Some of the Companys contracts are
cancelable upon notice by the customer. The loss of certain contracts could have a
material adverse effect on the Companys business, financial condition, operating
results and cash flows. As a result of these and other factors, the Companys results
of operations have fluctuated in the past and may continue to fluctuate from
period-to-period.

25

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# Disposition of Hosting
and Information Technology (IT) Services Business Segment

In
June 2002, MDSI adopted a plan for sale and entered into an agreement to sell its Hosting
and IT Services business segment, Connectria Corporation (Connectria) to former Connectria
shareholders who were both shareholders and employees of the Company. The transaction
closed in July 2002. Pursuant to the terms of the agreement, the Company received from the
former Connectria shareholders 824,700 shares of MDSI that had a market value of
approximately $2.8 million and the cancellation of 103,088 previously issued stock options
of MDSI as consideration for Connectria. In addition to the share consideration, a
wholly-owned subsidiary of MDSI also received a warrant allowing it to purchase up to
50,380 shares of Series A Nonvoting Preferred Stock of Connectria at a price of $50 per
share exercisable for a period of five years. The Series A Nonvoting Preferred Stock of
Connectria has a face value of $100 per share, bears a dividend of five percent per annum,
bears a liquidation preference equal to the face value, may be redeemed at
Connectrias option at any time, and must be redeemed by Connectria upon a capital
infusion of $10 million or greater. In addition MDSI has advanced Connectria $500,000,
consisting of a loan in the principal amount of $250,000 with a two year term, bearing
interest at 5%, and $250,000 for prepaid hosting services. The loan was repaid subsequent
to December 31, 2003. On closing, the Company realized a small gain as a result of the
disposition of Connectria.

As
a result of its decision to dispose of Connectria, MDSI has treated this business segment
as a discontinued operation and the results of operations, financial position and changes
in cash flow for this segment have been segregated from those of continuing operations.
The following discussion and analysis of the Companys results of operations excludes
Connectria for the current and corresponding prior periods.

# Recent Accounting
Pronouncements

In December
2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 123R Share-Based Payment (SFAS
123R). This Statement is a revision of SFAS 123 Accounting for Stock-Based
Compensation. SFAS123R establishes standards for the accounting for transactions in
which an entity receives employee services in exchange for an award of equity instruments.
This Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees. This Statement is effective for all awards
granted, modified, repurchased, or cancelled after the beginning of the first interim
period after June 15, 2005. The Company intends to adopt this standard in the period
commencing July 1, 2005 on a prospective basis.

In
June 2004, the FASB issued an exposure draft of a proposed Statement, Fair Value
Measurements to provide guidance on how to measure the fair value of financial and
non-financial assets and liabilities when required by other authoritative accounting
pronouncements. The proposed statement attempts to address concerns about the ability to
develop reliable estimates of fair value and inconsistencies in fair value guidance
provided by current US GAAP, by creating a framework that clarifies the fair value
objective and its application in GAAP. In addition, the proposal expands disclosures
required about the use of fair value to remeasure assets and liabilities. The standard
would be effective for financial statements issued for fiscal years beginning after June
15, 2005. The Company is currently assessing the impact this standard will have on the
Companys Consolidated Financial Statements.

In
March 2004, the FASB ratified consensus reached by the EITF with respect to EITF Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF Issue No. 03-1 addresses recognition, measurement and disclosure
of other-than-temporary impairment evaluations for securities within the scope of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and
equity securities that are not subject to the scope of SFAS No. 115 and are not accounted
for under the equity method according to Accounting Principles Board Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock. The
recognition and measurement guidance is effective for reporting periods beginning after
June 15, 2004. Disclosures for cost method investments are required to be included in
annual financial statements prepared for fiscal years ending after June 15, 2004. The
Company does not have any significant cost method investments and therefore adoption is
not expected to have a significant impact on its Consolidated Financial Statements.

During
the year ended December 31, 2004, the FASB also issued the following Statements: SFAS No.
153 Exchanges of Non-Monetary Assets  an amendment of APB Opinion No.
29"; SFAS 152 Accounting for Real Estate Time-Sharing Transactions  an
amendment of FASB Statements No. 66 and 67"; and SFAS No. 151 Inventory Costs
 an amendment of ARB No. 43, Chapter 4". The Company does not believe that
these Statements will have an impact on the Consolidated Financial Statements.

26

---

# Critical Accounting
Policies and Significant Estimates

The
significant accounting policies are outlined within Note 1 to the Consolidated Financial
Statements. Some of those accounting policies require the Company to make estimates and
assumptions that affect the amounts reported by the Company. The following items require
the most significant judgment and involve complex estimation:

# Revenue Recognition

We
recognize revenue in accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions, SOP 81-1,
Accounting for Performance of Construction-type and Certain Production-type
Contracts, the Securities and Exchange Commissions Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements,
SAB No. 104, Revenue Recognition, Emerging Issues Task Force Issue No.
00-21, Revenue Arrangements with Multiple Deliverables and other authoritative
accounting literature. We derive revenues from the following sources: license fees,
professional services, maintenance and support fees and third party products and services.

We
generally provide services with our supply agreements that include significant production,
modification, and customisation of the software. These services are not separable and are
essential to the functionality of the software, and as a result we account for these
licence and service arrangements under SOP 81-1 using the percentage of completion method
of contract accounting.

License Fees and
Professional Services

Our
supply agreements generally include multiple products and services, or
elements. We use the residual method to recognize revenue when a supply
agreement includes one or more elements to be delivered at a future date and vendor
specific objective evidence of the fair value of all undelivered elements exists. The fair
value of the undelivered elements is determined based on the historical evidence of
stand-alone sales, or renewal terms of these elements to customers. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee, which relates to the license and implementation services, is
recognized as revenue on a percentage of completion basis. If evidence of the fair value
of one or more undelivered elements does not exist, the total revenue is deferred and
recognized when delivery of those elements occurs or when fair value is established.

We
estimate the percentage of completion on contracts with fixed fees on a monthly basis
utilizing man-days incurred to date as a percentage of total estimated man-days to
complete the project. If we do not have a sufficient basis to measure progress towards
completion, revenue is recognized when we receive final acceptance from the customer. When
the total cost estimate for a project exceeds revenue, we accrue for the estimated losses
immediately. The complexity of the estimation process and issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage-of-completion method of accounting affect the amounts of revenue and related
expenses reported in our Consolidated Financial Statements. A number of internal and
external factors can affect our estimates, including labor rates, utilization and
efficiency variances and specification and testing requirement changes.

We
are engaged on a continuous basis in the production and delivery of software under
contractual agreements. As a result we have developed a history of being able to estimate
costs to complete and the extent of progress toward completion of contracts, which
supports the use of the percentage of completion method of contract accounting.

Professional
services revenue primarily consists of consulting and customer training revenues, which
are usually charged on a time and materials basis and are recognized as the services are
performed. Revenue from certain fixed price contracts is recognized on a proportional
performance basis, which involves the use of estimates related to total expected man-days
of completing the contract derived from historical experience with similar contracts. If
we do not have a sufficient basis to measure the progress towards completion, revenue is
recognized when the project is completed or when we receive final acceptance from the
customer.

27

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Maintenance Revenue

Generally,
maintenance is initially sold as an element of a master supply arrangement, with
subsequent annual renewals, and is priced as a percentage of software license fees.
Maintenance revenue is recognized ratably over the term of the maintenance period, which
typically is one year. Maintenance and support revenue includes software license updates
that provide customers with rights to unspecified software product upgrades, maintenance
releases and patches released during the term of the support period. Product support
services also include Internet and telephone access to technical support personnel.

Historically,
we have provided a warranty phase during the supply agreement. Services provided during
this warranty phase include elements of maintenance and support. As a result we, defer a
portion of the supply agreement fee, based on vendor specific objective evidence of the
value of these services, and recognize the deferred amount as revenue pro rata over the
warranty period.

Third party products and
services

Revenue
from sales of third party products and services is recognized on delivery of the products.
Services are recognized on a percentage-complete basis.

When
software licenses are sold incorporating third-party products or sold with third-party
products, we recognize as revenue the gross amount of sales of third-party product. The
recognition of gross revenue is in accordance with criteria established in Emerging Issues
Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent.

On
occasion, we utilize third-party consultants to assist in implementations or installations
originated by the Company. In these cases, in accordance with criteria established in EITF
99-19 (as described above), the revenue for these implementations and installations is
recognized on a gross basis. In these cases we ultimately manage the engagement.

# Income Taxes

Significant
judgment is required in determining our worldwide income tax provision. In the ordinary
course of a global business, there are many transactions and calculations where the
ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of
revenue sharing and cost reimbursement arrangements among related entities, the process of
identifying items of revenue and expense that qualify for preferential tax treatment and
segregation of foreign and domestic income and expense to avoid double taxation. Although
we believe that our estimates are reasonable, no assurance can be given that the final tax
outcome of these matters will not be different than that which is reflected in our
historical income tax provisions and accruals. Such differences could have a material
effect on our income tax provision and net income in the period in which such
determination is made.

We
record a valuation allowance to reduce our deferred tax assets to the amount of future tax
benefit that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, there is no assurance that the valuation allowance will
not need to be increased to cover additional deferred tax assets that may not be
realizable. Any increase in the valuation allowance could have a material adverse impact
on our income tax provision and net income in the period in which such determination is
made.

# Restructuring Charges

In
calculating the restructuring charge in 2004 related to the costs to eliminate
approximately 30 positions the Company was required to estimate the amount of severance
pay required to terminate the employment, as well as the cost of any benefit continuity
provided to the employee. The Companys assumptions on either the amount of severance
or the cost of benefits or other expenses may be proven incorrect and the actual cost may
be materially different from the estimates.

In
calculating the cost to dispose of excess facilities relating to the restructuring charge
originally recorded in 2001, the Company was required to estimate for each location the
amount to be paid in lease termination payments, the future lease and operating costs to
be paid until the lease is terminated, and the amount, if any, of sublease revenues. This
required estimating the timing and costs of each lease to be terminated, the amount of
operating costs, and the timing and rate at which the Company might be able to sublease
the site. From the estimates for these costs the Company performed an assessment of the
affected facilities and considered the current market conditions for each site. A charge
of $1.9 million was recorded for the restructuring of excess facilities

28

---

as part of the 2001 restructuring
plan. The Companys assumptions on either the lease termination payments, operating
costs until terminated, or the offsetting sublease revenues may be proven incorrect and
actual cost may be materially different from the estimates.

# Accounts Receivable
 Allowance for Doubtful Accounts

The
Company periodically reviews the collectability of its accounts receivable balances. Where
doubt exists with regards to the collection of a certain receivable balance, an allowance
and charge to the income statement is recorded. At December 31, 2004, the allowance for
doubtful accounts was $288,000. The Company intends to continue vigorously pursuing these
accounts. If future events indicate additional collection issues, the Company may be
required to record an additional allowance for doubtful accounts. During the year ended
December 31, 2003 the Company wrote off a long term receivable of $2.8 million, as the
Company entered into a settlement agreement with this customer whereby no further proceeds
on the receivable would be realized by the Company.

# Commitment

The
Company has entered into a significant customer contract in which the Company has agreed
to utilize a certain amount of local services and create a certain amount of commercial
activity in South Africa. The Company is required to utilize local content or obtain
credits equivalent to approximately $7.1 million over a seven-year period ending May 2010.
The Company has furnished a performance guarantee equal to approximately 5% of such
amounts. The Company expects to fulfill its obligation through a number of activities,
including the establishment of a software development center in South Africa, the
provision of technical services, and the provision of training to local systems
integrators who will be able to provide implementation services with respect to the
Companys software products. As the Company expects to fulfill its obligations
through the purchase of services in the normal course of business, no liability has been
established for these future spending commitments. If the Company determines that it will
be unable to meet the minimum performance obligations, a liability for such obligations
will be accrued. The Companys obligations to utilize local services and obtain
related credits are expected to increase as a result of recent contract expansions.
However, negotiations related to this increase have yet to be completed.

# Warranty

The
Company warrants to its customers that its software will be in substantial conformance
with its specifications. If the Company is unable to deliver solutions that substantially
conform to specifications, warranty claims could have an adverse effect on the
Companys financial results.

29

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# Results of Operations

The
following table sets forth, for the years indicated, certain components of the selected
financial data of the Company:

|                                           | Years ended December 31,
|------------------------------------------ | ------------------------
|
|                                           |                         
|
|                                          
|Revenue:                                   |                         
|Software and services                      |                         
|Maintenance and support                    |                         
|Third party products and services          |                         
|                                           |                         
|                                           |                         
|Direct costs                               |                         
|                                           |                         
|Gross profit                               |                         
|                                           |                         
|Operating expenses:                        |                         
|Research and development                   |                         
|Sales and marketing                        |                         
|General and administrative                 |                         
|Restructuring charge                       |                         
|Strategic expenses                         |                         
|Provision for doubtful accounts            |                         
|                                           |                         
|                                           |                         
|                                           |                         
|Operating income (loss)                    |                         
|Other income (expense)                     |                         
|                                           |                         
|Income (loss) from continuing operations   |                         
|before tax provision                       |                         
|                                          
|(Provision for) recovery of income taxes   |                         
|from continuing operations                 |                         
|                                           |                         
|Income (loss) for continuing operations    |                         
|                                          
|Income (loss) from discontinued operations |                         
|                                           |                         
|Net income (loss) for the year             |                         
|                                           |                         

30

---

The
following table sets forth, for the years indicated, certain components of the selected
financial data of the Company as a percentage of total revenue.

|                                              | Years ended December 31,
|--------------------------------------------- | ------------------------
|
|                                              |                         
|Revenue:                                      |                         
|Software and services                         |                         
|Maintenance and support                       |                         
|Third party products and services             |                         
|                                              |                         
|                                              |                         
|Direct costs                                  |                         
|                                              |                         
|Gross profit                                  |                         
|                                              |                         
|Operating expenses:                           |                         
|Research and development                      |                         
|Sales and marketing                           |                         
|General and administrative                    |                         
|Restructuring charge                          |                         
|Strategic expenses                            |                         
|Provision for doubtful accounts               |                         
|                                              |                         
|                                              |                         
|                                              |                         
|Operating income (loss)                       |                         
|Other income (expense)                        |                         
|                                              |                         
|Income (loss) from continuing operations      |                         
|before tax provision                          |                         
|                                              |                         
|(Provision for) recovery of income taxes from |                         
|continuing operations                         |                         
|                                              |                         
|Income (loss) from continuing operations      |                         
|Income (loss) from discontinued operations    |                         
|                                              |                         
|Net income (loss) for the year                |                         
|                                              |                         

---

Year ended December 31, 2004
Compared to the Year ended December 31, 2003

All numbers in 000s unless
otherwise noted.

|Revenue
|-------
|
|
|$49,942

Revenue
increased by $2.6 million (5.4%) for the year ended December 31, 2004, compared to the
year ended December 31, 2003. The increase was primarily due to increased software
and services revenue, and maintenance and support revenue as a result of our growing
install base partially offset by a decrease in third party products and services.

|Software and Services Revenue
|-----------------------------
|
|
|$29,478                      

Software
and services revenue increased by $0.5 million (1.9%) for the year ended December 31,
2004, compared to the year ended December 31, 2003. The Company entered into two
significant contracts in 2002. One of these contracts generated consistent revenue in 2004
compared to 2003, and is expected to continue to make up a significant portion of revenues
over the next few quarters. Revenue on the second contract decreased in 2004 because the
project was winding down. The decrease in revenue from this second contract was offset by
revenue earned on several new contracts, primarily within the telecommunications industry.

31

---

|Maintenance and Support Revenue
|-------------------------------
|
|
|$18,119                        

Maintenance
and support revenue was $18.1 million for the year ended December 31, 2004, compared to
$14.0 million for the year ended December 31, 2003, an increase of 29.6%. Maintenance and
support revenue increased primarily due to phases of the above noted contracts moving from
implementation into maintenance as well as from growth in the Companys installed
customer base. Such revenue is expected to fluctuate as it corresponds to the number and
relative size of customers that engage the Company to support installed systems.
Historically the renewal rate of maintenance and support contracts has been high.

|Third Party Products and Services Revenue
|-----------------------------------------
|
|
|$ 2,346                                  

Third
party products and services revenue decreased by $2.1 million (47.6%) for the year ended
December 31, 2004, compared to the year ended December 31, 2003. Third party products and
services revenue is primarily earned from certain customers pursuant to agreements under
which the Company provides third party products and services. Not all customers under
contract require the provision of third party products and services. Accordingly, there
may be large fluctuations in revenue, direct costs, gross profits and income from
operations from one period to another. The Company has agreed to supply a large amount of
third party services at no margin, which is being recognized on a gross basis, in
connection with one particular contract, and therefore expects that future revenues from
third party products and services will fluctuate in the near term. For the year ended
December 31, 2004 approximately $0.6 million of these services were provided, as compared
to $1.8 million for the year ended December 31, 2003.

|Direct Costs
|------------
|
|
|$21,991     

Direct
costs were 44.0% of revenue for the year ended December 31, 2004, compared to 49.3% for
the year ended December 31, 2003. Direct costs include labor and other costs directly
related to a project including those related to the provision of services and support and
costs related to equipment purchased for sale to third parties. Labor costs include direct
payroll, benefits and overhead charges. The decrease in direct costs as a percentage of
revenue occurred due to cost cutting efforts initiated in the third quarter, lower than
usual costs of our embedded third party software components as well as the Company
supplying a smaller amount of third-party products and services at no margin, in
connection with one particular contract, during the year ended December 31, 2004 than
in the year ended December 31, 2003. As a result, direct costs as a percentage of revenue
decreased. The Company expects that direct costs as a percentage of revenue will remain
relatively consistent with the current period in the near term.

|Gross Margin
|------------
|
|
|$27,951     

Gross
margins were 56.0% of revenue for the year ended December 31, 2004, compared to 50.7% for
the year ended December 31, 2003. The increase in gross margins as a percentage of
revenue occurred due to cost cutting efforts initiated in the third quarter, lower than
usual costs of our embedded third party software components as well as the Company
supplying a smaller amount of third-party products and services at no margin, in
connection with one particular contract, during the year ended December 31, 2004 than in
the year ended December 31, 2003. The Company expects that in the near term its gross

32

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margins as a percentage of revenue
will remain consistent with the current year, subject to the level of third party
services actually provided.

|Research and Development
|------------------------
|
|
|$6,906                  

Research
and development expenses were $6.9 million, or 13.8% of revenue, for the year ended
December 31, 2004, compared to $5.5 million, or 11.6% of revenue, for the year ended
December 31, 2003. The increase in research and development expenses is a result of the
Companys commitment to enhance and develop additional functionality in its Advantex
r7 product including the hiring of additional development staff. The relative weakness of
the United States dollar also contributed to the increase in research and development
expenses during the year as the majority of research and development expenses are
denominated in Canadian dollars. The Company intends to continue committing a significant
portion of its revenue to enhance existing products and develop new products.

|Sales and Marketing
|-------------------
|
|
|$ 8,459            

Sales
and marketing expenses were $8.5 million or 16.9% of revenue for the year ended December
31, 2004 and $10.5 million or 22.2% of revenue for the year ended December 31, 2003. The
decrease in expenditures in 2004 was due to cost saving initiatives, including personnel
reductions, as well as the Companys annual user conference being held locally, in
Vancouver, British Columbia, Canada, which decreased costs. The Company anticipates that
the dollar amounts of its sales and marketing expenses will continue to be significant as
a result of the Companys commitment to its international marketing efforts and
attempts to penetrate additional markets for its products.

|General and Administrative
|--------------------------
|
|
|$7,185                    

General
and administrative expenses were $7.2 million, or 14.4% of revenue, for the year ended
December 31, 2004 and $6.6 million, or 13.8% of revenue, for the year ended December 31,
2003. General and administrative expenses increased in relation to the comparative period
primarily as a result of an increase in insurance fees incurred by the Company. We expect
that in the near future, general and administrative expenditures will remain relatively
consistent with current levels.

|Restructuring Charge
|--------------------
|
|
|$1,616              

During
the year ended December 31, 2004, the Company recorded a charge of $1.6 million related to
costs of workforce reduction for approximately 30 affected employees, stock based
compensation charges and other related costs. No restructuring charge was recorded during
the year ended December 31, 2003. See above discussion under Restructuring.

33

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|Strategic Expenses
|------------------
|
|
|$2,340            

Strategic
expenses were $2.3 million, or 4.7% of revenue for the year ended December 31, 2004
compared to $1.3 million, or 2.7% of revenue for the year ended December 31, 2003.
Strategic expenses consist primarily of professional fees associated with investigating
potential corporate transactions. The increase in strategic expenses during the year ended
December 31, 2004, compared to the prior year, related primarily to expenses incurred
by the Company in connection with a definitive agreement entered into on April 12, 2004,
which would have resulted in the Company being acquired by At Road. On July 27, 2004, the
Company announced that the Company and At Road had mutually agreed to terminate the
agreement. The termination of the agreement did not result in any penalty or termination
fee being payable by either party. The Company expects it will from time to time consider
new strategic opportunities; however, the Company cannot predict the amount or timing of
strategic expenses associated with such opportunities or whether the Company will be able
to negotiate and effect a successful transaction. Of the total strategic expenses, fees of
$795,406 were paid in 2004 to a company with a director in common to MDSI.

|Provision for Doubtful Accounts
|-------------------------------
|
|
|$    74                        

During
the year ended December 31, 2004, management specifically identified all doubtful accounts
receivable and allowed for these amounts. During the year ended December 31, 2003 the
Company determined that an additional allowance of approximately $3.1 million was required
primarily due to a settlement agreement being reached in the legal action against Citizens
Communications. This settlement did not result in the Company realizing any proceeds on
its $2.8 million long term receivable from Citizens Communications, and as a result the
Company wrote off the entire amount during that year. The remaining provision resulted
from significant uncertainty surrounding collection of one further specific account. In
2004, the Company recovered $230,000 in connection with amounts allowed for in 2003.

|Other Income (Expense)
|----------------------
|
|
|$ 114                 

Other
income was $0.1 million for the year ended December 31, 2004, compared to $(0.3) million
for the year ended December 31, 2003. Substantially all of other income (expense) related
to fluctuations in the currencies of the Companys foreign operations, interest
income on cash and short-term deposits, and interest expense on short-term borrowings
under the line of credit and capital lease obligations.

|Income Taxes
|------------
|
|
|$(979)      

The
Companys effective tax rate for the year ended December 31, 2004 was a provision of
65.8% (2003  (14.2%)) compared to a Canadian federal statutory tax rate of 35.6 %.  The
Companys effective tax rate represents a rate which is applicable to all of the
Companys operations crossing multiple tax jurisdictions with tax rates which are
different than the Canadian federal statutory tax rate. The Company also operates in tax
jurisdictions which have regulations which permit the carry back of current period tax
losses and credits to prior periods when income taxes were paid. The Companys
effective tax rate in the years presented reflects recoveries and refunds of prior year
taxes paid and tax credits received offset by valuation

34

---

allowances on losses carried
forward. The Company did not record a full recovery of income tax expense during the year
ended December 31, 2004 as it is more likely than not that the Company will not be able
to utilize the benefits of these losses.

Year ended December 31, 2003
Compared to the Year ended December 31, 2002

|Revenue
|-------
|
|
|$47,385

Revenue
 increased  by $9.2  million  (24.0%) for the year ended  December  31,  2003,  compared
to the year ended December 31,  2002.  The increase was  primarily  due to increased
 software and  services  revenue,  and  maintenance  and support revenue.

|Software and Services Revenue
|-----------------------------
|
|
|$28,932                      

Software
and services revenue increased by $4.3 million (17.2%) for the year ended December 31,
2003,  compared to the year ended December 31, 2002. The increase in revenue was
 attributable  to several  significant  contracts the Company has entered in the core
markets the Company serves.

|Maintenance and Support Revenue
|-------------------------------
|
|
|$13,976                        

Maintenance
and support revenue  increased by $2.9 million (26.4%) for the year ended December 31,
2003,  compared to the year ended  December  31,  2002,  an  increase of 26.4%.  The
primary  reason for the  increase in  maintenance  and support  revenue during 2003 was
that two of the Company's  significant  implementation  contracts  entered the
maintenance and support phases of their agreements during the year.

|Third Party Products and Services Revenue
|-----------------------------------------
|
|
|$4,477                                   

Third
party products and services revenue  increased by $2.0 million (80.5%) for the year ended
December 31, 2003, compared  to the year ended  December  31,  2002,  primarily  due to
the Company  supplying  a large  amount of third party services at no margin,  which was
recognized on a gross basis,  in connection  with one particular  contract.  For the year
ended December 31, 2003  approximately  $1.8 million of these  services were provided,
 as compared to $0.1 million for the year ended December 31, 2002.

|Direct Costs
|------------
|
|
|$23,363     

Direct
 costs were 49.3% of revenue for the year ended  December  31,  2003,  compared to 44.5%
for the year ended December  31,  2002.  The  increase in direct costs as a percentage
 of revenue  occurred  primarily  due to the  Company's agreement to supply a large
amount of third-party  services at no margin, in connection with one particular
 contract.  The relative  weakness of the

35

---

United  States dollar also
 contributed  to the cost increase as the majority of direct costs are incurred in
Canadian dollars. As a result, direct costs as a percentage of revenue increased.

|Gross Margin
|------------
|
|
|$24,022     

Gross
 margins were 50.7% of revenue for the year ended  December  31, 2003,  compared to 55.5%
for the year ended December 31, 2002. The decrease in gross margins as a percentage of
revenue related  primarily to an agreement  whereby the Company has agreed to supply a
large  amount of  third-party  services at no margin.  During 2003,  the Company
 recognized approximately  $1.8  million in third party  revenues  and costs  related to
this  project.  The  relative  weakness of the United States dollar also contributed to
the reduction in gross margin in the period.

|Research and Development
|------------------------
|
|
|$5,513                  

Research
and development  expenses were $5.5 million,  or 11.6% of revenue,  for the year ended
December 31, 2003, compared to $5.5  million,  or 14.4% of  revenue,  for the year ended
 December  31,  2002.  The  decrease in research  and development  expenses as a
percentage of revenue was a result of stable research and development  expenses  incurred
during a period of revenue growth.  The Company also utilized  research and development
 personnel on revenue  producing  projects in 2003,  and  corresponding  portions of the
 associated  salary  costs for these staff are  reflected  as direct costs as opposed to
research and development expenses.

|Sales and Marketing
|-------------------
|
|
|$10,497            

Sales
and  marketing  expenses  were $10.5  million or 22.2% of revenue for the year ended
 December  31, 2003 and $12.4 million or 32.4% of revenue for the year ended  December
31, 2002.  Total sales and marketing  expenses  represents a decrease of  approximately
 $1.9 million as compared to the same period of 2002. The decrease in  expenditures  in
2003 was due  primarily to a decrease in  commission  costs  relating to contracts
 entered into during 2002 that did not reoccur in 2003.

|General and Administrative
|--------------------------
|
|
|$6,551                    

General
and administrative  expenses were $6.6 million, or 13.8% of revenue,  for the year ended
December 31, 2003 and $6.2  million,  or 16.3% of  revenue,  for the year ended  December
 31,  2002.  General  and  administrative  expenses remained  relatively  consistent with
the comparative period as a result of a cost control effort initiated by the Company,
offset by increased legal costs incurred during 2003.

36

---

|Provision for Doubtful Accounts
|-------------------------------
|
|
|$3,070                         

During
the year ended  December 31, 2003 the Company  determined  that an  additional  allowance
of  approximately $3.1 million  was required  primarily  due to a settlement  agreement
 being reached in the legal action  against  Citizens Communications.  This  settlement
 did not result in the  Company  realizing  any  proceeds on its $2.8  million  long term
receivable  from  Citizens  Communications,  and as a result the Company has written off
the entire  amount during the year ended  December 31,  2003. The remaining  provision
 resulted from significant  uncertainty  surrounding  collection of one further  specific
 account.  Although the Company intends to vigorously  pursue  collection of accounts
where no settlement agreements have been reached, due to uncertainty with regard to
ultimate  collection,  the Company determined that it would be prudent to record an
allowance to address the  uncertainty  regarding  collection of amounts due.  During the
year ended December 31, 2002 the Company recovered  approximately $0.6 million from a
previously  allowed for doubtful accounts.  Also during the year ended December 31, 2002
the Company  determined that an additional  allowance of approximately $0.6 million was
required due to significant  uncertainty  surrounding  collection of a specific account.
 The net result was that there was no charge recorded in the provision for doubtful
accounts for the year ended December 31, 2002.

|Strategic Expenses
|------------------
|
|
|$1,275            

Strategic
 expenses were  approximately  $1.3 million,  or 2.7% of revenue,  for the year ended
December 31, 2003. The Company did not incur any  strategic  expenses in the year ended
 December 31, 2002.  Strategic  expenses  consisted of professional  fees associated with
 investigating  potential  corporate  transactions  that the Company  considered  during
2003.

|Other Income (Expense)
|----------------------
|
|
|$(307)                

Other
 expense was $0.3  million for the year ended  December 31,  2003,  compared to $(0.3)
 million for the year ended December 31, 2002.  Substantially  all of other income
 (expense)  related to interest  income on cash and short-term deposits, interest expense
on capital leases, and fluctuations in foreign currency denominated assets and
liabilities.

|Income Taxes
|------------
|
|
|$  (452)    

The
Company  provided for income taxes on losses for the year ended  December 31, 2003.  The
 Company's  effective tax rate reflects the  application of certain  operating loss carry
forwards  against taxable income and the blended effect of Canadian,  U.S., and other
foreign  jurisdictions'  tax rates.  Since the Company  incurred a loss during the period
and it was not more likely than not that the Company  would be able to utilize the
 benefits of these  losses,  the Company did not record a full recovery of income tax
expense during the year ended December 31, 2003.

37

---

|Income from Discontinued Operations
|-----------------------------------
|
|
|$   --                             

During
the year ended  December  31, 2002 the Company  divested  itself of its Hosting and IT
services  subsidiary Connectria  Corporation  ("Connectria").   As  a  result,
 Connectria's  results  of  operations  have  been  presented  as Discontinued
 Operations.  There was no effect on income from  Discontinued  Operations  during the
year ended December 31, 2003.  Income from  Discontinued  Operations  for the year ended
 December 31, 2002 was  $121,000.  The Company  expects no further financial statement
impact from this disposition.

Liquidity and Capital Resources

The
 Company has  financed  its  operations,  acquisitions  and  capital  expenditures  with
cash  generated  from operations,  loans,  private placements and public offerings of its
securities.  At December 31, 2004, the Company had cash and cash equivalents of $19.8
million (2003 - $15.8 million) and working capital of $10.4 million (2003 - $8.6 million).

Cash
provided by (used in) operating  activities  was $5.6 million,  $7.4 million and $2.3
million,  respectively, for the years ended  December 31, 2004,  2003 and 2002.  The $5.6
million of cash provided by operating  activities in 2004 was  comprised  of $0.5
 million  net income,  non-cash  charges of $2.6  million  and $2.4  million of changes
to non-cash working  capital  items.  Depreciation  accounted  for $2.2  million of the
 non-cash  charge in the year.  The  changes to working  capital  items  include a $1.5
 million  increase  in trade  receivables,  a $1.6  million  decrease  in  unbilled
receivables,  a $0.7 million  decrease in prepaid  expenses and other assets,  a $0.1
million  increase in accounts payable and accrued  liabilities,  a $0.5  million
 increase  in taxes  payable and a $1.1  million  increase in deferred  revenue. Unbilled
 accounts  receivable  arise  where the Company has earned  revenue on a project  and has
not  completed  specific billing  milestones  under the terms of the applicable
 contract.  Deferred revenue arises where the Company has achieved a billing  milestone
 under a customer  contract but has yet to recognize all of the revenue  billed due to
the percentage of completion under the contract.

The
Company  maintains,  as at December 31,  2004, a provision of $0.3 million with respect
to doubtful  accounts. The Company  intends to vigorously  pursue  collection  of these
 accounts;  however,  due to  uncertainty  with regards to ultimate  collection,  the
 Company  determined  that it  would be  prudent  to  maintain  an  allowance  to
 address  this uncertainty.

Cash
used in financing activities was $0.6 million, $1.7 million and $1.7 million,
respectively,  during the years ended  December  31,  2004,  2003 and 2002.  The cash
used in  financing  activities  in 2004  comprised  $1.1  million  in repayments of
capital leases offset by $0.5 million from the issuance of common shares.

Cash
used in investing  activities was $0.9 million,  $0.9 million and $2.2 million,
 respectively,  for the years ended  December 31, 2004,  2003 and 2002.  Total  investing
 activity in 2004  primarily  consisted of $0.9 million for the purchase of capital
 equipment,  including  computer hardware and software for use in research and
development  activities, and to support the growth of the Company's corporate information
systems.

Existing
 sources of liquidity at December 31, 2004 include $19.8 million of cash and cash
 equivalents  and funds available  under the Company's  operating  line of credit.  At
the year ended  December 31, 2004,  the Company's  borrowing capacity under the line of
credit was up to CDN$10 million  (US$8.3  million) (2003 - CDN$10  million).  Under the
terms of the  agreement,  borrowings  and  letters  of  credit  under  the  line  are
 limited  to 75% to 90% of  eligible  accounts receivable.  Borrowings  accrue  interest
at the bank's prime rate plus 0.25%.  At December  31, 2004,  the Company was not using
 this line of credit,  except as  security  for an  outstanding  letter of credit in the
 amount of  CDN$1.4  million (US$1.2 million) expiring October 1, 2005.

The
Company has a  revolving,  demand term loan  facility  available by way of floating  rate
 advances or Cost of Funds  loans  ("COF")  with a  Canadian  commercial  bank to
 finance  up to 75% of the  cost of the  capital  expenditures ("Capex"),  to a maximum
of CDN$1.5 million (US$1.2 million).  Floating rate advances bear interest at prime plus
0.25% and COF loans bear interest at COF+ 2%.  As at December 31, 2004, the Company was
not utilizing the loan facility.

The
Company has a letter of credit  facility with a Canadian  commercial bank for issuance of
letters of credit in support of contracts  for up to CDN$10  million  (US$8.3  million)
 (2003 - CDN$10  million),  which bears  interest at the bank's prime rate plus 0.50% per
annum.  As at December  31,  2004,  the Company has not issued any letters of credit
under this facility.

38

---

The
Company  believes that the principal  source of its liquidity is operating  cash flow.
 Certain  circumstances including  a  reduction  in the demand for the  Company's
 products,  an  increase in the length of the sales cycle for the Company's  products,
 an increase in operating costs,  unfavorable  results of litigation,  or general
 economic  slowdowns could have a material impact on the Company's operating cash flow
and liquidity.

The
Company  believes that future cash flows from  operations and its borrowing  capacity
under the operating line of credit  combined with current cash balances will provide
 sufficient  funds to meet cash  requirements  for at least the next twelve months.
 Commensurate  with its past and expected future growth,  the Company may increase,  from
time to time, its borrowing  facility  under its operating  line of credit to support its
 operations.  Future growth or other  investing activities  may require the Company to
obtain  additional  equity or debt  financing,  which may or may not be available on
attractive  terms,  or at all, or may be dilutive to current or future  shareholders.  As
at December  31, 2004 the Company had the following contractual obligations and
commercial commitments:

|Contractual Obligations   | Payments Due by Period
|------------------------- | ----------------------
|
|                         
|Capital Lease Obligations |                       
|                         
|Operating Leases          |                       
|                         
|Normal Course Purchase    |                       
|Commitments               |                       
|                         
|Total Contractual         |                       
|Obligations               |                       
|                         

The
Company has entered into a significant customer contract in which the Company has agreed
to utilize a certain amount of local services and create a certain amount of commercial
activity in South Africa. The Company is required to utilize local content or obtain
credits equivalent to approximately $7.1 million over a seven-year period ending May 2010.
The Company has furnished a performance guarantee equal to approximately 5% of such
amounts. The Company expects to fulfill its obligation through a number of activities,
including the establishment of a software development center in South Africa, the
provision of technical services, and the provision of training to local systems
integrators who will be able to provide implementations services with respect to the
Companys software products. As the Company expects to fulfill its obligations
through the purchase of services in the normal course of business, no liability has been
established for these future-spending commitments. If we determine that we will be unable
to meet the minimum performance obligations, a liability for such obligations will be
accrued. As at December 31, 2004 the Company has generated an estimated $989,323 of
credits relating to this obligation. The Companys obligations to utilize local
services and obtain related credits are expected to increase as a result of recent
contract expansions. However negotiations related to this increase have yet to be
completed.

# Indemnification

The
Company typically includes indemnification provisions within license and implementation
service agreements, which are consistent with those prevalent in the software industry.
Such provisions indemnify customers against actions arising from patent infringements that
may arise through the normal use or proper possession of the Companys software. To
date the Company has not experienced any significant obligations under customer
indemnification provisions and accordingly, no amounts have been accrued for such
potential indemnification obligations.

# Derivative Financial
Instruments

The
Company generates a significant portion of its sales from customers located outside the
United States, principally in Canada and Europe. Canadian sales are made mostly by the
Company and on occasion are denominated in Canadian dollars. International sales are made
mostly from a foreign subsidiary and are typically denominated in either U.S. dollars,
Euros or British pounds. The Company also incurs a significant portion of expenses
outside the United States, principally in Canada and Europe, which are typically
denominated in Canadian dollars, Danish kroner or British pounds. The Companys
international business is subject to risks typical of an international business
including, but not limited to: differing economic conditions, changes in political
climate, differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Companys future results could be
materially adversely impacted by changes in these or other factors. The Company may enter
into foreign exchange forward contracts to offset the impact of currency fluctuations on
certain nonfunctional currency assets and liabilities,

39

---

primarily denominated in the
Canadian dollar, Euro and British pound. The foreign exchange forward contracts the
Company enters into generally have original maturities ranging from three to eighteen
months. The Company does not enter into foreign exchange forward contracts for trading or
speculative purposes, and does not expect gains or losses on these contracts to have a
material impact on the Companys financial results.

The
Companys foreign currency forward contracts are executed with credit worthy banks
and are denominated in currencies of major industrial countries. As at December 31, 2004
and 2003 the Company had no foreign currency forward contracts outstanding.

# Off-Balance Sheet
Transactions

The
Company does not have any off-balance sheet arrangements.

# Item 7A:  Quantitative
and Qualitative Disclosures About Market Risk

Market risk
represents the risk of loss that may impact our financial position due to adverse changes
in financial market prices and rates. Our market risk exposure is primarily a result of
fluctuations in foreign currency exchange rates and interest rates. We do not hold or
issue financial instruments for trading purposes.

# Foreign Currency Risk

We
conduct business on a global basis in international currencies. As such, we are exposed to
adverse or beneficial movements in foreign exchange rates. The majority of our sales are
denominated in U.S. dollars, the functional currency of our domestic operations and the
currency in which we report our financial statements. We also conduct a portion of our
sales in currencies other than the U.S. dollar, including the British pound, Euro and
Canadian dollar.

We
are exposed to foreign exchange fluctuations as the financial results of our foreign
subsidiaries are translated into U.S. dollars on consolidation. All translation gains and
losses are included in the determination of net income (loss). As exchange rates vary,
these results when translated may impact our overall expected financial results. We also
have exposure to foreign currency rate fluctuations when we translate cash from one
currency into another to fund operational requirements. In addition, we have exposure to
the change in rates as the result of timing differences between expenses being incurred
and paid. As exchange rates vary, we may experience a negative impact on financial
results.

We
have evaluated our exposure to foreign currency risk and have determined that while we
have a degree of exposure to the Euro, the Danish kroner and British pound, our most
significant operating exposure to foreign currencies at this time is to the Canadian
dollar. In certain historical periods, the strengthening of the Canadian dollar has
negatively affected our operating results.

As
of December 31, 2004, the potential reduction in future earnings from a hypothetical
instantaneous 10% change in quoted foreign currency exchange rates applied to our foreign
currency sensitive contracts and assets would be approximately $3.0 million. The foreign
currency sensitivity model is limited by the assumption that all foreign currencies, to
which the Company is exposed, would simultaneously change by 10%. Such synchronized
changes are unlikely to occur. The sensitivity model does not include the inherent risks
associated with anticipated future transactions denominated in foreign currencies or
future forward contracts entered into for hedging purposes.

To
minimize the risk associated with the effects of certain foreign currency exposures, we
occasionally use foreign currency forward exchange contracts. We do not use forward
contracts for trading or speculative purposes. From time to time we may also purchase
Canadian dollars in the open market and hold these funds in order to satisfy forecasted
operating needs in Canadian dollars.

At
December 31, 2004 and December 31, 2003, we had no outstanding currency forward exchange
contracts and during the years ended December 31, 2004 and December 31, 2003 we did not
enter into any forward exchange contracts. We therefore did not record any gain or loss as
a result of these contracts for these years.

40

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# Interest Rate Risk

Our
exposure to market rate risk for changes in interest rates relates primarily to our
investment portfolio. The investment of cash is regulated by our investment policy of
which the primary objective is the security of principal. Among other selection criteria,
the investment policy states that the term to maturity of investments cannot exceed one
year in length. We invest our cash in a variety of short-term financial instruments,
including government bonds, commercial paper and money market instruments. Our portfolio
is diversified and consists primarily of investment grade securities to minimize credit
risk. These investments are typically denominated in U.S. dollars. Cash balances in
foreign currencies are operating balances and are only invested in demand or short-term
deposits of the local operating bank. We do not use derivative financial instruments in
our investment portfolio.

Investments
in both fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value adversely
impacted because of a rise in interest rates, while floating rate securities may produce
less income than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations because of changes in interest rates or
we may suffer losses in principal if forced to sell securities that have seen a decline in
market value because of changes in interest rates.

While
interest income on our cash, cash equivalents, and short-term investments is subject to
interest rate fluctuations, we believe that the impact of these fluctuations does not have
a material effect on our financial position due to the short-term nature of these
financial instruments. Our interest income and interest expense are most sensitive to the
general level of interest rates in Canada and the United States. Sensitivity analysis is
used to measure our interest rate risk. Based on analysis of our balances as of
December 31, 2004, a 100 basis-point adverse change in interest rates would not have
a material effect on our consolidated financial position, results of operation, or cash
flows.

The
Company does not have any material exposure to commodity risks. The Company is exposed to
economic and political changes in international markets where the Company competes such as
inflation rates, recession, foreign ownership restrictions and other external factors over
which the Company has no control; domestic and foreign government spending, budgetary and
trade policies.

# Item 8:  Financial
Statements and Supplementary Data

The
financial statements listed under the heading (a)1. Consolidated Financial
Statements of Item 15 herein, are included immediately following this page.

41

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# Report of Independent
Registered Chartered Accountants

To the Board of Directors and
Shareholders of MDSI Mobile Data Solutions Inc.

We
have audited the accompanying Consolidated Balance Sheets of MDSI Mobile Data Solutions
Inc. and subsidiaries as of December 31, 2004 and 2003 and the related Consolidated
Statements of Operations, Stockholders Equity and Cash Flows for each of the three
years in the period ended December 31, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15(c). These Consolidated Financial
Statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance 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 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, such Consolidated Financial Statements present fairly, in all material
respects, the financial position of the Company and subsidiaries as at December 31, 2004
and 2003 and the results of its operations and cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic Consolidated Financial Statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.

The
Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. 
Accordingly we express no such opinion.

/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, British Columbia
March 25, 2005

42

---

MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)

|                                                                              | As at December 31,
|----------------------------------------------------------------------------- | ------------------
|                                                                              |                   
|
|                                                                              |                   
|Assets                                                                        |                   
|Current assets                                                                |                   
|Cash and cash equivalents                                                     |                   
|Accounts receivable                                                           |                   
|Trade (net of allowance for doubtful accounts of $288,246; 2003 - $2,792,415) |                   
|Unbilled                                                                      |                   
|Prepaid expenses and other assets                                             |                   
|Current deferred income taxes                                                 |                   
|                                                                              |                   
|Total current assets                                                          |                   
|                                                                              |                   
|Capital assets, net (note 3)                                                  |                   
|Deferred income taxes (note 6)                                                |                   
|                                                                              |                   
|Total assets                                                                  |                   
|                                                                              |                   
|                                                                              |                   
|Liabilities and stockholders' equity                                          |                   
|Current liabilities                                                           |                   
|Accounts payable (note 4)                                                     |                   
|Accrued liabilities                                                           |                   
|Accrued restructuring charge (note 13)                                        |                   
|Income taxes payable                                                          |                   
|Deferred revenue                                                              |                   
|Current obligations under capital lease (note 9(a))                           |                   
|                                                                              |                   
|Total current liabilities                                                     |                   
|                                                                              |                   
|Long term deferred taxes                                                      |                   
|Obligations under capital leases (note 9(a))                                  |                   
|                                                                              |                   
|Total liabilities                                                             |                   
|                                                                              |                   
|Commitments and contingencies (note 9)                                        |                   
|                                                                              |                   
|Stockholders' equity                                                          |                   
|Common stock (note 5)                                                         |                   
|Authorized:                                                                   |                   
|Unlimited common shares with no par value                                     |                   
|Issued: 8,353,179 shares; 2003: 8,218,118 shares                              |                   
|Additional paid-up capital                                                    |                   
|Accumulated other comprehensive loss                                          |                   
|Deficit                                                                       |                   
|                                                                              |                   
|                                                                              |                   
|                                                                              |                   
|Total liabilities and stockholders' equity                                    |                   
|                                                                              |                   

See accompanying notes to the
Consolidated Financial Statements

43

---

MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)

|                                                              | Years ended December 31,
|------------------------------------------------------------- | ------------------------
|                                                              |                         
|
|                                                              |                         
|Revenue                                                       |                         
|Software and services                                         |                         
|Maintenance and support                                       |                         
|Third party products and services                             |                         
|                                                              |                         
|                                                              |                         
|                                                             
|Direct costs                                                  |                         
|                                                              |                         
|Gross profit                                                  |                         
|                                                              |                         
|Operating expenses                                            |                         
|Research and development                                      |                         
|Sales and marketing                                           |                         
|General and administrative                                    |                         
|Restructuring charge (note 13)                                |                         
|trategic expenses (note 14)                                   |                         
|Provision for doubtful accounts                               |                         
|                                                              |                         
|                                                              |                         
|                                                              |                         
|Operating income (loss)                                       |                         
|                                                              |                         
|Other income (expense)                                        |                         
|                                                              |                         
|Income (loss) from continuing operations before tax provision |                         
|                                                              |                         
|(Provision for) recovery of income taxes from continuing      |                         
|operations (note 6)                                           |                         
|                                                              |                         
|Income (loss) from continuing operations                      |                         
|                                                              |                         
|Income from discontinued operations (note 2)                  |                         
|                                                              |                         
|Net income (loss) for the year                                |                         
|                                                              |                         
|                                                              |                         
|Income (loss) per common share (note 1(k))                    |                         
|Income (loss) from continuing operations                      |                         
|Basic                                                         |                         
|                                                              |                         
|Diluted                                                       |                         
|                                                              |                         
|Net income (loss)                                             |                         
|Basic                                                         |                         
|                                                              |                         
|Diluted                                                       |                         
|                                                              |                         

See accompanying notes to the
Consolidated Financial Statements

44

---

MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in United States dollars)

|                           | Common stock |  |  |           |   |  
|-------------------------- | ------------ |  |  | --------- | - | -
|
|                           |              |  |  |           |   |  
|Balance, December 31, 2001 |              |  |  | 8,676,020 |   | $
|                           |              | 
|Issued on exercise of      |              | 
|stock options              |              |  |  | 253,181   |   |  
|Issued under stock         |              | 
|purchase plan (Note 5(b))  |              |  |  | 85,405    |   |  
|Redemption of shares       |              | 
|during year on             |              | 
|divestiture of             |              |  |  | (824,700  | ) |  
|subsidiary (Note 2)        |              | 
|Redemption of treasury     |              | 
|shares                     |              |  |  | (13,475   | ) |  
|Net loss for the year      |              |  |  | --        |   |  
|                           |              |  |  |           |   |  
|Balance, December 31, 2002 |              |  |  | 8,176,431 |   | $
|                           |              | 
|Issued on exercise of      |              | 
|stock options              |              |  |  | 4,312     |   |  
|Issued under stock         |              | 
|purchase plan (Note 5(b))  |              |  |  | 37,375    |   |  
|Net loss for the year      |              |  |  | --        |   |  
|                           |              |  |  |           |   |  
|Balance, December 31, 2003 |              |  |  | 8,218,118 |   | $
|                           |              | 
|Issued on exercise of      |              | 
|stock options              |              |  |  | 124,368   |   |  
|Issued under stock         |              | 
|purchase plan (Note 5(b))  |              |  |  | 10,693    |   |  
|Stock based compensation   |              | 
|charge                     |              |  |  | --        |   |  
|Net income for the year    |              |  |  | --        |   |  
|                           |              |  |  |           |   |  
|Balance, December 31, 2004 |              |  |  | 8,353,179 |   | $
|                           |              |  |  |           |   |  

See accompanying notes to the
Consolidated Financial Statements

45

---

MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)

|                                                              | Years ended December 31,
|------------------------------------------------------------- | ------------------------
|                                                              |                         
|
|                                                              |                         
|Cash flows from operating activities                          |                         
|Net income (loss) from continuing operations for the year     |                         
|Items not affecting cash:                                     |                         
|Depreciation                                                  |                         
|Write-down in value of long term receivable                   |                         
|Deferred income taxes                                         |                         
|Stock-based compensation charge                               |                         
|Changes in non-cash operating working capital items (Note 11) |                         
|                                                              |                         
|Net cash provided by operating activities                     |                         
|                                                              |                         
|Cash flows from investing activities                          |                         
|Acquisition of capital assets                                 |                         
|                                                              |                         
|Net cash (used in) investing activities                       |                         
|                                                              |                         
|Cash flows from financing activities                          |                         
|Issuance of common shares                                     |                         
|Repayment of capital leases                                   |                         
|                                                              |                         
|Net cash (used in) financing activities                       |                         
|                                                              |                         
|Net cash provided by (used in) continuing operations          |                         
|                                                              |                         
|Net cash (used in) discontinued operations (note 2)           |                         
|                                                              |                         
|Net cash inflow (outflow)                                     |                         
|                                                              |                         
|Cash and cash equivalents, beginning of year                  |                         
|                                                              |                         
|Cash and cash equivalents, end of year                        |                         
|                                                              |                         
|                                                              |                         
|Supplemental disclosure of cash flow information              |                         
|                                                              |                         
|Cash payment for interest                                     |                         
|                                                              |                         
|Cash payment (refund) for taxes                               |                         
|                                                              |                         

See accompanying
notes to the Consolidated Financial Statements

46

---

# MDSI MOBILE DATA SOLUTIONS INC. 
Consolidated Statements of Cash Flows 
(Expressed in United States dollars)

# SUPPLEMENTAL DISCLOSURE
OF NON CASH INVESTING AND FINANCING ACTIVITIES

During
the year ended December 31, 2002 MDSI completed an agreement to sell its Hosting and IT
Services business segment, Connectria Corporation (Connectria). Pursuant to the terms of
the agreement, the Company received from the former Connectria shareholders 824,700 shares
that had an approximate market value of $2.8 million and the cancellation of 103,088
previously issued stock options of MDSI as consideration for Connectria. In addition to
the share consideration, a wholly-owned subsidiary of MDSI received a warrant allowing it
to purchase up to 50,380 shares of Series A Nonvoting Preferred Stock of Connectria at a
price of $50 per share exercisable for a period of five years. The Series A Nonvoting
Preferred Stock of Connectria has a face value of $100 per share, bears a dividend of five
percent per annum, bears a liquidation preference equal to the face value, may be redeemed
at Connectrias option at any time, and must be redeemed by Connectria upon a capital
infusion of $10 million or greater.

During
the year ended December 31, 2002 the Company entered into two capital lease arrangements
for the gross amount of $2,922,078 (2001  $881,195) for newly purchased capital
assets. As a result of these arrangements the Company did not incur cash outlays to
purchase these assets but will pay lease obligations with interest accruing at interest
rates of up to 9.5% over terms of up to three years. Since these asset purchases in 2002
are non cash transactions, the gross amount of the leases have been excluded from both the
Acquisition of Capital Assets and Proceeds from Capital Leases line items.

See accompanying
notes to the Consolidated Financial Statements

47

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES
|-- |  | -------------------------------

These
financial statements have been prepared in accordance with accounting principles generally
accepted in the United States and reflect the following significant accounting policies:

| | (a) |  | Nature
of operations
| | --- |  | --------------------

| | The
Company develops, markets and supports workforce management software solutions for use in
the mobile service industry. Prior to the disposition of Connectria (Note 2), the Company
was also a provider of managed application services.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Basis
of presentation
| | --- |  | ---------------------

| | These
Consolidated Financial Statements include the accounts of the Company and its wholly
owned subsidiaries, and are presented in the Companys functional currency, the
United States dollars. All intercompany balances and transactions have been eliminated.
MDSI is not involved with any variable interest entities, as defined by the Financial
Accounting Standards Board (FASB) Interpretation No. 46, having a significant effect on
the financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2002, MDSI adopted a plan for sale and entered into an agreement to sell its Hosting
and IT services business segment Connectria Corporation (Connectria) to former Connectria
shareholders who were both shareholders and employees of the Company. As a result of this
transaction, the Consolidated Financial Statements and related footnotes have been
restated to present the results of the business as discontinued operations (Note 2).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Foreign
exchange
| | --- |  | ----------------

| | The
accounts of the Company and its foreign subsidiaries are expressed in United States
dollars, its functional currency. Current monetary assets and liabilities denominated in
foreign currencies are translated at the rate in effect at the balance sheet date. Other
balance sheet items and revenues and expenses are translated at the rates prevailing on
the respective transaction dates. Translation gains and losses relating to monetary items
and revenue and expenses denominated in foreign currencies are included in the Statements
of Operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | Use
of estimates
| | --- |  | ----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates are used for, but not limited to, the accounting
for doubtful accounts, accrual for restructuring charges, amortization, determination of
net recoverable value of assets, revenue recognized on long-term contracts, taxes and
contingencies. Actual results could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | Cash
and cash equivalents
| | --- |  | -------------------------

| | Cash
and cash equivalents consist of cash on hand, deposits in banks and highly liquid
investments with an original maturity of three months or less.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | Accounts
Receivable and Allowance for Doubtful Accounts
| | --- |  | -------------------------------------------------------

| | Accounts
receivable are comprised of billed and unbilled receivables arising from recognized or
deferred revenues. Receivables related to specific deferred revenues are offset for
balance sheet presentation. The Companys receivables are unsecured.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (f) |  | Accounts
Receivable and Allowance for Doubtful Accounts (continued)
| | --- |  | -------------------------------------------------------------------

| | The
Company maintains an allowance for doubtful accounts at an amount it estimates to be
sufficient to provide adequate protection against losses resulting from collecting less
than full payment on its receivables. Individual overdue accounts are reviewed, and
allowance adjustments are recorded when determined necessary to state receivables at
realizable value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) |  | Capital
assets
| | --- |  | --------------

| | Capital
assets are recorded at cost. Depreciation is charged to operations over the estimated
useful lives of the assets as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Computer hardware and software
Furniture and fixturesLeasehold improvementsVehicle

| | Reviews
are regularly performed to determine whether facts and circumstances exist which indicate
that the carrying amount of assets may not be recoverable or that the useful life is
shorter than originally estimated. The Company assesses the recoverability of its assets
held for use by comparing the projected undiscounted net cash flows associated with the
related asset or group of assets over their remaining lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets. If assets are determined to be recoverable, but the
useful lives are shorter than originally estimated, the net book value of the assets is
depreciated over the newly determined remaining useful lives.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) |  | Revenue
recognition
| | --- |  | -------------------

| | We
recognize revenue in accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions, SOP 81-1,
Accounting for Performance of Construction-type and Certain Production-type
Contracts, the Securities and Exchange Commissions Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements,SAB No. 104,
Revenue Recognition, Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables and other authoritative accounting
literature. We derive revenues from the following sources: license fees, professional
services, maintenance and support fees and third party products and services.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
generally provide services with our supply agreements that include significant
production, modification, and customisation of the software. These services are not
separable and are essential to the functionality of the software, and as a result we
account for these licence and service arrangements under SOP 81-1 using the percentage of
completion method of contract accounting.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | License Fees and Professional Services
| | --------------------------------------

| | Our
supply agreements generally include multiple products and services, or elements. We
use the residual method to recognize revenue when a supply agreement includes one or more
elements to be delivered at a future date and Vendor Specific Objective Evidence of the
fair value of all undelivered elements exists. The fair value of the undelivered elements
is determined based on the historical evidence of stand-alone sales, or renewal terms of
these elements to customers. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee, which relates to
the license and implementation services, is recognized as revenue on a percentage of
completion basis. If evidence of the fair value of one or more undelivered elements does
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (h) |  | Revenue
recognition (continued)
| | --- |  | -------------------------------

| | not
exist, the total revenue is deferred and recognized when delivery of those elements
occurs or when fair value is established.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | We
estimate the percentage of completion on contracts with fixed fees on a monthly basis
utilizing hours incurred to date as a percentage of total estimated hours to complete the
project. If we do not have a sufficient basis to measure progress towards completion,
revenue is recognized when we receive final acceptance from the customer. When the total
cost estimate for a project exceeds revenue, we accrue for the estimated losses
immediately. The complexity of the estimation process and issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage-of-completion method of accounting affect the amounts of revenue and related
expenses reported in our Consolidated Financial Statements. A number of internal and
external factors can affect our estimates, including labor rates, utilization and
efficiency variances and specification and testing requirement changes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are engaged on a continuous basis in the production and delivery of software under
contractual agreements. As a result we have developed a history of being able to estimate
costs to complete and the extent of progress toward completion of contracts, which
supports the use of the percentage of completion method of contract accounting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
services revenue primarily consists of consulting and customer training revenues, which
are usually charged on a time and materials basis and are recognized as the services are
performed. Revenue from certain fixed price contracts is recognized on a proportional
performance basis, which involves the use of estimates related to total expected man-days
of completing the contract derived from historical experience with similar contracts. If
we do not have a sufficient basis to measure the progress towards completion, revenue is
recognized when the project is completed or when we receive final acceptance from the
customer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maintenance
Revenue
| | -------------------

| | Generally,
maintenance is initially sold as an element of a master supply arrangement, with
subsequent annual renewals, and is priced as a percentage of new software license fees.
Maintenance revenue is recognized ratably over the term of the maintenance period, which
typically is one year. Maintenance and support revenue includes software license updates
that provide customers with rights to unspecified software product upgrades, maintenance
releases and patches released during the term of the support period. Product support
services also include Internet and telephone access to technical support personnel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Historically,
we have provided a warranty phase during the supply agreement. Services provided during
this warranty phase include elements of maintenance and support. As a result, we defer a
portion of the supply agreement fee, based on Vendor Specific Objective Evidence of the
value of these services, and recognize the deferred amount as revenue over the warranty
period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Third
party products and services
| | ---------------------------------

| | Revenue
from sales of third party products and services is recognized on delivery of the
products. Services are recognized on a percentage-complete basis. When software licenses
are sold incorporating third-party products or sold with third-party products, we
recognize as revenue the gross amount of sales of third-party product. The recognition of
gross revenue is in accordance with criteria established in Emerging Issues Task Force
Issue (EITF) No. 99-19.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (h) |  | Revenue
recognition (continued)
| | --- |  | -------------------------------

| | Reporting
Revenue Gross as a Principal versus Net as an Agent.
| | --------------------------------------------------------------

| | On
occasion, we utilize third-party consultants to assist in implementations or
installations originated by the Company. In these cases, in accordance with criteria
established in EITF 99-19 (as described above), the revenue for these implementations and
installations is typically recognized on a gross basis. In these cases, we ultimately
manage the engagement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warranty
| | --------

| | The
Company warrants to its customers that its software will be in substantial conformance
with its specifications.
| | -------------------------------------------------------------------------------------------------------------------

| | (i) |  | Research
and development
| | --- |  | ------------------------

| | Research
and development costs related to software are expensed as incurred unless a project meets
the specified criteria for capitalization in accordance with Statement of Financial
Accounting Standard No. 86 Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Acquired research and development costs related to software
are charged to the Statements of Operations on acquisition if there is no alternative
future use and technological feasibility has not been established.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (j) |  | Income
taxes
| | --- |  | ------------

| | The
Company accounts for income taxes using the asset and liability method. Under this method,
deferred income taxes are recorded for the temporary differences between the financial
reporting basis and tax basis of the Companys assets and liabilities. These deferred
taxes are measured by the provisions of currently enacted tax laws. A valuation allowance
is recognized to the extent the recoverability of future income tax assets is not
considered likely.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (k) |  | Earnings
(loss) per common share
| | --- |  | --------------------------------

| | Basic
earnings (loss) per share is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities by including
other common share equivalents in the weighted average number of common shares
outstanding for a period, if dilutive. Common equivalent shares consist of incremental
shares issuable upon the exercise of stock options (using the treasury stock method).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (k) |  | Earnings
(loss) per common share (continued)
| | --- |  | --------------------------------------------

| | A
reconciliation of net income (loss) per common share from continuing operations and the
weighted average shares used in the earnings per share (EPS) calculations for
fiscal years 2004, 2003, and 2002 is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | Net Income (Loss)
from Continuing
Operations (Numerator) | Shares
(Denominator) | Income (Loss) Per
 Share
from continuing
operations
|----------------------- | -------------------------------------------------------- | -------------------- | ---------------------------------------------------
|                        |                                                          |                      |                                                    
|2004                    |                                                          |                      |                                                    
|Basic                   |                                                          | $507,478             |                                                    
|Effect of stock options |                                                          | --                   |                                                    
|                        |                                                          |                      |                                                    
|Diluted                 |                                                          | $507,478             |                                                    
|                        |                                                          |                      |                                                    

|                        |  |             |  
|----------------------- |  | ----------- | -
|2003                    |  |             |  
|Basic                   |  | $(3,642,743 | )
|Effect of stock options |  | --          |  
|                        |  |             |  
|Diluted                 |  | $(3,642,743 | )
|                        |  |             |  

|                        |  |             |  
|----------------------- |  | ----------- | -
|2002                    |  |             |  
|Basic                   |  | $(2,046,637 | )
|Effect of stock options |  | --          |  
|                        |  |             |  
|Diluted                 |  | $(2,046,637 | )
|                        |  |             |  

| | For
the year ended December 31, 2004, 167,638 common share equivalents were included in the
calculation of diluted EPS due to the exercise price of these common share equivalents
being less than the market value at year end of the common shares. For the years ended
December 31, 2003 and 2002, options to purchase 1,191,248 and 1,291,181 shares
respectively were excluded from the computation of diluted EPS because of the net losses
in fiscal 2003 and 2002 and therefore their effect would be anti-dilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (l) |  | Stock-based
compensation
| | --- |  | ------------------------

| | The
Company accounts for stock-based compensation using the intrinsic value based method
whereby compensation cost is recorded for the excess, if any, of the quoted market price
of the common share over the exercise price of the common stock option at the date
granted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following pro forma financial information presents the net income (loss) for the year and
income (loss) per common share had the Company adopted Statement of Financial Accounting
Standard No. 123 (SFAS 123) Accounting for Stock-based Compensation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (l) |  | Stock-based
compensation (continued)
| | --- |  | ------------------------------------

|                                                | 2004 | 2003 | 2002
|----------------------------------------------- | ---- | ---- | ----
|                                                |     
|Net income (loss) from continuing operations    |      |      |     
|(as reported)                                   |      |      | $   
|Total stock-based compensation costs, net of    |      |     
|related tax effects, that would have been       |      |     
|included in net income (loss) for the year if   |      |     
|the fair value based method had been applied    |      |      | $   
|                                                |     
|Pro forma net income from continuing operations |      |      | $   
|                                                |     
|Basic and fully diluted loss per common share   |      |      | $   
|Total stock-based compensation costs, net of    |      |     
|related tax effects, that would have been       |      |     
|included in net income (loss) for the year if   |      |     
|the fair value based method had been applied    |      |      | $   
|                                                |     
|Pro forma basic and fully diluted loss per      |      |     
|common share                                    |      |      | $   
|                                                |     

| | Using
the fair value method for stock-based compensation, additional compensation costs of
approximately $650,725 would have been recorded for the year ended December 31, 2004
(2003  $1,566,400 and 2002  $2,681,899 respectively). This amount is
determined using an option pricing model assuming no dividends are to be paid, an average
vesting period of 4 years (2003  4 years; 2002  4 years), average life of the
option of 5 years (2003  5 years; 2002  5 years;) a weighted average
annualized volatility of the Companys share price of 43% (2003  47% and 2002
 73% respectively) and a weighted average annualized risk free interest rate at
2.2% (2003 1.1% and 2002 2.7% respectively).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (m) |  | Comprehensive
income
| | --- |  | --------------------

| | The
Company reports comprehensive income or loss in accordance with the provisions of SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income or loss, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company had no source of other comprehensive
income for the years ended December 31, 2004, 2003, 2002. Tax effects of other
comprehensive income or loss are not considered material for any period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (n) |  | Segmented
information
| | --- |  | ---------------------

| | SFAS
131, Disclosures About Segments of an Enterprise and Related Information,established
standards for the reporting of segmented information in annual financial statements and
requires the reporting of certain selected segmented information on interim reports to
shareholders. In accordance with SFAS 131 the Company has determined that it has one
reportable segment, Field Service and has reported in accordance with SFAS 131 in Note 9.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (o) |  | Accounting
for derivative instruments and hedging activities
| | --- |  | ------------------------------------------------------------

| | Effective
January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), and the corresponding amendments under SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities  an
amendment of SFAS No. 133 (SFAS 138) and under SFAS No. 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 133 requires that all
derivative financial instruments be recognized in the financial statements and measured
at fair value regardless of the purpose or intent for holding them. If the derivative is
designated as a fair value hedge, changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in net earnings (loss). If the
derivative is designated as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in other comprehensive income (loss) (OCI)
and are recognized in net earnings (loss) when the hedged item affects net earnings
(loss). Ineffective portions of changes in the fair value of cash flow hedges are
recognized in net earnings (loss). If the derivative used in an economic hedging
relationship is not designated in an accounting hedging relationship, changes in the fair
value of the derivative are recognized in net earnings (loss).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | From
time to time the Company may attempt to hedge its position with respect to currency
fluctuations on specific contracts. This is generally accomplished by entering into
forward contracts. As at December 31, 2004 and December 31, 2003 the Company had no
forward transactions open.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (p) |  | Recent
accounting pronouncements
| | --- |  | --------------------------------

| | In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123R Share-Based Payment (SFAS
123R). This Statement is a revision of SFAS 123 Accounting for Stock-Based
Compensation. SFAS123R establishes standards for the accounting for transactions in
which an entity receives employee services in exchange for an award of equity
instruments. This Statement does not change the accounting guidance for share-based
payment transactions with parties other than employees. This Statement is effective for
all awards granted, modified, repurchased, or cancelled after the beginning of the first
interim period after June 15, 2005. The Company intends to adopt this standard in the
period commencing July 1, 2005 on a prospective basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2004, the FASB issued an exposure draft of a proposed Statement, Fair Value
Measurements to provide guidance on how to measure the fair value of financial and
non-financial assets and liabilities when required by other authoritative accounting
pronouncements. The proposed statement attempts to address concerns about the ability to
develop reliable estimates of fair value and inconsistencies in fair value guidance
provided by current US GAAP, by creating a framework that clarifies the fair value
objective and its application in GAAP. In addition, the proposal expands disclosures
required about the use of fair value to remeasure assets and liabilities. The standard
would be effective for financial statements issued for fiscal years beginning after June
15, 2005. The Company is currently assessing the impact this standard will have on the
Companys Consolidated Financial Statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|1. |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|-- |  | -------------------------------------------

| | (p) |  | Recent
accounting pronouncements (continued)
| | --- |  | --------------------------------------------

| | In
March 2004, the FASB ratified consensuses reached by the Emerging Issues Task Force (EITF)
with respect to EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF Issue No. 03-1 addresses
recognition, measurement and disclosure of other-than-temporary impairment evaluations
for securities within the scope of SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities, and equity securities that are not subject to the scope
of SFAS No. 115 and are not accounted for under the equity method according to Accounting
Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock. The recognition and measurement guidance is effective for reporting
periods beginning after June 15, 2004. Disclosures for cost method investments are
required to be included in annual financial statements prepared for fiscal years ending
after June 15, 2004. The Company does not have any significant cost method investments
and therefore adoption is not expected to have a significant impact on its Consolidated
Financial Statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2004, the FASB also issued the following Statements: SFAS No.
153 Exchanges of Non-Monetary Assets  an amendment of APB Opinion No. 29";
SFAS 152 Accounting for Real Estate Time-Sharing Transactions  an amendment
of FASB Statements No. 66 and 67"; and SFAS No. 151 Inventory Costs  an
amendment of ARB No. 43, Chapter 4". The Company does not believe that these
Statements will have an impact on the Consolidated Financial Statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | DISCONTINUED
OPERATIONS
|-- |  | -----------------------

| | Connectria
Corporation
| | ----------------------

| | In
June 2002, MDSI adopted a plan for sale and entered into an agreement to sell its Hosting
and IT Services business segment, Connectria Corporation (Connectria) to former
Connectria shareholders who were both shareholders and employees of the Company. The
transaction closed in July 2002. Pursuant to the terms of the agreement, the Company
received from the former Connectria shareholders 824,700 shares that had an approximate
market value of $2.8 million and the cancellation of 103,088 previously issued stock
options of MDSI as consideration for Connectria. In addition to the share consideration,
a wholly-owned subsidiary of MDSI received a warrant allowing it to purchase up to 50,380
shares of Series A Nonvoting Preferred Stock of Connectria at a price of $50 per share
exercisable for a period of five years. The Series A Nonvoting Preferred Stock of
Connectria has a face value of $100 per share, bears a dividend of five percent per
annum, bears a liquidation preference equal to the face value, may be redeemed at
Connectrias option at any time, and must be redeemed by Connectria upon a capital
infusion of $10 million or greater. In addition MDSI has advanced to Connectria $500,000,
consisting of a loan in the principal amount of $250,000 with a two year term, bearing
interest at 5%, and $250,000 for prepaid hosting services. The loan was repaid subsequent
to December 31, 2003. The Company recognized a gain of $12,419 on the disposal of
Connectria. Connectria represented a significant segment of the Companys business.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
businesses are accounted for as discontinued operations and for reporting purposes the
results of operations, financial position and cash flow for the year ended December 31,
2002 are segregated from those of continuing operations for the period. The Company has
included in the results of the discontinued operations, the sale proceeds, the costs of
disposition, the results of operations from the measurement date to the disposal date and
an estimate of the costs to complete the remaining contracts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|2. |  | DISCONTINUED
OPERATIONS (Continued)
|-- |  | -----------------------------------

| | Connectria
Corporation (continued)
| | ----------------------------------

| | Summarized
financial information of the discontinued operations is as follows:
| | ------------------------------------------------------------------------------

|                                                  | December 31, 2004 | December 31, 2003 | December 31, 2002
|------------------------------------------------- | ----------------- | ----------------- | -----------------
|                                                  |                   |                   |                  
|Revenues from discontinued operations             |                   |                   | $                
|                                                  |                   |                   |                  
|Income before income taxes                        |                   |                   |                  
|                                                  |                   |                   |                  
|Operating income to measurement date              |                   |                   |                  
|Estimated income on disposal (net of income taxes |                   |                  
|of 2002 $5,322)                                   |                   |                   |                  
|                                                  |                   |                   |                  
|Income from discontinued operations               |                   |                   | $                
|                                                  |                   |                   |                  

| | Cash
flow of discontinued operations
| | ------------------------------------

|                                     | December 31, 2004 | December 31, 2003 | December 31, 2002
|------------------------------------ | ----------------- | ----------------- | -----------------
|                                     |                   |                   |                  
|Operating activities                 |                   |                   | $                
|Investing activities                 |                   |                   |                  
|Financing activities                 |                   |                   |                  
|                                     |                   |                   |                  
|Cash used in discontinued operations |                   |                   | $                
|                                     |                   |                   |                  

|3. |  | CAPITAL
ASSETS
|-- |  | --------------

|                               | 2004 | 2003
|------------------------------ | ---- | ----
|                               |      |     
|Computer hardware and software |      |     
|Furniture and fixtures         |      |     
|Leasehold improvements         |      |     
|                               |      |     
|                               |      |     
|                               |      |     
|Less: accumulated amortization |      |     
|Computer hardware and software |      |     
|Furniture and fixtures         |      |     
|Leasehold improvements         |      |     
|                               |      |     
|                               |      |     
|                               |      |     
|                               |      |     
|                               |      |     

| | During
the year ended December 31, 2004, the Company had an active capital lease arrangement for
computer hardware in the amount of $2,386,574 (2003  $3,540,336) and recorded
accumulated amortization of $1,181,817 (2003  $1,280,535) relating to these assets
(note 9(a)).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

56

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|4. |  | ACCOUNTS
PAYABLE
|-- |  | ----------------

|                       | 2004 | 2003
|---------------------- | ---- | ----
|                       |      |     
|Trade accounts payable |      |     
|Other                  |      |     
|                       |      |     
|                       |      |     
|                       |      |     

|5. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------

| | (a) |  | Stock
options
| | --- |  | -------------

| | The
Company adopted its Stock Option Plan to provide options to purchase common shares of the
Company for its employees, officers, directors and consultants. The options granted
pursuant to the Stock Option Plan are exercisable at a price which is equal to the fair
market value of the common shares at the time the options are granted. The options
typically vest over a three-year period and the term of the option is typically five
years. The maximum number of common shares reserved for issuance under the Stock Option
Plan, including current options outstanding, is 2,400,000 common shares. Upon acquisition
of Connectria the Company assumed certain obligations under the Connectria Stock Option
Plan, and all future option issuances will occur under the MDSI Plan. As a result of the
divestiture of Connectria (note 2) all outstanding options under the Connectria plan were
cancelled during 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
resulting position of the two Stock Option plans is as follows:
| | -------------------------------------------------------------------

|                                 | Connectrial Plan
Number of
Shares | MDSI Plan
Number of Shares | Total
Number of 
Shares | Weighted
Average
Price
|-------------------------------- | --------------------------------- | -------------------------- | ----------------------- | ----------------------
|                                 |                                  
|Outstanding at December 31, 2001 |                                   |                            |                         | 427,143               
|                                 |                                  
|Granted                          |                                   |                            |                         | --                    
|Exercised                        |                                   |                            |                         | (253,077              
|Cancelled                        |                                   |                            |                         | (174,066              
|                                 |                                  
|Outstanding at December 31, 2002 |                                   |                            |                         | --                    
|                                 |                                  
|Granted                          |                                   |                            |                         | --                    
|Exercised                        |                                   |                            |                         | --                    
|Cancelled                        |                                   |                            |                         | --                    
|                                 |                                  
|Outstanding at December 31, 2003 |                                   |                            |                         | --                    
|                                 |                                  
|Granted                          |                                   |                            |                         | --                    
|Exercised                        |                                   |                            |                         | --                    
|Cancelled                        |                                   |                            |                         | --                    
|Expired                          |                                   |                            |                         | --                    
|                                 |                                  
|Outstanding at December 31, 2004 |                                   |                            |                         | --                    
|                                 |                                  

57

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|5. |  | STOCKHOLDERS EQUITY
(Continued)
|-- |  | --------------------------------

| | (a) |  | Stock
options (continued)
| | --- |  | -------------------------

| | The
following table summarizes information concerning options outstanding at December 31,
2004:
| | -----------------------------------------------------------------------------------------------

|                | Options Outstanding | Options Exercisable
|--------------- | ------------------- | -------------------
|                |                     |                    
|
|                |                     |                    
|$0 - $4.39      |                     |                    
|$4.40 -$4.93    |                     |                    
|$4.94 - $9.62   |                     |                    
|$9.63 - $19.65  |                     |                    
|$19.66 - $32.88 |                     |                    
|                |                     |                    
|                |                     |                    
|                |                     |                    

| | At
December 31, 2003 and 2002, 1,191,248 and 1,291,181 options were outstanding at a
weighted average exercise price of $5.67 and $6.96 respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Stock
purchase plan
| | --- |  | -------------------

| | The
Company has established a voluntary stock compensation arrangement for its full and
part-time employees to purchase common shares of the Company by way of payroll deductions
for a maximum of CDN$10,000 for each employee per year. The subscription price of common
shares purchased under the 2002 Stock Purchase Plan is determined based upon a weighted
average market price of the Companys common shares each quarter, less 15%. During
the year ended December 31, 2004, 10,405 (2003  37,375; 2002  85,405) common
shares were issued under the Stock Purchase Plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Shareholder
rights plan
| | --- |  | -----------------------

| | At
the Annual General Meeting on May 6, 1999, the Companys shareholders approved
the adoption of a Shareholder Rights Plan, similar to those adopted by other Canadian
companies. Under the terms of the Plan, rights were attached to the common shares of the
Company. These rights became marketable and exercisable only after certain specified
events related to the acquisition of, or announcement of an intention to acquire, 20% or
more of the outstanding common shares of the Company. The Plan had a 5-year term and
expired on May 6, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|6. |  | INCOME
TAXES
|-- |  | ------------

| | The
provision for income taxes consists of the following:
| | ---------------------------------------------------------

|                                                   | 2004 | 2003 | 2002
|-------------------------------------------------- | ---- | ---- | ----
|                                                   |      |      |     
|Current:                                           |      |      |     
|Canada                                             |      |      | $   
|Foreign                                            |      |      |     
|                                                   |      |      |     
|Total current provision for (recovery of) income   |      |     
|taxes from continuing operations                   |      |      |     
|                                                   |      |      |     
|Deferred:                                          |      |     
|Canada                                             |      |      |     
|Foreign                                            |      |      |     
|                                                   |      |      |     
|Total deferred  (recovery of) provision for income |      |     
|taxes from continuing operations                   |      |      |     
|                                                   |      |      |     
|Provision for (recovery of) income taxes from      |      |     
|continuing operations                              |      |      | $   
|                                                   |      |      |     

| | The
provision for income taxes  reported  differs from the amounts  computed by applying the
 cumulative  Canadian          Federal and provincial  income tax rates to the loss from
 continuing  operations  before tax provision due to the          following:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | 2004 | 2003 | 2002
|---------------------------------------------------- | ---- | ---- | ----
|                                                     |      |      |     
|Statutory tax rate                                   |      |      |     
|Provision for (recovery of) income taxes from        |      |     
|continuing operations computed at statutory rate     |      |      | $   
|Tax benefits not recognized in the period that the   |      |     
|benefit arose                                        |      |      |     
|Lower effective rate on earnings of foreign          |      |     
|subsidiaries                                         |      |      |     
|Amortization and write-down of intangible assets not |      |     
|deductible for tax                                   |      |      |     
|Other                                                |      |      |     
|                                                     |      |      |     
|Provision for (recovery of) income taxes from        |      |     
|continuing operations                                |      |      | $   
|                                                     |      |      |     

| | The
principal components of the deferred portion of the provision for income taxes are as
follows:
| | --------------------------------------------------------------------------------------------------

|                                           | 2004 | 2003 | 2002
|------------------------------------------ | ---- | ---- | ----
|                                           |      |      |     
|Depreciation                               |      |      | $   
|Deferred revenue                           |      |      |     
|Other                                      |      |      |     
|                                           |      |      |     
|Total deferred provision for (recovery of) |      |     
|income taxes                               |      |      | $   
|                                           |      |      |     

59

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|6. |  | INCOME
TAXES (Continued)
|-- |  | ------------------------

| | The
approximate tax effect of each type of temporary difference that gave rise to the Companys
deferred tax assets are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------

|                               | 2004 | 2003
|------------------------------ | ---- | ----
|                               |      |     
|Operating loss carry forwards  |      |     
|Deferred revenue               |      |     
|Capital assets and intangibles |      |     
|Reserves and accrued expenses  |      |     
|Other                          |      |     
|                               |      |     
|                               |      |     
|Less: Valuation allowance      |      |     
|                               |      |     
|Net deferred tax assets        |      |     
|                               |      |     

| | Reported
as:
| | ------------

|                                            | 2004 | 2003
|------------------------------------------- | ---- | ----
|                                            |      |     
|Current deferred tax assets (liabilities)   |      |     
|Long-term deferred tax assets (liabilities) |      |     
|                                            |      |     
|Net deferred tax assets                     |      |     
|                                            |      |     

| | At
December 31, 2004, the Company has the following loss carry-forwards available for tax
purposes:
| | ---------------------------------------------------------------------------------------------------

|Country | Amount | Expiry    
|------- | ------ | ----------
|Canada  |        | 10,094,000
|US      |        | 11,200,000

|7. |  | DEFERRED
REVENUE
|-- |  | ----------------

| | Deferred
revenue is comprised of deferrals for software and service fees, and maintenance and
support fees. The principal components of deferred revenue at December 31, 2004 and
2003 were as follows
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | 2004 | 2003
|----------------------- | ---- | ----
|                        |      |     
|Software and services   |      |     
|Maintenance and support |      |     
|                        |      |     
|Total Deferred Revenue  |      |     
|                        |      |     

|8. |  | RELATED
PARTY TRANSACTIONS
|-- |  | --------------------------

| | Related
party transactions not disclosed elsewhere in these financial statements include
professional fees and expenses associated with investigating potential corporate
transactions during the year ended December 31, 2004 of $795,406 (2003  $nil; 2002
 $nil) to a company with a director in common with MDSI.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

60

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|9. |  | COMMITMENTS
AND CONTINGENCIES
|-- |  | -----------------------------

| | (a) |  | Capital
and operating leases
| | --- |  | ----------------------------

| | At
December 31, 2004, future minimum payments under capital and non-cancelable operating
leases for office space and computer equipment are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Capital
Leases | Operating
Leases
|--------------------------------------------------- | -------------- | ----------------
|                                                    |                |                 
|2005                                                |                |                 
|2006                                                |                |                 
|2007                                                |                |                 
|2008                                                |                |                 
|2009                                                |                |                 
|Thereafter                                          |                |                 
|                                                    |                |                 
|Total minimum lease payments                        |                |                 
|                                                    |                |                 
|Less: amount representing interest                  |                |                 
|                                                    |                |                 
|Present value of net current minimum lease payments |                |                 
|                                                    |                |                 

| | Rent
expense for the year ended December 31, 2004 in respect of operating leases for office
space was $1,991,518 (2003  $1,468,887; 2002  $1,139,352). This is net of
subleases in the year for $746,370 (2003  $738,482; 2002  $426,090)
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Line
and letters of credit
| | --- |  | --------------------------

| | The
Company has an operating line of credit with a Canadian commercial bank to borrow up to
CDN$10 million (US$8.3 million) (2003  CDN$10 million), secured by assets of the
Company, which bears interest at prime plus 0.25% (2003  prime plus 0.25%). As at
December 31, 2004, the Company was not utilizing the operating line of credit,
except as security for an outstanding letter of credit. The Company has provided a letter
of credit in the amount of CDN $1.4 million (USD$1.2 million) expiring October 1,
2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has a revolving, demand term loan facility available by way of floating rate
advances or Cost of Funds loans (COF) with a Canadian commercial bank to
finance up to 75% of the cost of the capital expenditures (Capex), to a
maximum of CDN$1.5 million (US$1.2 million). Floating rate advances bear interest at
prime plus 0.25% and COF loans bear interest at COF+ 2%. As at December 31, 2004,
the Company was not utilizing the loan facility.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has a letter of credit facility with a Canadian commercial bank for issuance of
letters of credit in support of contracts for up to CDN$10 million (US$8.3 million) (2003
 CDN$10 million), which bears interest at prime plus 0.50% per annum. As at
December 31, 2004, the Company has not issued any letters of credit under this facility.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Contingency
| | --- |  | -----------

| | During
the year ended December 31, 2003, the Company was involved in a legal dispute with a
customer. On February 2, 2004 the customer and the Company settled this lawsuit. Under
the settlement agreement each company fully released and discharged the other from all
outstanding legal claims without further financial compensation. As a result of this
settlement the Company wrote off the remaining $2.7 million long term receivable due from
the customer as no further consideration will be received from this customer under terms
of the settlement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|9. |  | COMMITMENTS
AND CONTINGENCIES (Continued)
|-- |  | -----------------------------------------

| | (c) |  | Contingency
(continued)
| | --- |  | -----------------------

| | From
time to time, the Company is a party to litigation and claims incidental to the ordinary
course of its business. While the results of litigation and claims cannot be predicted
with certainty, the Company believes that the final outcome of such matters will not have
a material adverse effect on the Companys business, financial condition, operating
results and cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | Commitment
| | --- |  | ----------

| | During
the year ended December 31, 2003, the Company entered into a significant customer
contract in which the Company agreed to utilize a certain amount of local services and
create a certain amount of commercial activity in South Africa. The Company is required
to utilize local content or obtain credits equivalent to approximately $7.1 million over
a seven-year period ending May 2010. The Company has furnished a performance guarantee
equal to approximately 5% of such amounts. The Company expects to fulfill its obligation
through a number of activities, including the establishment of a software development
center in South Africa, the provision of technical services, and the provision of
training to local systems integrators who will be able to provide implementation services
with respect to the Companys software products. As the Company expects to fulfill
its obligations through the purchase of services in the normal course of business, no
liability has been established for these future-spending commitments. As at December 31,
2004 the Company has generated an estimated $989,328 (2003  $175,000) of credits
relating to this obligation. The Companys obligation is expected to increase as a
result of contract expansions. In the event that the Company determines that it will be
unable to meet this commitment in the normal course of operations it will record a
liability in the period such circumstances are determinable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | Indemnification
| | --- |  | ---------------

| | The
Company typically includes indemnification provisions within license and implementation
service agreements, which are consistent with those prevalent in the software industry.
Such provisions indemnify customers against actions arising from patent infringements
that may arise through the normal use or proper possession of the Companys
software. To date the Company has not experienced any significant obligations under
customer indemnification provisions and accordingly, no amounts have been accrued for
such potential indemnification obligations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. |  | SEGMENTED
INFORMATION
|--- |  | ---------------------

| | As
described in Note 2, the Company reclassified the results of operations of Connectria as
discontinued operations. The business was previously disclosed as a separate operating
segment. As a result of discontinuing this business, the Company now only operates in a
single business segment, the Field Service business segment. The segment data below
excludes amounts related to the discontinued operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

62

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|10. |  | SEGMENTED
INFORMATION (Continued)
|--- |  | ---------------------------------

| | Geographic
information
| | ----------------------

| | The
Company earned revenue from sales to customers and has long-lived assets, including
capital assets and goodwill, in the following geographic locations:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | 2004 | 2003 | 2002
|------------------- | ---- | ---- | ----
|                    |      |      |     
|
|                    |      |      |     
|Canada              |      |      | $   
|United States       |      |      |     
|Europe, Middle East |      |     
|and Africa          |      |      |     
|Asia and other      |      |      |     
|                    |      |      |     
|                    |      |      | $   
|                    |      |      |     

| | Major
customers and concentration of credit risk.
| | -------------------------------------------------

| | During
the year ended December 31, 2004 the Company earned revenue from one customer of
$9,623,179 (2003  $8,532,086; 2002  $3,472,229) and revenue from a second
customer of $5,307,072 (2003  $8,098,509; 2002  $1,661,818), representing
19.3% (2003  18.0%; 2002  9.1%) and 10.6% (2003  17.1%; 2002 4.3%)
of revenue respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. |  | SUPPLEMENTAL
CASH FLOW DISCLOSURES
|--- |  | ----------------------------------

| | Changes
in non-cash working capital items
| | -----------------------------------------

|                                         | 2004 | 2003 | 2002
|---------------------------------------- | ---- | ---- | ----
|                                         |      |      |     
|Accounts receivable                      |      |      | $   
|Prepaid expenses and other assets        |      |      |     
|Income taxes payable                     |      |      |     
|Accounts payable and accrued liabilities |      |      |     
|Deferred revenue                         |      |      |     
|                                         |      |      |     
|                                         |      |      | $   
|                                         |      |      |     

|12. |  | FINANCIAL
INSTRUMENTS
|--- |  | ---------------------

| | The
carrying value of cash and cash equivalents, accounts receivable, certain other assets,
accounts payable, accrued liabilities, and capital lease obligations approximate their
respective fair values as of December 31, 2004 and 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys revenues have historically been dependent on large contracts from a
limited number of customers in the utility, telecommunications and cable sectors. Where
exposed to credit risk, the Company mitigates this risk by analyzing the counter-partiesfinancial
condition prior to entering into agreements, establishing billing arrangements and
assessing the collectibility of the account on an ongoing basis. As these customers are
geographically dispersed, concentrations of credit risk are further mitigated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|13. |  | RESTRUCTURING
CHARGE
|--- |  | --------------------

| | During
the year ended December 31, 2004 the Company announced a restructuring plan approved by
the Companys Board of Directors to enable the Company to operate in a more
effective and efficient manner and reduce costs. The Company recorded a charge of $1.6
million in connection with this restructuring. The $1.6 million charge relates to costs
of workforce reduction for approximately 30 affected employees, stock based compensation
charges and other related costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2004 a provision of approximately $255,800 remained from a restructuring
charge taken in 2001. The remaining provision relates to excess space the Company has
under lease.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal
2001
| | -----------

| | On
March 30, 2001, the Company, in response to uncertain economic conditions and poor
financial performance, announced a restructuring plan approved by the Companys
Board of Directors designed to reduce operating costs that resulted in the elimination of
34 full time and contractor positions. On May 11, 2001, the Company announced a Board
approved update to this plan, which resulted in the elimination of an additional 115
positions. As part of this restructuring, the Company recorded a charge to earnings of
$6.1 million in the year ended December 31, 2001. These charges were reflected in the
restructuring charge line item of the Companys Consolidated Statement
of Operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
breakdown of the nature of the charges and the costs incurred to date is as follows:
| | --------------------------------------------------------------------------------------

|                   | Workforce 
Reduction | Provision for
excess office
space | Non-cash
writedown of
capital assets | Other      | Total
|------------------ | -------------------- | --------------------------------- | ------------------------------------ | ---------- | -----
|Reserve balance at |                      |                                   |                                      |            |      
|December 31, 2001  |                      |                                   | $                                    | 1,375,000  |      
|Cash payments      |                      |                                   |                                      | (1,375,000 | )    
|                   |                     
|Reserve balance at |                      |                                  
|December 31, 2002  |                      |                                   |                                      | --         |      
|Cash payments      |                      |                                   |                                      | --         |      
|                   |                     
|Reserve balance at |                      |                                  
|December 31, 2003  |                      |                                   |                                      | --         |      
|Cash payments      |                      |                                   |                                      | --         |      
|                   |                     
|Reserve balance at |                      |                                  
|December 31, 2004  |                      |                                   | $                                    | --         |      
|                   |                     

| | The
Company recorded a $1.9 million provision in 2001 relating to surplus office space under
long-term leases held by the Company at two locations. The Company has incurred
approximately $1.6 million of cash costs relating to this provision leaving an accrual of
$255,800 remaining as at December 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal
2004
| | -----------

| | During
the three months ended September 30, 2004 the Company announced a restructuring plan
approved by the Companys Board of Directors to enable the Company to operate in a
more effective and efficient manner and reduce costs. The Company recorded a charge of
$1.5 million in connection with this restructuring. The $1.5 million charge relates to
costs of workforce reduction for approximately 30 affected employees, stock based
compensation charges and other related costs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the three months ended December 31, 2004 the Company accrued a further $0.1 million in
connection with this restructuring.
| | ---------------------------------------------------------------------------------------------------------------------------------

64

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|13. |  | RESTRUCTURING
CHARGE (Continued)
|--- |  | --------------------------------

| | Fiscal
2004 (continued)
| | -----------------------

| | A
breakdown of the nature of the restructuring charges and the costs incurred to date is as
follows:
| | ----------------------------------------------------------------------------------------------------

|                                      | Workforce
Reduction | Stock-based
compensation | Other | Total    
|------------------------------------- | ------------------- | ------------------------ | ----- | ---------
|Restructuring charges, three months   |                     |                          |       |          
|ending September 30, 2004             |                     |                          | $     | 1,385,000
|Cash payments                         |                     |                          |       | (200,000 
|Noncash charges                       |                     |                          |       | --       
|                                      |                    
|Reserve balance at September 30, 2004 |                     |                          |       | 1,185,000
|Additional charges                    |                     |                          |       | 100,000  
|Cash payments                         |                     |                          |       | (702,076 
|Noncash charges                       |                     |                          |       | --       
|                                      |                    
|Reserve balance at December 31, 2004  |                     |                          | $     | 582,924  
|                                      |                    

| | The
Company has recorded a charge of $1,485,000 related to employee separation costs as a
result of the elimination of approximately 30 positions made in an effort to increase
efficiency and reduce costs. As at December 31, 2004 cash disbursements of approximately
$902,076 had been made related to this charge leaving an accrual of approximately
$582,924 relating to workforce reduction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has recorded a charge of $48,921 related to the changing of vesting conditions on
employees, stock options as a result of termination.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
restructuring costs of $82,328 relate to outplacement and related expenses the Company
expects to incur as a result of the September 2004 restructuring. As at December 31, 2004
no amounts have been paid in relation to these costs resulting in an accrual of $82,328
as at December 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. |  | STRATEGIC
EXPENSES
|--- |  | ------------------

| | Strategic
expenses consist of professional fees and expenses associated with investigating
potential corporate transactions that the Company considered during the years ended
December 31, 2004 and 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2003, the Company retained Bear, Stearns & Co. Inc. as financial advisor to the Board
of Directors, to assist the Board in evaluating potential business combinations,
financings and other strategic alternatives to help the Company offer enhanced products
and services to its customers and maximize shareholder value. As a result of this
process, on April 12, 2004, the Company signed a definitive combination agreement with At
Road providing for the acquisition of the Company by At Road. On July 27, 2004 the
Company announced that the Company and At Road had mutually agreed to terminate the
agreement. The termination of the agreement has not resulted in any penalty or
termination fee being payable by either party.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2004, 2003, and 2002 
(Expressed in United States dollars)

|15. |  | DIFFERENCES
BETWEEN UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP) AND
CANADIAN GENERALLYACCEPTED ACCOUNTING PRINCIPLES (CANADIAN GAAP)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
financial statements have been prepared in accordance with US GAAP, which differ in some
respects from Canadian GAAP.
| | ---------------------------------------------------------------------------------------------------------------------------

MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)

|                                                | As of December 31,
|----------------------------------------------- | ------------------
|                                                |                   
|
|                                                |                   
|
|Assets                                          |                   
|Current Assets                                  |                   
|Cash and cash equivalents                       |                   
|Accounts Receivable                             |                   
|Trade (net of allowance for doubtful accounts   |                   
|of $288,246; 2003 - $2,792,415)                 |                   
|Unbilled                                        |                   
|Prepaid expenses and other assets               |                   
|Current deferred/future income taxes            |                   
|                                                |                   
|Total current assets                            |                   
|Capital assets, net                             |                   
|Deferred income taxes                           |                   
|                                                |                   
|Total assets                                    |                   
|                                                |                   
|Liabilities and stockholders' equity            |                   
|Current Liabilities                             |                   
|Accounts Payable                                |                   
|Accrued liabilities                             |                   
|Accrued restructuring charge                    |                   
|Income taxes payable                            |                   
|Deferred revenue                                |                   
|Current obligations under capital lease         |                   
|                                                |                   
|Total current liabilities                       |                   
|Long term deferred/future taxes                 |                   
|Obligations under capital leases                |                   
|                                                |                   
|Total liabilities                               |                   
|Stockholders' Equity                            |                   
|Common Stock                                    |                   
|Authorized:                                     |                   
|Unlimited common shares with no par value       |                   
|Issued: 8,353,179 shares; 2003:8,218,118 shares |                   
|Additional paid-up capital                      |                   
|Accumulated other comprehensive loss            |                   
|                                                |                   
|Other stockholders' equity                      |                   
|Cumulative translation adjustment               |                   
|Deficit                                         |                   
|                                                |                   
|                                                |                   
|                                                |                   
|Total liabilities and stockholders' equity      |                   
|                                                |                   

66

---

MDSI MOBILE DATA SOLUTIONS INC. 
Consolidated Statements of Operations
(Expressed in United States Dollars)

|                                         | Year ended December 31,
|---------------------------------------- | -----------------------
|                                         |                        
|
|                                         |                        
|
|                                         |                        
|Software and Services                    |                        
|Maintenance and support                  |                        
|Third party products and services        |                        
|                                         |                        
|                                         |                        
|                                         |                        
|Direct costs                             |                        
|                                         |                        
|Gross profit                             |                        
|                                         |                        
|Operating expenses                       |                        
|Research and development                 |                        
|Sales and marketing                      |                        
|General and administrative               |                        
|Restructuring charge                     |                        
|Strategic expenses                       |                        
|Provision for doubtful accounts          |                        
|                                         |                        
|                                         |                        
|                                         |                        
|Operating income (loss)                  |                        
|                                         |                        
|Other income (expense)                   |                        
|                                         |                        
|Income (loss) from continuing operations |                        
|before tax provision                     |                        
|                                         |                        
|(Provision for) recovery of income taxes |                        
|from continuing operations               |                        
|                                         |                        
|                                         |                        
|Income (loss) from continuing operations |                        
|Income from discontinued operations      |                        
|                                         |                        
|                                         |                        
|Net income (loss) for the year           |                        
|                                         |                        
|Income (loss) per common share           |                        
|Income (loss) from continuing operations |                        
|Basic and diluted                        |                        
|Net income (loss)                        |                        
|Basic and diluted                        |                        

67

---

# MDSI MOBILE DATA
SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)

|                                              | Year ended December 31,
|--------------------------------------------- | -----------------------
|                                              |                        
|
|                                              |                        
|
|                                              |                        
|Net income (loss) from continuing operations  |                        
|for the year                                  |                        
|Items not affecting cash:                     |                        
|Depreciation                                  |                        
|Write down in value of long term receivable   |                        
|Deferred/future income taxes                  |                        
|Stock-based compensation charge               |                        
|Changes in non-cash operating working capital |                        
|items                                         |                        
|                                              |                        
|Net cash provided by operating activities     |                        
|Cash flows from investing activities          |                        
|Acquisition of capital assets                 |                        
|                                              |                        
|Net cash used in investing activities         |                        
|                                              |                        
|Cash flows from financing activities          |                        
|Issuance of common shares                     |                        
|Repayment of capital leases                   |                        
|                                              |                        
|Net cash used in financing activities         |                        
|                                              |                        
|Net cash provided by (used in) continuing     |                        
|operations                                    |                        
|Net cash used in discontinued operations      |                        
|                                              |                        
|Net cash inflow (outflow)                     |                        
|Cash and cash equivalents, beginning of year  |                        
|                                              |                        
|Cash and cash equivalents, end of year        |                        
|                                              |                        
|Supplemental disclosure of cash information   |                        
|Cash payment for interest                     |                        
|Cash payment (refund) for taxes               |                        

68

---

Material differences between Canadian
and US GAAP and their effect on the financial statements in the prior years are summarized
below. There are no material differences between Canadian and US GAAP which affect the
consolidated balance sheets as at December 31, 2004 and 2003 and the statements of cash
flows for the years ended December 31, 2004, 2003, and 2002.

|Results of operations                                       | Year ended December 31,
|----------------------------------------------------------- | -----------------------
|                                                            |                        
|
|                                                            |                        
|Income (loss) for the year from continuing operations       |                        
|Under US GAAP                                               |                        
|Stock based compensation charge (a)                         |                        
|                                                            |                        
|                                                            |                        
|Income (loss) for the year from continuing operations under |                        
|Canadian GAAP                                               |                        
|Income for the year from discontinued operations            |                        
|under US GAAP and Canadian GAAP                             |                        
|                                                            |                        
|Net income (loss) for the year under Canadian GAAP          |                        
|                                                            |                        
|                                                            |                        
|Basic income (loss) per common share from continuing        |                        
|operations under Canadian GAAP                              |                        
|                                                            |                        
|Weighted average shares outstanding under Canadian GAAP     |                        
|                                                            |                        
|Diluted income (loss) per common share under Canadian GAAP  |                        
|                                                            |                        
|Weighted average shares outstanding under Canadian GAAP     |                        

| | (a) |  | Stock-based
compensation
| | --- |  | ------------------------

| | Effective
January 1, 2003, the Company adopted the new amended provisions of the CICA Handbook
Section 3870  Stock based Compensation and Other Stock-based Payments which
required entities to account for employee stock options using the fair value based method
under Canadian GAAP. In accordance with the transitional options permitted under amended
Section 3870, the Company prospectively applied the fair value based method to all
employee stock options granted on or after January 1, 2003, using the fair value based
method.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of each option grant was estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | Year ended December 31,
|----------------------- | -----------------------
|
|                        |                        
|Risk-free interest rate |                        
|Dividend yield          |                        
|Expected life           |                        
|Volatility              |                        

69

---

| | As
a result of the differing methods of recognizing stock based compensation under Canadian
GAAP and US GAAP, a charge of $252,506 (2003  $227,401; 2002  $nil) would
have been or has been recognized in the Canadian GAAP statement of operations and the
same amount was recorded as other stockholders equity, while no corresponding
amount for stock based compensation has been recognized in the US GAAP consolidated
financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on net income (loss) under Canadian GAAP if the
fair value based method had been applied to all options awarded on or after January 1,
2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Results of operations                                               | Year ended December 31,
|------------------------------------------------------------------- | -----------------------
|                                                                    |                        
|
|                                                                    |                        
|Net income (loss) under Canadian GAAP                               |                        
|Add:                                                                |                        
|Stock-based employee compensation expense included in net income    |                        
|(loss), net of related tax effects                                  |                        
|Deduct:                                                             |                        
|Stock-based employee compensation expense determined under the fair |                        
|value based method for all awards from the original effective date  |                        
|of January 1, 2002, net of related tax effects                      |                        
|                                                                    |                        
|Pro forma net income (loss) under Canadian GAAP                     |                        
|                                                                    |                        
|Income (loss) per share:                                            |                        
|Under Canadian GAAP:                                                |                        
|Basic and diluted                                                   |                        
|Pro forma under Canadian GAAP:                                      |                        
|Basic and diluted                                                   |                        

|(b) |  | Comprehensive
income
|--- |  | --------------------

| | For
US GAAP purposes, the Company reports comprehensive income or loss in accordance with the
provisions of SFAS 130, Reporting Comprehensive Income. Under Canadian GAAP, companies do
not report comprehensive income or loss.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the years ended December 31, 2004, 2003, and 2002 there were no comprehensive income or
loss for the under US GAAP.
| | -----------------------------------------------------------------------------------------------------------------------

|(c) |  | Future
income taxes
|--- |  | -------------------

| | Under
US GAAP tax rates applied in the calculation of future income taxes are those rates that
are passed into law. Under Canadian GAAP substantially enacted rates are used. The
Company determined that there is no material effect on the consolidated financial
statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | StockholdersEquity
|--- |  | -------------------

| | While
there is no net difference between stockholders equity as reported under US GAAP
and under Canadian GAAP, the various components within stockholders equity are
affected by the acquisition in 2000 and disposition in 2002 of Connectria, which was
accounted for using the pooling method under US GAAP and using the purchase method under
Canadian GAAP and by the change in reporting and functional currency from Canadian
dollars to US dollars during the year ended December 31, 2000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

70

---

# Selected Quarterly
Financial Data (unaudited)

The following
table sets forth certain unaudited statement of operations data for each of the eight
quarters beginning January 1, 2003 and ending December 31, 2004 as well as the percentage
of the Companys revenue represented by each item. The unaudited financial statements
have been prepared on the same basis as the audited financial statements contained herein
and include all adjustments, consisting only of normal recurring adjustments, that the
Company considers necessary to present fairly this information when read in conjunction
with the Companys audited financial statements and the notes thereto appearing
elsewhere in this report. In view of the Companys recent restructuring and other
factors, the Company believes that quarterly comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.

|                                  | Three Months Ended
|--------------------------------- | ------------------
|
|
|
|Statement of Operations Data:     |                   
|Revenue:                          |                   
|Software and services             |                   
|Maintenance and support           |                   
|Third party products and services |                   
|                                  |                   
|                                  |                   
|Direct costs                      |                   
|                                  |                   
|Gross profit                      |                   
|                                  |                   
|Operating expenses:               |                   
|Research and development          |                   
|Sales and marketing               |                   
|General and administrative        |                   
|Strategic expenses                |                   
|Restructuring charge              |                   
|Provision for doubtful accounts   |                   
|                                  |                   
|                                  |                   
|                                  |                   
|Operating income (loss)           |                   
|Other income (expense)            |                   
|                                  |                   
|Income (loss) from continuing     |                   
|operations before income tax      |                   
|provision                         |                   
|Provision for income taxes from   |                   
|continuing operations             |                   
|                                  |                   
|Net income (loss) for the period  |                   
|                                  |                   

71

---

The
following table sets forth, for the periods indicated, certain components of the unaudited
selected financial data of the Company as a percentage of total revenue:

|                                  | Three Months Ended
|--------------------------------- | ------------------
|
|
|
|Revenue:                          |                   
|Software and services             |                   
|Maintenance and support           |                   
|Third party products and services |                   
|                                  |                   
|                                  |                   
|Direct costs                      |                   
|                                  |                   
|Gross profit                      |                   
|                                  |                   
|Operating expenses:               |                   
|Research and development          |                   
|Sales and marketing               |                   
|General and administrative        |                   
|Strategic expenses                |                   
|Restructuring expenses            |                   
|Provision for doubtful accounts   |                   
|                                  |                   
|                                  |                   
|                                  |                   
|Operating income (loss)           |                   
|Other income (expense)            |                   
|                                  |                   
|Income (loss) from continuing     |                   
|operations before income tax      |                   
|provision                         |                   
|Provision for income taxes from   |                   
|continuing operations             |                   
|                                  |                   
|Net income (loss) for the period  |                   
|                                  |                   

72

---

Item 9:  Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

None

# Item 9A:  Controls and
Procedures

# Changes in Internal
Control Over Financial Reporting

As
disclosed in the Companys quarterly report on Form 10-Q for the quarter ended March
31, 2004, the Company has undertaken certain steps to strengthen the Companys
internal control over financial reporting. These steps have included implementing a formal
contract review checklist for each new contract, a thorough review and analysis of new
software and implementation contracts by senior members of the Companys accounting
group, a determination of the appropriate revenue recognition treatment for each new
contract by senior members of the accounting group, revisions to the Companys
standard contractual wording, improving communication between the various functional
groups within the Company (namely sales, implementation, accounting and legal) at both the
contract negotiation and execution level and at the implementation level, requiring any
exceptions to the Companys standard contractual wording to be approved at a senior
management level and review by management of any unusual terms which may impact the
Companys historical practice of accounting for revenue. The Companys
management is in the process of a further review and assessment of the Companys
internal control over financial reporting in light of the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 and the rules adopted by the SEC thereunder, which the SEC
currently plans to implement for non-accelerated and foreign filers for fiscal years
ending on or after July 15, 2006. As of the date of this report, the Company is not an
accelerated filer and, accordingly, the Company expects these additional requirements to
apply to the Company for its fiscal year ended December 31, 2006. The Companys
management may recommend and the Company may implement additional changes in the
Companys internal control over financial reporting pursuant to this review. In light
of these additional SEC requirements and the Companys current level of activities,
the Company is evaluating the level of staffing of its finance group.

Except
as described in the foregoing paragraphs, no changes were made in the Companys
internal control over financial reporting during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

# Evaluation of Disclosure
Controls and Procedures

In
connection with the filing of this annual report on Form 10-K, the Companys
management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this report (the Evaluation Date).

Based
upon the evaluation described above, the Chief Executive Officer and Chief Financial
Officer concluded that as of the Evaluation Date, the Companys disclosure controls
and procedures were effective in timely alerting them to the material information relating
to the Company (or its consolidated subsidiaries) required to be included in reports that
the Company files or submits under the Exchange Act.

# Note Regarding Control
Limitations

The
Companys management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that the Companys disclosure controls and procedures or
internal control over financial reporting will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be
detected.

73

---

# Item 9B:  Other
Information

The
Company has reported all information required to be disclosed in a report on Form 8-K
during the fourth quarter of 2004.

74

---

# Part III

# Item 10:  Directors and
Executive Officers of the Registrant

The
following table sets forth certain information concerning the Companys executive
officers and directors as of March 24, 2005:

|Name                             | Age | Position
|-------------------------------- | --- | --------
|                                 |     |         
|Executive Officers               |     |         
|Erik Dysthe                      |     | 67      
|Verne D. Pecho                   |     | 61      
|Neil McDonnell                   |     | 46      
|Glenn Y. Kumoi                   |     | 42      
|Eddie Yip                        |     | 49      
|Directors                        |    
|Peter Ciceri (2)(3)              |     | 49      
|Robert C. Harris, Jr. (1)(2)     |     | 58      
|Peter W. Roberts (3)             |     | 61      
|Marc Rochefort (1)(2)(3)         |     | 57      
|David R. Van Valkenburg(1)(2)(3) |     | 62      
|                                 |     |         

|(1) |  | Member
of Compensation Committee.
|--- |  | ---------------------------------

|(2) |  | Member
of Corporate Governance and Nominating Committee.
|--- |  | --------------------------------------------------------

|(3) |  | Member
of Audit Committee.
|--- |  | --------------------------

Erik
Dysthe has served as Chairman of the Company since its inception. Mr. Dysthe was
appointed Chief Executive Officer of the Company in March 2001 and President in March
2002. He also served as Chief Executive Officer of the Company from its inception to
November 1998 and President from its inception until February 1996. Mr. Dysthe also serves
as a director of Digital Dispatch Systems Inc. and Optimal Geomatics Inc.

Verne
D. Pecho has served as Vice President  Finance and Administration and Chief
Financial Officer of the Company since June 1996. From June 1995 to June 1996, Mr. Pecho
was an independent consultant. From September 1992 to June 1995, Mr. Pecho was Executive
Vice President and Chief Financial Officer of Versacold Corporation.

D.
Neil McDonnell has served as Chief Operating Officer of the Company since
          September 2004. From January 2004 to September 2004, Mr. McDonnell was Senior
          Vice President Sales and Operations for the Americas and Asia. Prior to joining
          the Company, from 2000 to 2003 he was the Chief Executive Officer and President
          of Intrinsyc Software, which designs and manufactures intelligent devices and
          networking software. From 1997 to 2000, Mr. McDonnell was the Executive Vice
          President and General Manager of Plexus Systems Design, which develops mortgage
          administration enterprise software. From 1994 to 1996, Mr. McDonnell was Vice
          President Sales and Marketing with Dynapro Systems, developers of flat panel
          industrial computers and from 1993 to 1994, he also held the same position at
          Epic Data, which designs and manufactures data collection systems. Mr.
McDonnell           has previously held the position of Managing Director at Epic Data
Europe from           1991 to 1993 and various sales and operations positions at Northern
Telecom from           1981to1989. Mr. McDonnell also serves as a director
for British           Columbia Lottery Corp.

Glenn
Y. Kumoi has served as Chief Administrative Officer of the Company since September
2004, and is responsible for the Companys legal, human resources and administrative
affairs. From September 2002 to September 2004, he was the Companys Chief Legal
Officer. Prior to that he was Managing Director  Europe, Middle East and Africa of
the Company since May 2001. Prior to that he was Vice President  Chief Legal Officer
of the Company since October 1999. From December 1998 to October 1999, Mr. Kumoi was Vice
President  General Counsel of the Company. From April 1997 to November 1998, Mr.
Kumoi served as Vice President  Customer Contracts of the Company. From 1994 to
1996, Mr. Kumoi was a lawyer at the firm of Wedge and Company, Computer Law in Vancouver,
British Columbia.

Eddie
Yiphas served as Vice President  Product Development of the Company since
January 2005. From March 1996 to December 2004, Mr. Yip served the Company in various
technical positions, including the Director of Software Production January 1999 to
December 2004 and Software Development Manager from April 1998 to December 1998. Prior to
joining the Company, Mr. Yip held engineering positions at MacDonald, Dettwiler and
Associates Ltd. from 1994 to 1996 and Logica Plc UK from 1988 to 1993.

75

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David
R. Van Valkenburghas served as a director of the Company since June 2001.  Mr.
Van Valkenburg is currently a management consultant.  From 1999 to 2000, he was
Executive Vice President of MediaOne Group, Inc., and from 1996 to 1999 he was Executive
Vice President, MediaOne International, and from 1997 to 1999 CEO/COO of Telewest
Communications, PLC.  From 1994 to 1995, Mr. Van Valkenburg was Senior Vice
President, Multimedia Group, MediaOne Group Inc. Mr. Van Valkenburg also serves as a
director of Harmonic Inc., Moscow Cablecom Corp and several private companies.

Peter
Ciceri has served as a director of the Company since June 2001. Mr. Ciceri is
currently a management consultant and a Corporate Director. From 2000 to 2001, he was
President of Rogers Telecom, Inc. and from 1997 to 2000 he was President and Managing
Director of Compaq Canada Ltd. and Vice-President Compaq Computer Corporation (US). Mr.
Ciceri also serves as an independent lead director of Sierra Wireless, Inc. and several
private companies.

Robert
C. Harris, Jr. has served as a director of the Company since December 1995. Mr. Harris
is currently Senior Managing Director, Group Head, Global Technology of Bear Stearns &
Co., Inc. Mr. Harris was a co-founder and Managing Director of Unterberg Harris from May
1989 until November 1997. Mr. Harris also serves as a director of Pacific Media PLC, and
several private companies.

Marc
Rochefort has served as a director of the Company since June 1996. Mr. Rochefort has
been a partner at the law firm of Desjardins Ducharme Stein Monast in Montreal, Quebec
since May 1993. From March 1989 to April 1993, Mr. Rochefort was a partner at the law firm
of Clark Lord Rochefort Fortier. Mr. Rochefort also serves as a director of Mont
Saint-Sauveur International Inc., as well as numerous other private companies.

Peter
W. Robertswas appointed by the Companys Board on March 21, 2005 and to the
Audit Committee on March 22, 2005. Mr. Roberts was Chief Financial Officer and Corporate
Secretary of Sierra Wireless, Inc. from 1999 to 2004. He is now retired from Sierra
Wireless, Inc. Prior to joining Sierra Wireless, Mr. Roberts served in senior
financial roles over a fifteen-year period with Service Corporation UK plc, The Loewen
Group Inc., Overwaitea Foods and Sydney Development Corporation. Before this, Mr. Roberts
practiced a decade in public accounting. He holds Certified Public Accountant and
Chartered Accountant designations and is a member of the Council of the Institute of
Chartered Accountants of B.C. and will serve as its President in 2006.

76

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# Board of Directors

Each
member of the Board of Directors is elected annually and holds office until the next
annual meeting of shareholders or until his successor has been elected or appointed,
unless his office is earlier vacated in accordance with the Bylaws of the Company or the
provisions of the CBCA. Officers serve at the discretion of the Board and are appointed
annually. The Companys Board of Directors currently has three committees, the Audit
Committee, the Corporate Governance and Nominating Committee and the Compensation
Committee.

# Committees of the Board
of Directors

The
Audit Committee recommends independent accountants to the Company to audit the
Companys financial statements, discusses the scope and results of the audit with the
independent accountants, reviews the Companys interim and year-end operating results
with the Companys executive officers and the Companys independent accountants,
considers the adequacy of the internal accounting controls, considers the audit procedures
of the Company and reviews and approves the non-audit services to be performed by the
independent accountants. The members of the Audit Committee are: David Van Valkenburg,
Peter Ciceri, Marc Rochefort and Peter Roberts. The Board of Directors has determined that
David Van Valkenburg is an audit committee financial expert within the meaning of the
SECs rules. Each member of the Audit Committee is independent, as independence is
defined in the NASDAQs listing standards. The Audit Committee Terms of Reference
were amended on March 22, 2005, and are attached as Exhibit 99.1 hereto.

The
Corporate Governance and Nominating Committee monitors and assesses the corporate
governance system in place in the Company, develops corporate disclosure and insider
trading policies, and monitors the effectiveness of the Board of Directors, its size and
composition, its committees and the individual performance of its directors. The Corporate
Governance and Nominating Committee also identifies and recommends potential appointees to
the Board of Directors, reviews the adequacy of directors and officers third-party
liability coverage, ensures that annual strategic planning process and review is carried
out and approves appropriate orientation and education programs for new directors. The
Corporate Governance and Nominating Committee has not adopted any formal procedures for
security holders to submit candidates for election as a director of the Company. The
members of the Corporate Governance and Nominating Committee are Marc Rochefort, Robert C.
Harris, Jr., Peter Ciceri, and David Van Valkenburg.

The
Compensation Committee reviews and recommends the compensation arrangements for the
executive officers of the Company and administers the Companys stock option and
stock purchase plans. The members of the Compensation Committee are Robert C. Harris, Jr.,
Marc Rochefort and David Van Valkenburg.

A
Special Committee of the Board of Directors was formed in 2002. Its mandate is to review
strategic business development alternatives that would potentially enhance shareholder
value. The members of the Special Committee are Peter Ciceri, Marc Rochefort and David Van
Valkenburg. During the year ended December 31, 2004, the activities of the Special
Committee were terminated.

# Code of Ethics

The
Company has adopted a code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or controller and persons
performing similar functions. The Companys Code of Ethics was amended on March 22,
2005, and is attached as Exhibit 14.1 hereto.

# Section 16 (a)
Beneficial Ownership Reporting Compliance

The
Company is a foreign private issuer and, as such, its insiders are not required to file
reports under Section 16(a).

77

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# Item 11:  Executive
Compensation

# Report of the
Compensation Committee

The
Companys compensation program for all executive officers is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee is composed
of three non-employee directors.

# Objectives

The
primary objectives of the Companys executive compensation program are to enable the
Company to attract, motivate and retain outstanding individuals and to align their success
with that of the Companys shareholders through the achievement of strategic
corporate objectives and creation of shareholder value. The level of compensation paid to
an individual is based on the individuals overall experience, responsibility and
performance. The Companys executive compensation program consists primarily of a
base salary, participation in the Companys incentive bonus program, additional
performance bonuses and stock options. The Company also furnishes other benefits to
certain of its officers and other employees.

# Executive Officers

There
are currently 5 executive officers of the Company, including the Chief Executive Officer.
For purposes of this section, executive officer of the Company means an
individual that performs a policy-making function in respect of the Company. The reduction
in the number of executive officers of the Company as at March 24, 2005, as compared to
prior years, resulted from the Companys re-evaluation of those individuals that
perform policy-making functions for the Company.

# Employment Agreements

The
Company has entered into employment agreements with each of its executive officers except
Eddie Yip. These agreements provide for base salaries and incentive plan bonuses as
approved by the Board of Directors of the Company, medical and dental benefits and
reimbursement for certain expenses approved by the Company.

The
Company may terminate any of its executive officers for cause without any payment of any
kind of compensation, except for such compensation earned to the date of such termination.
The Company may terminate any of its executive officers without cause by giving notice and
upon payment of all salary and bonuses owing up to the date of termination and for those
executive officers with an employment agreement, a lump sum termination payment equal to
amounts ranging up to two times base annual salary and current bonus, plus continuation of
certain benefits and stock option vesting. Any executive officer may terminate his or her
employment with the Company at any time by giving four, or in certain cases, up to twelve
weeks written notice, to the Board of Directors of the Company. The employment agreements
of certain executive officers, including Mr. Dysthe, provide that in the event of a
takeover or change of control of the Company, they may elect to terminate their employment
and receive, in addition to compensation earned to the date of their termination, the same
lump sum termination payment and other benefits to which they would have been entitled
upon being terminated by the Company without cause. The Companys employment
agreements with certain of its executive officers also provide for the acceleration of
options in the event of termination without cause, and in certain cases, in the event of a
takeover or change in control of the Company.

The
Companys executive officer employment agreements also generally include provisions
relating to the handling of confidential information, the ownership and use of work
products, and non-competition covenants made by the executive officers in favor of the
Company.

# Incentive Bonus Program

Generally
speaking, employees of the Company, including executive officers, are eligible to receive
a cash bonus equal to a percentage of the employees salary if the Company achieves
certain quarterly or annual earnings per share or other financial targets as established
by the Board of Directors. In addition, certain employees of the Company are eligible to
receive a cash bonus based upon the employees personal performance providing the
Companys financial targets have been met. The financial targets adopted by the Board
of Directors for purposes of this program are adopted for compensatory purposes and may
differ from the Companys published guidance. Accordingly, the targets adopted under
this program should not be relied upon by investors.

78

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# 2000 Stock Option Plan

The
Companys 2000 Stock Option Plan provides for the issuance of incentive stock options
and non-qualified stock options exercisable to purchase common shares of the Company to
employees, officers, consultants, independent contractors and directors providing services
to the Company, its subsidiaries or other entities affiliated with the Company. The
aggregate number of common shares of the Company that may be issued under all option
grants under the plan is 2,400,000, subject to appropriate adjustment in the event of
certain corporate transactions or events in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the plan. The plan
is currently administered by the Compensation Committee of the Board of Directors.

Each
option granted to participants under the plan will be subject to individual terms
specified by the Committee in an individual option agreement, including the number of
common shares that the participant will have the right to purchase, the exercise price per
common share issuable under the option, the time or times at which the option may be
exercised, and the available methods of payment for such common shares. Options granted
pursuant to the plan are generally not transferable and may be exercised only by the
participant during his or her lifetime (unless a guardian or legal representative is
appointed). If the Company amalgamates, consolidates with or merges into another
corporation any common shares receivable on the exercise of the option will be converted
into the securities, property or cash which the optionee would have received upon such
amalgamation, consolidation or merger if the optionee had exercised his or her option
immediately prior to the record date applicable to such amalgamation, consolidation or
merger, and the plan will be adjusted appropriately by the Board or the Committee and such
adjustment will be binding for all purposes of the plan.

Options
to purchase common shares under the plan will generally terminate: (i) immediately upon
optionees termination as an employee, consultant or director of the Company, its
subsidiaries or management company that provides services (other than investor relations)
to the Company for just cause; (ii) 30 days after the optionees termination as an
employee, consultant or director with the Company, its subsidiaries or management company
that provides services (other than investor relations) to the Company for a reason other
than just cause, death or disability; (iii) the termination date specified in the option
agreement after death or disability; (iv) 30 days after the Committee provides the
optionee notice of a terminating event (dissolution, liquidation, merger, disposition of
substantially all of the assets, or certain other corporate actions); or such other time
as may be determined by the Committee, at its sole discretion, upon making a written
application to the Committee. Options otherwise expire a maximum of ten years after the
date on which the options are granted, the actual term to be determined by the Board or
the Committee.

# 2002 Stock Purchase Plan

The
Companys 2002 Stock Purchase Plan provides for the issuance of common shares of the
Company to employees and senior officers of the Company and its subsidiaries. The
aggregate number of common shares that may be issued under the plan is 100,000. The plan
consists of two separate components, the MDSI Purchase Plan and the Employee Share
Ownership Program (ESOP). The ESOP is the program administered by the Province of British
Columbia under the Employee Investment Act (British Columbia) to provide employees with
provincial tax credits to invest in their employers. An employee must be a resident of the
Province of British Columbia to be eligible to participate in the ESOP component of the
plan. The MDSI Purchase Plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the United States Internal Revenue Code of
1986, as amended. The plan is currently administered by the Compensation Committee of the
Board of Directors.

All
employees of the Company are entitled to enroll and participate in the plan. A participant
that is properly enrolled at the beginning of the Companys fiscal quarter or year,
as applicable, may in accordance with procedures prescribed by the Committee elect to have
the Company deduct a specified percentage of the participants compensation for the
purchase of common shares pursuant to the plan, up to a maximum of CAD $10,000 per year at
a maximum rate of CAD $2,500 per quarter. The maximum amount for which a participant may
receive provincial tax credits in the Province of British Columbia is CAD $50,000 over the
participants lifetime. A participant may change the designated payroll deduction or
suspend participation in the plan quarterly by giving the Company 30 days advance notice
on the appropriate form provided by the Company. Unless a participant requests a change,
deductions requested in one quarter will be continued indefinitely. At the end of each
fiscal quarter in which a participant has subscribed for common shares, the participant
will have the following options: (i) authorize the Company to convert the total
contribution to common shares or (ii) authorize the Company to continue to hold the
contribution against future purchases of common shares. No purchases may be made by any
person who owns shares that account for five percent (5%) or more of the total combined
voting power of the Company. Thirty days after the end of each fiscal quarter, unless
instructed otherwise by the participant in writing, the Company will issue from its
treasury and deliver to each participant, common shares equal in value to the contribution
held in trust on such date by the Company for such employee converted at the purchase
price.

The
purchase price for common shares under the plan shall be the greater of: (i) the weighted
average price of the common shares on the Toronto Stock Exchange for the first five
business days in the third month of the Companys most recently completed fiscal

79

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quarter prior to the commencement
date of the quarterly subscription, less fifteen percent (15%), and (ii) the average of
the highest and lowest quoted selling prices of common shares on the Toronto Stock
Exchange on the fifth business day in the third month of the Companys most recently
completed fiscal quarter prior to the commencement date of the quarterly subscription
period, less fifteen percent (15%), as shall be determined by the Committee. The purchase
price for common shares under the plan shall adjust for stock splits, stock dividends,
recapitalizations and similar corporate events, as determined by the Committee.

During
a participants lifetime, the participants right to purchase common shares
under the plan is exercisable only by the participant, and a participants rights
under the plan, including rights to accumulated payroll deductions, may not be pledged,
assigned, encumbered or otherwise transferred for any reason other than by will or the
laws of descent and distribution.

If
a participant ceases to be employed by or provide services to the Company or any of its
subsidiaries for any reason or receives notice from the Company or any of its subsidiaries
of the termination of his or her employment or involvement, the participant shall no
longer be eligible to participate under the plan. Upon termination, a participant who has
fully completed his or her probationary period or any extension thereof may elect to deal
with his or her unconverted contribution by either converting the full amount of the
unconverted contribution or by having such amount refunded to him or her. Any participant
who does not fully complete his or her probationary period prior to termination or the
Companys notice of termination shall, except in the case of the participants
death, automatically have such unconverted contributions refunded to him or her.

# Pension Arrangements

The
Company and its subsidiaries do not have any pension arrangements in place for any of its
executive officers.

80

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# Summary Compensation
Table

The
following table sets forth all compensation paid during the fiscal years ended December
31, 2004, 2003 and 2002 in respect of (i) each individual who, at any time during fiscal
2004, served as the Companys Chief Executive Officer, (ii) each executive officer
other than the Chief Executive Officer whose total salary and bonus exceeded $100,000 for
fiscal 2004 who was serving as an executive officer as at December 31, 2004, and (iii) two
individuals who would have been among the foregoing but for the fact that such individuals
were not employed by the Company at December 31, 2004 (collectively, the Named
Executive Officers):

|                               
|-------------------------------
|
|
|                               
|Erik Dysthe                    
|Chief Executive Officer,       
|President & Chairman of the    
|Board                          
|                               
|Verne Pecho                    
|Chief Financial Officer        
|                               
|                               
|Glenn Y. Kumoi                 
|Chief Administrative Officer   
|                               
|                               
|Neil McDonnell(1)              
|Chief Operating Officer        
|                               
|                               
|Tommy Lee(2)                   
|Senior Vice President - Product
|Development                    
|                               
|Cy Tordiffe(3)                 
|Vice President                 
|EMEA Sales and Operations      
|                               

|(1) |  | Mr.
McDonnell was hired on January 5, 2004.
|--- |  | -------------------------------------------

|(2) |  | Mr.
Lees employment terminated on September 22, 2004. Mr. Lees other
          compensation consisted of $161,742 in severance and $26,956 in payout of
accrued           vacation.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr.
Tordiffes employment terminated on September 30, 2004. Mr.           Tordiffes
other compensation consisted of $51,988 in severance and $57,052           in payout of
accrued vacation.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Eddie
Yip was not considered an executive officer of the Company until January 2005, when he was
appointed to the position of Vice President  Product Development. Accordingly, Mr.
Yip has not been deemed a Named Executive Officer for the year ended December 31, 2004.

Each
of Peter Hill Rankin, Simon Backer and Warren Cree served as an executive officer of the
Company for portions of the year ended December 31, 2004; however, the total compensation
received by Messrs. Rankin, Backer and Cree during the year ended December 31, 2004 was
less than the total compensation received by Messrs. Lee and Tordiffe. Accordingly,
Messrs. Rankin,Backer and Cree have not been deemed Named Executive Officers for
the year ended December 31, 2004. Mr. Rankin served as the Companys Vice President
 Strategy and Performance Improvement until September 29, 2004. Mr. Backer served
as the Companys Vice President

81

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 Strategic Planning until
September 22, 2004 and Mr. Cree served as the Companys Vice President  Marketing
and Business Development until September 22, 2004

The
Company entered into agreements with each of Messrs. Lee, Tordiffe, Rankin,Backer
and Cree in connection with the termination of their employment, copies of which are
included as exhibits to this report.

# Stock Options

The
following table sets forth stock options granted by the Company during the fiscal year
ended December 31, 2004 to any of the Named Executive Officers:

# Option Grants During the
Fiscal Year Ended December 31, 2004

|Name                              | Securities
Under
Options
Granted (#) | % of Total
Options
Granted to
Employees in 
Fiscal Year | Exercise or
Base Price
($/Security) | Expiration Date | Potential Realized Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Term
|--------------------------------- | ------------------------------------ | ------------------------------------------------------- | ----------------------------------- | --------------- | --------------------------------------------------------------------------------------------
|
|                                 
|Erik Dysthe                       |                                      | 81,000                                                  |                                     | 30.2            | %                                                                                           
|Chief Executive Officer,          |                                      |                                                         |                                     |                 |                                                                                             
|President & Chairman of the Board |                                      |                                                         |                                     |                 |                                                                                             
|                                 
|Glenn Kumoi                       |                                      | 26,000                                                  |                                     | 9.7             | %                                                                                           
|Chief Administrative Officer      |                                      |                                                         |                                     |                 |                                                                                             
|                                 
|Neil McDonnell                    |                                      | 25,000                                                  |                                     | 9.3             | %                                                                                           
|Chief Operating Officer           |                                      |                                                         |                                     |                 |                                                                                             
|                                  |                                      | 20,000                                                  |                                     | 7.5             | %                                                                                           
|                                  |                                      |                                                         |                                     |                 |                                                                                             
|                                 
|Eddie Yip                         |                                      | 11,670                                                  |                                     | 4.3             | %                                                                                           
|Vice President, Product           |                                      |                                                         |                                     |                 |                                                                                             
|Development                       |                                      |                                                         |                                     |                 |                                                                                             
|                                 
|Tommy Lee                         |                                      | Nil                                                     |                                     | Nil             |                                                                                             
|Vice President                    |                                      |                                                         |                                     |                 |                                                                                             
|Product Development               |                                      |                                                         |                                     |                 |                                                                                             
|                                 
|Cy Tordiffe                       |                                      | Nil                                                     |                                     | Nil             |                                                                                             
|Vice President                    |                                      |                                                         |                                     |                 |                                                                                             
|EMEA Sales and Operations         |                                      |                                                         |                                     |                 |                                                                                             
|                                 

82

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The
following table sets forth details of each exercise of stock options during the fiscal
year ended December 31, 2004 by any of the Named Executive Officers, and the fiscal year
end value of unexercised options on an aggregate basis:

Aggregated Options Exercised During
the Fiscal Year Ended December 31, 2004 and Fiscal Year-End Option Values

|Name                 | Securities Acquired
on Exercise (#) | Aggregate
Value
Realized
($) | Unexercised Options at
FY-End (#)
Exercisable/Unexercisable(2) | Value of Unexercised in the
Money-Options at FY-end ($)
Exercisable/Unexercisable(1)
|-------------------- | ----------------------------------- | ---------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------------------------
|                    
|Erik Dysthe          |                                     | Nil                          |                                                                | Nil                                                                                 
|President & Chief    |                                     |                              |                                                                |                                                                                     
|Executive Officer    |                                    
|                    
|Verne Pecho          |                                     | Nil                          |                                                                | Nil                                                                                 
|Chief Financial      |                                     |                              |                                                                |                                                                                     
|Officer              |                                    
|                    
|Glenn Kumoi          |                                     | Nil                          |                                                                | Nil                                                                                 
|Chief                |                                     |                              |                                                                |                                                                                     
|Administrative       |                                    
|Officer              |                                    
|                    
|Neil McDonnell       |                                     | Nil                          |                                                                | Nil                                                                                 
|Chief Operating      |                                     |                              |                                                                |                                                                                     
|Officer              |                                     |                              |                                                                |                                                                                     
|                    
|Tommy Lee            |                                     | 13,000                       |                                                                | Nil                                                                                 
|Vice President       |                                     |                              |                                                                |                                                                                     
|Product Development  |                                     |                              |                                                                |                                                                                     
|                    
|Cy Tordiffe          |                                     | Nil                          |                                                                | Nil                                                                                 
|Vice President EMEA  |                                     |                              |                                                                |                                                                                     
|Sales and Operations |                                     |                              |                                                                |                                                                                     

_________________

|(1) |  | Based
on NASDAQ closing price of $6.00 and TSX closing price CDN$7.28 on December 31, 2004.
|--- |  | -------------------------------------------------------------------------------------------

|(2) |  | Includes
options to purchase common shares within 60 days after December 31, 2004.
|--- |  | ----------------------------------------------------------------------------------

# Compensation of Directors

During
the latest fiscal year, the Company paid its non-employee directors a meeting stipend of
$2,500 for each board meeting they attended in person, $1,250 for each board meeting they
attended by telephone, and $1,000 for certain committee meetings. In the case of the
Special Committee, members received $2,500 per day. During the fiscal year ended December
31, 2004, the non-employee directors of the Company received aggregate cash compensation
of $146,250 for their services. The non-employee directors were also reimbursed for actual
expenses reasonably incurred in connection with the performance of their duties as
directors.

Non-employee
directors were also eligible to receive stock options issued pursuant to the
Companys stock option plan in consideration for their services as directors and in
accordance with rules and policies of the Toronto Stock Exchange. On October 29, 2004, the
Companys four non-employee directors were granted options to acquire an aggregate of
30,000 shares. The exercise prices ranged from $4.75 to $4.93 per share. The vesting
period ranges from immediate vesting to vesting over thirty-six months, subject to the
grantee being a director on the date of vesting.

# Compensation Committee
Interlocks and Insider Participation

During
the fiscal year ended December 31, 2004, the Compensation Committee consisted of Robert C.
Harris, Jr., Marc Rochefort and David Van Valkenburg. None of the members of the
Compensation Committee was an officer or employee of MDSI during the fiscal year ended
December 31, 2004, or was formerly an officer of MDSI. None of the members of the
Compensation Committee had any relationship during the fiscal year ended December 31, 2004
that required disclosure under Item 13 below, except for Robert C. Harris Jr. See Item 13.

83

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During
the fiscal year ended December 31, 2004, no executive officer of MDSI served as a director
or member of a committee of the board of any entity that had one or more executive
officers serving as a member of MDSIs Board or Compensation Committee.

84

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# Item 12:  Security
Ownership of Certain Beneficial Owners and Management

The
following table sets forth certain information known to the Company with respect to the
beneficial ownership of its Common Shares as of December 31, 2004, by (i) each person
known by the Company to be the beneficial owner of more than 5% of the outstanding Common
Shares, (ii) each director of the Company, (iii) each Named Executive Officer, and (iv)
all directors and executive officers as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Shares listed below, based on
information furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws where applicable.

|Directors, Executive Officers and 5% Shareholders(1) | Number of Shares
Beneficially 
Owned(2) | % of total Shares
Owned
|---------------------------------------------------- | --------------------------------------- | -----------------------
|                                                    
|Erik Dysthe(3)                                       |                                         | 514,600                
|Robert C. Harris, Jr.(4)                             |                                         | 111,744                
|David R. Van Valkenburg(5)                           |                                         | 49,998                 
|Peter Ciceri(6)                                      |                                         | 19,998                 
|Marc Rochefort(7)                                    |                                         | 22,803                 
|Verne Pecho(8)                                       |                                         | 66,050                 
|Neil McDonnell(9)                                    |                                         | 6,770                  
|Glenn Kumoi(10)                                      |                                         | 26,114                 
|                                                    
|All Directors and Executive Officers as a group      |                                         | 818,077                
|(8 persons)(11)                                      |                                        
|                                                    
|5% Shareholders:                                     |                                        
|Seamark Asset Management Ltd.                        |                                         | 1,110,500              
|1801 Hollis Street, Suite 310                        |                                        
|Halifax, Nova Scotia B3J 3N4, Canada                 |                                        
|Howson Tattersall Investment Counsel Limited         |                                         | 947,495                
|20 Queen Street West,                                |                                        
|Toronto, Ontario M5H 3R3, Canada                     |                                        
|Loeb Partners Corporation(12)                        |                                         | 656,228                
|61 Broadway,                                         |                                        
|New York, N.Y. 10006                                 |                                        
|Ramius Capital Group, LLC(13)                        |                                         | 484,917                
|666 Third Avenue, 26th floor                         |                                        
|New York, N.Y. 10017-4011, USA                       |                                        
|                                                    

_________________

|* |  | Represents
beneficial ownership of less than 1% of the Common Shares.
|- |  | ---------------------------------------------------------------------

|(1) |  | Unless
otherwise indicated, the address of each beneficial owner is that of the Company.
|--- |  | ----------------------------------------------------------------------------------------

|(2) |  | Beneficial
ownership is determined in accordance with the rules of the           Securities and
Exchange Commission, based on factors including voting and           investment power
with respect to shares. Common Shares subject to options           currently exercisable
at December 31, 2004, or exercisable within 60 days after           December 31, 2004,
are deemed outstanding for computing the percentage ownership           of the person
holding such options, but are not deemed outstanding for computing           the
percentage ownership for any other person. Applicable percentage ownership           is
based on the aggregate Common Shares outstanding as of December 31, 2004,
          together with the applicable options of such shareholder.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
326,898 Common Shares held by Erik Dysthe Holdings Co. and options to           purchase
139,706 Common Shares exercisable within 60 days after December 31,           2004 held
by Mr. Dysthe individually.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
4,096 Common Shares held by Robert C. Harris, Jr. Corporation and           options to
purchase 49,414 Common Shares exercisable within 60 days after           December 31,
2004 held by Mr. Harris individually.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Includes
options to purchase 34,998 Common Shares exercisable within 60 days           after
December 31, 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(6) |  | Includes
options to purchase 19,998 Common Shares           exercisable within 60 days after
December 31, 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(7) |  | Includes
options to           purchase 21,373 Common Shares exercisable within 60 days after
December 31,           2004.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(8) |  | Includes
20,000 Common Shares held by Versus Investments Ltd. and           includes options to
purchase 38,541 Common  Shares  exercisable within 60 days of December 31, 2004 held by
Mr. Pecho individually.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Includes
options to purchase 6,770 Common Shares exercisable within 60 days after December 31,
2004.
|--- |  | ----------------------------------------------------------------------------------------------------

|(10) |  | Includes
options to purchase 23,747 Common Shares exercisable within 60 days after December 31,
2004.
|---- |  | -----------------------------------------------------------------------------------------------------

|(11) |  | Includes
options to purchase 334,547 Common Shares exercisable within 60 days after December 31,
2004.
|---- |  | ------------------------------------------------------------------------------------------------------

|(12) |  | Collective
 holdings of Loeb Arbitrage  Fund,  Loeb Partners  Corporation,  Loeb Offshore Fund Ltd.,
Loeb Marathon Fund LP and Loeb Marathon Offshore Fund Ltd., acting as a group; as at
September 28, 2004.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Ramius
Capital Group, LLC, RCG Halifax Fund, Ltd., RCG Ambrose Master Fund,           Ltd.,
Ramius Securities, L.L.C., C4S & Co., L.L.C., Peter A. Cohen, Morgan           B.
Stark, Thomas W. Strauss and Jeffrey M. Solomon share voting and dispositive
          power with respect to such 484,917 Shares.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

85

---

# Equity Compensation Plan
Information as at December 31, 2004

|Plan Category                    | Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights | Weighted-average exercise
price of outstanding
options, warrants and rights | Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities subject to
outstanding options, warrants and
rights)
|-------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans        |                                                                                             | 1,099,897 (stock option plan)                                               |                                                                                                                                                                        
|approved by security holders     |                                                                                             | Nil (employee share purchase plan)                                          |                                                                                                                                                                        
|                                 |                                                                                            
|Equity compensation plans        |                                                                                             | Nil                                                                         |                                                                                                                                                                        
|not approved by security holders |                                                                                             |                                                                             |                                                                                                                                                                        
|                                
|Total                            |                                                                                             | 1,099,897                                                                   |                                                                                                                                                                        
|                                

# Item 13:  Certain
Relationships and Related Transactions

The
Company has granted  options to certain of its  directors  and  executive  officers.  See
Item 11 - "Executive Compensation".

In
addition, the Company has retained Bear Stearns & Co. Inc., an investment bank, as
financial advisor to the Board of Directors to assist the Board in evaluating potential
business combinations, financings and other strategic alternatives to help the Company
offer enhanced products and services to its customers and maximize shareholder value. Bear
Stearns provided the Company with services regarding the At Road Inc. transaction. During
the years ended December 31, 2004 and December 31, 2003, the Company paid Bear Stearns
expenses in the amount of $795,406 and $Nil, respectively. Robert C. Harris, Jr., one of
the Companys directors, is currently Senior Managing Director, Vice Chairman,
Technology Investment Banking of Bear Stearns.

The
Company believes that all of the transactions set forth above were made on terms no less
favorable to the Company than could have been obtained from unaffiliated third parties.
All future transactions, between the Company and its officers, directors, principal
shareholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested directors, and will
continue to be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.

# Item 14:  Principal
Accounting Fees and Services

The following
table sets forth the aggregate fees billed to the Company for the years ended December 31,
2004 and 2003 by its independent accountants, Deloitte & Touche LLP
(Deloitte):

|                      | Year ended
December 31, 2004 | Year ended
December 31, 2003
|--------------------- | ---------------------------- | ----------------------------
|                     
|Audit Fees            |                              |                             
|Audit-Related Fees(1) |                              |                             
|Tax Fees(2)           |                              |                             
|All Other Fees        |                              |                             

|(1) |  | Fees
for audit-related services provided during fiscal 2004 and 2003 consisted
               of due diligence associated with mergers, financial accounting and
reporting                consultations and Sarbanes-Oxley Act, Section 404 advisory
services.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Amounts
for tax fees relate to corporate tax compliance services.
|--- |  | -----------------------------------------------------------------

The
Audit Committee must pre-approve audit-related and non-audit services not prohibited by
law to be performed by the Companys independent certified public accountants. The
Audit Committee pre-approved all audit-related and non-audit services in 2004.

86

---

# Part IV

# Item 15:  Exhibits and
Financial Statement Schedules

| | (a) | 1. |  | Consolidated Financial Statements
| | --- | -- |  | ---------------------------------

| | The
following financial statements of the Company and the Report of Independent Auditors
thereon are included herewith in response to Item 8 above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Report of Independent Registered Chartered Accountants 
Consolidated Balance Sheets 
Consolidated Statements of Operations 
Consolidated Statements of Changes in Stockholders Equity
Consolidated Statements of Cash Flows
 Notes to the Consolidated Financial Statements
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  |  | Exhibits
| | --- |  |  | --------

The
following Exhibits are filed as part of this report:

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 2.1(3) |  | Agreement
and Plan of Merger dated April 17, 1997 among the Company, MDSI Acquisition Corp.,
                     Alliance, Geoffrey Engerman and Doug Engerman
| | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.1(1) |  | Articles
of Incorporation of the Company
| | ------ |  | ----------------------------------------

| | 3.2(1) |  | Articles
of Amendments of the Company
| | ------ |  | -------------------------------------

| | 3.3(1) |  | By-laws
of the Company
| | ------ |  | ----------------------

| | 4.1(1) |  | Form
of Common Share Certificate
| | ------ |  | --------------------------------

| | 4.2(9) |  | Shareholder
Rights Plan Agreement made as of December 17, 2003 between the Company and
                     Computershare Trust Company of Canada
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1(2)(3) |  | 2000
Stock Option Plan
| | ---------- |  | ----------------------

| | 10.2(1) |  | Form
of Indemnification Agreement between the Company and certain officers of the Company
| | ------- |  | -----------------------------------------------------------------------------------------

| | 10.3(1) |  | Lease
dated September 25, 1997 between Sun Life Assurance Company of Canada and the Company
| | ------- |  | -------------------------------------------------------------------------------------------

| | 10.4(4) |  | Amending
Agreement dated December 1, 1998 between Sun Life Assurance Company of Canada and the
                     Company
| | ------- |  | ---------------------------------------------------------------------------------------------------------------------------

| | 10.5(2)(5) |  | Employment
Agreement dated January 2, 2002 between the Company and Verne Pecho
| | ---------- |  | ------------------------------------------------------------------------------

| | 10.6(2)(6) |  | 2002
Stock Purchase Plan
| | ---------- |  | ------------------------

| | 10.7(7) |  | Exchange
Agreement dated as of June 26, 2002 among the Company, Connectria Corporation, Richard S.
                     Waidmann and Eric Y. Miller
| | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8(7) |  | Amendment
to Exchange Agreement dated as of June 30, 2002 among the Company, Connectria
                     Corporation, Richard S. Waidmann and Eric Y. Miller
| | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9(7) |  | Warrant
dated as of June 29, 2002 to purchase 50,380 shares of Series A Nonvoting Preferred Stock
                     of Connectria Corporation
| | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10(2)(8) |  | Employment
Agreement dated August 1, 2003 between the Company and Peter Hill Rankin
| | ----------- |  | -----------------------------------------------------------------------------------

| | 10.11(2)(8) |  | Employment
Agreement dated September 3, 2003 between the Company and Glenn Kumoi
| | ----------- |  | --------------------------------------------------------------------------------

| | 10.12(2)(8) |  | Employment
Agreement dated September 4, 2003 between the Company and Erik Dysthe
| | ----------- |  | --------------------------------------------------------------------------------

| | 10.13(2)(8) |  | Employment
Agreement dated August 20, 2003 between the Company and Joo-Hyung (Tommy) Lee
| | ----------- |  | ----------------------------------------------------------------------------------------

| | 10.14(10) |  | Combination
Agreement dated as of April 12, 2004 among At Road, Inc., Orion Exchange Co. Ltd. and
                     the Company
| | --------- |  | ----------------------------------------------------------------------------------------------------------------------------------

| | 10.15(11) |  | Amendment
No. 1 to the Combination Agreement dated June 15, 2004 among At Road Inc., Orion
                     Exchange Co. Ltd., and the Company
| | --------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16(2)(12) |  | Employment
Agreement dated December 20, 2003 between the Company and Neil McDonnell
| | ------------ |  | -----------------------------------------------------------------------------------

| | 10.17(2) |  | Employment
Agreement dated August 20, 2003 between the Company and Simon Backer
| | -------- |  | -------------------------------------------------------------------------------

| | 10.18(2) |  | Employment
Agreement dated August 20, 2003 between the Company and Warren C. Cree
| | -------- |  | ---------------------------------------------------------------------------------

| | 10.19(2) |  | Employment
Agreement dated August 20, 2003 between the Company and Cy Tordiffe
| | -------- |  | ------------------------------------------------------------------------------

| | 10.20(2) |  | Termination
of Employment Agreement dated September 27, 2004 among the Company, Peter Hill Rankin
                     and Blue Citrus Ventures Inc.
| | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

87

---

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 10.21(2) |  | Termination
of Employment and Severance Agreements and Release dated September 22, 2004 and
                     September 23, 2004 between the Company and Joo-Hyung (Tommy) Lee
| | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22(2) |  | Termination
of Employment and Severance Agreements and Release dated September 22, 2004, amended
                     October 15, 2004, and October 18, 2004 between the Company and Simon
Backer
| | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23(2) |  | Termination
of Employment and Severance Agreements and Release dated September 22, 2004, September
                     23, 2004 and September 24, 2004 between the Company and Warren C.
Cree
| | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24(2) |  | Termination
of Employment and Severance Agreements and Release dated October 1, 2004 and October
                     7, 2004 between the Company and Cy Tordiffe
| | -------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14.1 |  | Code
of Ethics
| | ---- |  | --------------

| | 21.1 |  | List
of the Company's Subsidiaries
| | ---- |  | ----------------------------------

| | 23.1 |  | Consent
of Deloitte & Touche LLP
| | ---- |  | --------------------------------

| | 31.1 |  | Section
302 Certification of Chief Executive Officer
| | ---- |  | ----------------------------------------------------

| | 31.2 |  | Section
302 Certification of Chief Financial Officer
| | ---- |  | ----------------------------------------------------

| | 32.1 |  | Section
906 Certification of Chief Executive Officer
| | ---- |  | ----------------------------------------------------

| | 32.2 |  | Section
906 Certification of Chief Financial Officer
| | ---- |  | ----------------------------------------------------

| | 99.1 |  | Audit
Committee Terms of Reference
| | ---- |  | ----------------------------------

_________________

|(1) | Previously filed as exhibits with the same corresponding number with the
          Registrants Registration Statement on Form F-1 (Registration No. J33-5872)
          and amendments numbers 1 and 2 thereto, filed with the Securities and Exchange
          Commission on October 28, 1996, November 13, 1996 and November 25, 1996,
          respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This document has been identified as a management contract or compensatory plan
          or arrangement.
|--- | ---------------------------------------------------------------------------------------------------------

|(3) | Previously
filed as exhibits with the Registrants           Registration Statement on Form S-8
filed on November 22, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(4) | Previously
          filed as exhibits with the Registrants Form 10-K for the year ended
          December 31, 2001.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(5) | Previously
filed as exhibits with the Registrants           Form 10-Q for the quarterly period
ended March 31, 2002.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(6) | Previously
filed as           exhibits with the Registrants Form 10-Q for the quarterly period
ended           June 30, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously
filed as exhibits with the Registrants Form           8-K filed on August 14, 2002.
|--- | -----------------------------------------------------------------------------------------------

|(8) | Previously
filed as exhibits with the           Registrants Form 10-Q for the quarterly period
ended September 30, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(9) | Previously
filed as exhibits with the Registrants Form 8-K filed on           December 18,
2003.
|--- | -------------------------------------------------------------------------------------------------

|(10) | Previously
filed as exhibits with the Registrants           Form 10-Q for the quarterly period
ended March 31, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------

|(11) | Previously
filed           as exhibits with the Registrants Form 8-K filed on June 22, 2004.
|---- | ---------------------------------------------------------------------------------------------

|(12) | Previously
filed as exhibits with the Registrants Form 8-K filed on           September 28,
2004.
|---- | --------------------------------------------------------------------------------------------------

|* |  | Confidential portions of this exhibit have been omitted and filed separately with the
Commission pursuant to an application for Confidential Treatment under Rule 24b -2
promulgated under the Securities Exchange act of 1934, as amended.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (c) |  | Financial Statement Schedules
| |  | --- |  | -----------------------------

| | The
 financial statement schedule required to be filed by Item 8 and Item 15(c) is
included immediately following this  page.
| | -----------------------------------------------------------------------------------------------------------------------------

88

---

# SCHEDULE II

# MDSI MOBILE DATA
SOLUTIONS INC.
Valuation and Qualifying Accounts 
(Expressed in United States Dollars)

|                                  | Balance, 
Beginning of
Period | Additions,
During Period | Application/Write-
off During Period | Balance, End
of Period
|--------------------------------- | ----------------------------- | ------------------------ | ------------------------------------ | ----------------------
|Allowance for doubtful accounts   |                               |                          |                                      |                       
|                                  |                               |                         
|Year ended December 31, 2004      |                               |                          | $                                    | 2,792,415             
|Year ended December 31, 2003      |                               |                          |                                      | 3,506,614             
|Year ended December 31, 2002      |                               |                          |                                      | 3,587,303             
|                                  |                               |                         
|Provision against investments and |                               |                         
|advances                          |                               |                         
|Year ended December 31, 2004      |                               |                          |                                      | --                    
|Year ended December 31, 2003      |                               |                          |                                      | 2,499,992             
|Year ended December 31, 2002      |                               |                          |                                      | 2,999,992             
|                                  |                               |                         
|Deferred income tax valuation     |                               |                         
|allowance                         |                               |                         
|Year ended December 31, 2004      |                               |                          |                                      | 11,918,289            
|Year ended December 31, 2003      |                               |                          |                                      | 9,332,954             
|Year ended December 31, 2002      |                               |                          |                                      | 8,148,680             

89

---

# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, MDSI
Mobile Data Solutions Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

March
31, 2005.

| | MDSI MOBILE DATA SOLUTIONS INC.

By:  
/s/ Erik Dysthe         Erik Dysthe, Chief Executive Officer, President &
         Chairman of the Board and Director
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report to be signed by
the following persons on behalf of MDSI Mobile Data Solutions Inc. in the capacities and
on the dates indicated.

|Signature | Title | Date
|--------- | ----- | ----

|/s/ Erik Dysthe
Erik Dysthe | Chief Executive Officer, President & Chairman of
the Board and Director (Principal Executive
                 Officer) | March 31, 2005
|--------------------------- | ---------------------------------------------------------------------------------------------------------------------- | --------------

|/s/ Verne D. Pecho
Verne D. Pecho | Chief Financial Officer (Principal Financial and
Accounting Officer) | March 31, 2005
|--------------------------------- | -------------------------------------------------------------------- | --------------

|/s/ Peter Ciceri
Peter Ciceri | Director | March 31, 2005
|----------------------------- | -------- | --------------

|/s/ Robert C. Harris, Jr.
Robert C. Harris, Jr. | Director | March 31, 2005
|----------------------------------------------- | -------- | --------------

|/s/ Peter Roberts
Peter Roberts | Director | March 31, 2005
|------------------------------- | -------- | --------------

|/s/ Marc Rochefort
Marc Rochefort | Director | March 31, 2005
|--------------------------------- | -------- | --------------

|/s/ David R. Van Valkenburg
David R. Van Valkenburg | Director
 (Authorized U.S. Representative) | March 31, 2005
|--------------------------------------------------- | ------------------------------------------ | --------------

90

---

EXHIBIT LIST

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 2.1(3) |  | Agreement
and Plan of Merger dated April 17, 1997 among the Company, MDSI Acquisition Corp.,
                     Alliance, Geoffrey Engerman and Doug Engerman
| | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.1(1) |  | Articles
of Incorporation of the Company
| | ------ |  | ----------------------------------------

| | 3.2(1) |  | Articles
of Amendments of the Company
| | ------ |  | -------------------------------------

| | 3.3(1) |  | By-laws
of the Company
| | ------ |  | ----------------------

| | 4.1(1) |  | Form
of Common Share Certificate
| | ------ |  | --------------------------------

| | 4.2(9) |  | Shareholder
Rights Plan Agreement made as of December 17, 2003 between the Company and
                     Computershare Trust Company of Canada
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1(2)(3) |  | 2000
Stock Option Plan
| | ---------- |  | ----------------------

| | 10.2(1) |  | Form
of Indemnification Agreement between the Company and certain officers of the Company
| | ------- |  | -----------------------------------------------------------------------------------------

| | 10.3(1) |  | Lease
dated September 25, 1997 between Sun Life Assurance Company of Canada and the Company
| | ------- |  | -------------------------------------------------------------------------------------------

| | 10.4(4) |  | Amending
Agreement dated December 1, 1998 between Sun Life Assurance Company of Canada and the
                     Company
| | ------- |  | ---------------------------------------------------------------------------------------------------------------------------

| | 10.5(2)(5) |  | Employment
Agreement dated January 2, 2002 between the Company and Verne Pecho
| | ---------- |  | ------------------------------------------------------------------------------

| | 10.6(2)(6) |  | 2002
Stock Purchase Plan
| | ---------- |  | ------------------------

| | 10.7(7) |  | Exchange
Agreement dated as of June 26, 2002 among the Company, Connectria Corporation, Richard S.
                     Waidmann and Eric Y. Miller
| | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8(7) |  | Amendment
to Exchange Agreement dated as of June 30, 2002 among the Company, Connectria
                     Corporation, Richard S. Waidmann and Eric Y. Miller
| | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9(7) |  | Warrant
dated as of June 29, 2002 to purchase 50,380 shares of Series A Nonvoting Preferred Stock
                     of Connectria Corporation
| | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10(2)(8) |  | Employment
Agreement dated August 1, 2003 between the Company and Peter Hill Rankin
| | ----------- |  | -----------------------------------------------------------------------------------

| | 10.11(2)(8) |  | Employment
Agreement dated September 3, 2003 between the Company and Glenn Kumoi
| | ----------- |  | --------------------------------------------------------------------------------

| | 10.12(2)(8) |  | Employment
Agreement dated September 4, 2003 between the Company and Erik Dysthe
| | ----------- |  | --------------------------------------------------------------------------------

| | 10.13(2)(8) |  | Employment
Agreement dated August 20, 2003 between the Company and Joo-Hyung (Tommy) Lee
| | ----------- |  | ----------------------------------------------------------------------------------------

| | 10.14(10) |  | Combination
Agreement dated as of April 12, 2004 among At Road, Inc., Orion Exchange Co. Ltd. and
                     the Company
| | --------- |  | ----------------------------------------------------------------------------------------------------------------------------------

| | 10.15(11) |  | Amendment
No. 1 to the Combination Agreement dated June 15, 2004 among At Road Inc., Orion
                     Exchange Co. Ltd., and the Company
| | --------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16(2)(12) |  | Employment
Agreement dated December 20, 2003 between the Company and Neil McDonnell
| | ------------ |  | -----------------------------------------------------------------------------------

| | 10.17(2) |  | Employment
Agreement dated August 20, 2003 between the Company and Simon Backer
| | -------- |  | -------------------------------------------------------------------------------

| | 10.18(2) |  | Employment
Agreement dated August 20, 2003 between the Company and Warren C. Cree
| | -------- |  | ---------------------------------------------------------------------------------

| | 10.19(2) |  | Employment
Agreement dated August 20, 2003 between the Company and Cy Tordiffe
| | -------- |  | ------------------------------------------------------------------------------

| | 10.20(2) |  | Termination
of Employment Agreement dated September 27, 2004 among the Company, Peter Hill Rankin
                     and Blue Citrus Ventures Inc.
| | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

91

---

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 10.21(2) |  | Termination
of Employment and Severance Agreements and Release dated September 22, 2004 and
                     September 23, 2004 between the Company and Joo-Hyung (Tommy) Lee
| | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22(2) |  | Termination
of Employment and Severance Agreements and Release dated September 22, 2004, amended
                     October 15, 2004, and October 18, 2004 between the Company and Simon
Backer
| | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23(2) |  | Termination
of Employment and Severance Agreements and Release dated September 22, 2004, September
                     23, 2004 and September 24, 2004 between the Company and Warren C.
Cree
| | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24(2) |  | Termination
of Employment and Severance Agreements and Release dated October 1, 2004 and October
                     7, 2004 between the Company and Cy Tordiffe
| | -------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14.1 |  | Code
of Ethics
| | ---- |  | --------------

| | 21.1 |  | List
of the Company's Subsidiaries
| | ---- |  | ----------------------------------

| | 23.1 |  | Consent
of Deloitte & Touche LLP
| | ---- |  | --------------------------------

| | 31.1 |  | Section
302 Certification of Chief Executive Officer
| | ---- |  | ----------------------------------------------------

| | 31.2 |  | Section
302 Certification of Chief Financial Officer
| | ---- |  | ----------------------------------------------------

| | 32.1 |  | Section
906 Certification of Chief Executive Officer
| | ---- |  | ----------------------------------------------------

| | 32.2 |  | Section
906 Certification of Chief Financial Officer
| | ---- |  | ----------------------------------------------------

| | 99.1 |  | Audit
Committee Terms of Reference
| | ---- |  | ----------------------------------

_________________

|(1) | Previously filed as exhibits with the same corresponding number with the
          Registrants Registration Statement on Form F-1 (Registration No. J33-5872)
          and amendments numbers 1 and 2 thereto, filed with the Securities and Exchange
          Commission on October 28, 1996, November 13, 1996 and November 25, 1996,
          respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This document has been identified as a management contract or compensatory plan
          or arrangement.
|--- | ---------------------------------------------------------------------------------------------------------

|(3) | Previously
filed as exhibits with the Registrants           Registration Statement on Form S-8
filed on November 22, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(4) | Previously
          filed as exhibits with the Registrants Form 10-K for the year ended
          December 31, 2001.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(5) | Previously
filed as exhibits with the Registrants           Form 10-Q for the quarterly period
ended March 31, 2002.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(6) | Previously
filed as           exhibits with the Registrants Form 10-Q for the quarterly period
ended           June 30, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously
filed as exhibits with the Registrants Form           8-K filed on August 14, 2002.
|--- | -----------------------------------------------------------------------------------------------

|(8) | Previously
filed as exhibits with the           Registrants Form 10-Q for the quarterly period
ended September 30, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(9) | Previously
filed as exhibits with the Registrants Form 8-K filed on           December 18,
2003.
|--- | -------------------------------------------------------------------------------------------------

|(10) | Previously
filed as exhibits with the Registrants           Form 10-Q for the quarterly period
ended March 31, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------

|(11) | Previously
filed           as exhibits with the Registrants Form 8-K filed on June 22, 2004.
|---- | ---------------------------------------------------------------------------------------------

|(12) | Previously
filed as exhibits with the Registrants Form 8-K filed on           September 28,
2004.
|---- | --------------------------------------------------------------------------------------------------

|* |  | Confidential portions of this exhibit have been omitted and filed separately with the
Commission pursuant to an application for Confidential Treatment under Rule 24b -2
promulgated under the Securities Exchange act of 1934, as amended.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

92

---