**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe fiscal year ended March 31, 2007**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transaction period from                   to                  **

**Commissionfile number: 000-52697**

**XPLORETECHNOLOGIES CORP.**

**(Exact Name of Registrant asSpecified in Its Charter)**

| **Delaware**                                           |   | **74-2809234**                     |
|--------------------------------------------------------|--------|------------------------------------|
| (State or Other  Jurisdiction of Incorporation         |   | (IRS Employer  Identification No.) |
| or Organization)                                       |   | ** **                         |
| **14000 Summit Drive, Suite 900, Austin,  Texas** |   | **78728**                          |
| (Address of  Principal Executive Offices)              |   | (Zip Code)                         |

 

**(512) 336-7797**(Registrant’s Telephone Number, Including Area Code)

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

Securities registered pursuant to Section 12(g) ofthe Act: Common Stock, $0.001 par value per share

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o  No  x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes  o  No  x

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes  o  No  x

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check  One):

Large AcceleratedFiler  o  AcceleratedFiler  o  Non -AcceleratedFiler  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.).   Yes  o  No  x

As of September 29, 2006, the aggregate marketvalue of the common equity held by non-affiliates of the registrant wasCdn.$21,291,298 based on the closing sale price of Cdn$ 0.365 on such date asreported on the Toronto Stock Exchange.

As of May 31, 2007, the registrant had 64,152,832shares of common stock outstanding.

DOCUMENTSINCORPORATED BY REFERENCE: None.

 

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**Table of Contents**

|              | ** ** | ** **                                                                                                         | ** ** | **Page**   |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I**   | ** ** |                                                                                                               | ** ** | ** ** |
| Item 1.      | ** ** | Business                                                                                                           | ** ** | 1          |
| Item 1A.     | ** ** | Risk Factors                                                                                                       | ** ** | 8          |
| Item 1B.     | ** ** | Unresolved Staff Comments                                                                                          | ** ** | 13         |
| Item 2.      | ** ** | Properties                                                                                                         | ** ** | 13         |
| Item  3.     | ** ** | Legal  Proceedings                                                                                                 | ** ** | 14         |
| Item 4.      | ** ** | Submission of Matters to a Vote of Security Holders                                                                | ** ** | 14         |
| **Part II**  | ** ** |                                                                                                               | ** ** |       |
| Item 5.      | ** ** | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities | ** ** | 15         |
| Item 6.      | ** ** | Selected Financial Data                                                                                            | ** ** | 16         |
| Item 7.      | ** ** | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                        | ** ** | 18         |
| Item 7A.     | ** ** | Quantitative and Qualitative Disclosures About Market  Risk                                                        | ** ** | 32         |
| Item 8.      | ** ** | Financial Statements and Supplementary Data                                                                        | ** ** | 32         |
| Item 9.      | ** ** | Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure                              | ** ** | 32         |
| Item 9A.     | ** ** | Controls and Procedures                                                                                            | ** ** | 32         |
| Item 9A(T).  | ** ** | Controls and Procedures                                                                                            |       | 32         |
| Item  9B.    | ** ** | Other  Information                                                                                                 | ** ** | 32         |
| **Part III** | ** ** |                                                                                                               | ** ** |       |
| Item 10.     | ** ** | Directors, Executive Officers and Corporate Governance                                                             | ** ** | 33         |
| Item 11.     | ** ** | Executive Compensation                                                                                             | ** ** | 34         |
| Item 12.     | ** ** | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    | ** ** | 49         |
| Item 13.     | ** ** | Certain Relationships and Related Transactions, and  Director Independence                                         | ** ** | 51         |
| Item 14.     | ** ** | Principal Accounting Fees and Services                                                                             | ** ** | 53         |
| **Part IV**  | ** ** |                                                                                                               | ** ** | ** ** |
| Item 15.     |       | Exhibits, Financial Statement Schedules                                                                            |       | 54         |
|         |       | Signatures                                                                                                         |       | 56         |
|         |       | Index  to Financial Statements                                                                                     |       | F-1        |

 

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**Forward-Looking Statements**

From time to time, we may provide information, whetherorally or in writing, including certain statements in this Annual Report on Form 10-K,which are deemed to be “forward-looking” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (the “Litigation Reform Act”). Theseforward-looking statements and other information are based on our beliefs aswell as assumptions made by us using information currently available**.**

The words “believe,” “plan,” “expect,” “intend,”  “anticipate,” “estimate,” “may,” “will,” “should”and similar expressions are intended to identify forward-looking statements.Such statements reflect our current views with respect to future events and aresubject to certain risks, uncertainties and assumptions. Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from those described hereinas anticipated, believed, estimated, expected or intended or using othersimilar expressions. We do not intend to update these forward-lookingstatements, except as required by law.

In accordance with the provisions of the LitigationReform Act, we are making investors aware that such forward-looking statements,because they relate to future events, are by their very nature subject to manyimportant factors that could cause actual results to differ materially fromthose contemplated by the forward-looking statements contained in this AnnualReport on Form 10-K, any exhibits to this Form 10-K and otherpublic statements we make. Such factors are discussed in the “Risk Factors”section of this Annual Report on Form 10-K.

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**PART I**

**Item 1.**                        Business

**Overview**

We engineer, develop, integrate and market rugged,mobile computing systems. Our products and features are designed to enhance theability of persons to perform their job outside of traditional office settings.Our line of iXTM Tablet PCs are designed to operate in challenging workenvironments, such as extreme temperatures, repeated vibrations or dirty anddusty conditions. Our products can be fitted with a wide range of performance-matchedaccessories, including multiple docking station solutions, wirelessconnectivity alternatives, global positioning system modules, biometric andsmartcard modules, as well as traditional peripherals like keyboards, mousesand cases.

Over the past several years our products have beenrecognized for their ruggedness and versatility. In 2005, Pen Computing choseXplore for “The Best Rugged Slate-Style Tablet PC” award, readers of theMobile Village gave awards to both the iXTM product family and to itsdeployments, and Tablet PC2 gave us an Editor’s Choice Award for our AllVueTMscreen. More recently, Laptop Magazine recognized our line of rugged Tablet PCswith a coveted Editor’s Choice Award.

Our strategy is to become the leading developer andmarketer of rugged mobile wireless computer systems. We currently compete inthe rugged tablet PC market. Leveraging our expertise and our existinginfrastructure, we plan to penetrate other product market categories, which arelarger than the existing rugged tablet PC market.

We have undergonesignificant changes over the past few years, including the hiring of a newmanagement team, the establishment of a new sales team that expanded our marketfocus from primarily small public safety organizations to markets includingFortune 500 and Global 2000 companies, improvements in our products andoperational processes, a recapitalization that involved the conversion ofapproximately $19 million in debt (including accrued interest) to equitythrough the issuance of Series A Preferred Stock, and the relocation ofour headquarters from Mississauga, Ontario to Austin, Texas. In addition,on June 20, 2007, we changed our jurisdiction of incorporation from thefederal jurisdiction of Canada to the State of Delaware.

**Products**

Our family of iXTMadvanced rugged Tablet Personal Computers is comprised of:

·       the**iX104C****3 Tablet PC**with durable finger print reader and user accessible hard drive and PC cardbay; and

·       the**iX104C****2 Tablet PC**with Intel Centrino® technology.

Each of thesetablets come in the following models:

·       the**Dual Mode** with Intel Centrino®technology and both active stylus and finger touch inputs;

·       the**AllVueTM** with Intel Centrino® technologyand AllVueTM LCD technology for enhanced viewability in all lighting conditions;and

·       the**Dual Mode with AllVueTM** with IntelCentrino® technology, Dual Mode input capability and AllVueTM LCD technology forenhanced viewability in all lighting conditions.

Our iXTM Tablet PCs are designed to operate inchallenging work environments, such as extreme temperatures, repeatedvibrations or dirty and dusty conditions. Our systems can be fitted with a widerange of performance-matched accessories, including multiple dockingstation solutions, wireless connectivity alternatives, Global PositioningSystem modules, biometric and smartcard modules, as well as traditionalperipherals like keyboards, mouses and cases.

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Our family of iXTMcomputers are based primarily on the following features:

*Rugged—**As*opposed to some ofour competitors, which have primarily placed non-rugged computers in ruggedcases, we have built our devices from the inside out. We have developed over 30proprietary design elements that we believe provide a high level of durability.Our products meet some of strictest specifications in the world, such as thoseestablished by the U.S. military, including Military Standard Testing forEnvironmental Extremes. These specifications are designed to allow our productsto withstand damage from being dropped onto concrete from up to 4 feet, frombeing submerged for up to 30 minutes in up to 12 inches of water, and frombeing exposed to extreme temperatures that are as low as -40°Fahrenheit and as high as 167° Fahrenheit. Inaddition, our products are designed to continue to function when subjected tovibration, sand storms and other challenging outdoor work environments.

*ScreenTechnology—**We*seek to be a leader of screentechnology with award winning displays. We have designed the AllVueTM screenswhich is viewable in challenging lighting conditions, including direct sunlightand dimly-lit environments, as well as the Dual Mode screen model that allowsthe use of a digitizer pen and/or the finger to control the unit. The Dual Modesupports more precise inputs through the pen with more directional finger touchinputs—all in a single unit with auto switching capabilities.

*ProcessingPower—**Our*products have the ability toprovide processing power alternatives on a timely and cost-effective basis. Oursystems use Intel Pentium M Centrino® processors and associated chipsets, aswell as other performance enhancement technologies that we believe areessential in many field applications (such as mapping and remote connectivity).In addition, Lithium ION batteries support usage times between 3-5 hoursand a “warm” swap feature allows users to switch batteries in the field withouthaving to power down the system.

*RemoteConnectivity—**Our*current products provide a widerange of wireless alternatives and radio card options as well as globalpositioning system options.

*Accessories—**We*offer a broadrange of add-on modules and accessories that we believe better enable customersto adapt our computers to their intended use. In particular, we believe ourfunctional, durable and reliable docking solutions are tailored to customerneeds. Service, desktop, vehicle, forklift, armored vehicle, and mobile cartdocking systems have been deployed to customers.

*HeightenedSafety Standards—**All*of our wireless-enabledtablet PC systems have been tested and certified for use in hazardous locationsboth in North America and in the European Union.

Our computers are designedto be used as a mobile computing system. These systems are comprised of anXplore hardware platform that is fully integrated with one or more softwareapplications. Through its wide feature set, we believe the iXTM family ofproducts allows the customization of a platform that best suits a givenapplication. Our computers combine processing power, viewability, ruggednessand connectivity that can perform in extreme environments.

**Strategy**

Our strategy is to becomethe leading developer and marketer of rugged mobile wireless computer systems.We currently compete in the rugged tablet PC market. Leveraging our expertiseand our existing infrastructure, we plan to penetrate other product marketcategories, which are larger than the existing rugged tablet PC market.

*Leverage ExistingMarkets*

We seek to continue to analyze the needs of thevertical markets we are involved in so that we can continue to grow ourbusiness. We intend to continue to focus on customer specific applications byleveraging our core products and technology, as well as our key strategicalliances.

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Our strategy includes the following key elements:

*Identifyingand targeting vertical markets, major account and OEM opportunities—**To*achieve our goalof broad penetration of our products, we intend to continue to focus onspecific vertical market applications, major accounts and OEM relationships,such as Dell, Inc., Psion Teklogix Inc. and Peak Technologies.

*Investmentand nurturing of key relationships—**We*intend to continueto outsource our manufacturing so that we can continue to focus our efforts onour technology and product development, customer application and projectdeployment activities, through our collaborations on engineering andmanufacturing matters with our partners.

*Flexibleproduct design and customer-centric approach—**We*believe the designof our products provides us with the flexibility to respond to customer-specificrequirements. We involve our customers in product development and enhancements.This approach is intended to position our products as the optimal mobilecomputing platform for our customers.

*Deliveryof high quality, reliable systems—**We*seek to have ourmanufacturing partners implement rigorous quality assurance programs thatincorporate our processes, in concert with performing our custom-designedtest programs.

*Marketing and distributionrelationships—**Within*each targeted verticalindustry, we intend to focus on co-marketing relationships with key applicationproviders and systems integrators. This strategy allows us to define multiplechannels of sale within a region while maintaining key strategic alliances.

*Expand into NewRugged Product Markets*

We are evaluating other market opportunities, such asthe growing need for rugged notebooks, which are broader in scope andopportunity. We believe that an increasing number of companies are requiringtheir employees to transmit data from the field or non-traditional officeenvironments. We believe this need is supported by a white paper published bythe Mobile and Wireless Practice of Venture Development Corporation (which werefer to as VDC) in July 2006, which projects worldwide sales in therugged mobile computing market to grow to over $6.7 billion by 2010 andthe market for large form factor rugged devices to grow to $2.9 billion in2010. We currently do not have any products in the large form factor ruggedmobile computer market, but expect to have three products available for sale inthis segment by 2008.

We believe ourfamily of rugged tablet PCs are uniquely positioned to capitalize on theconvergence of three current market trends:

·       theexpanding wireless data movement;

·       thetransition toward rugged computing solutions in non-traditional officeenvironments; and

·       theadoption of more rugged mobile computers.

We believe companiesrecognize the total cost of ownership is improved by rugged computingsolutions.

**Sales**

Our customers are distribution partners, such as largecomputer companies, specialized system integrators, software vendors,distributors and value-added resellers, and to a lesser extent,end-users. For fiscal year 2007, approximately 81% of our total revenues wereattributable to sales to our distribution partners and approximately 19% of ourtotal revenues were attributable to sales directly to our end-users. Wecurrently have more than 60 distribution partners. Our distribution partnersgenerally have large sales 

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organizations which inturn sell our products to entities that are the ultimate end-users of ourproducts. Our distribution partners include large computer companies such asDell, Inc., specialized system integrators such as Methec, PsionTeklogix Inc. and Peak Technologies, and software vendors such asEnvironmental Systems Research Institute. In any given year, a singledistribution partner can account for a significant portion of our revenue.However in fiscal year 2007 we did not have any single distribution partnerthat accounted for over 10% of our revenue for that year and we did not haveany single end-user that accounted for over 10% of our revenue. We are notsubstantially dependent on any single one distribution partner or end-user. Ourend-users include Daimler Chrysler, Hydro One, the City of Cleveland PoliceDepartment, Shell Oil UK, Proctor & Gamble, the Royal Netherlands AirForce, the Rome Fire Department and the U.S. Federal Emergency ManagementAgency. Proctor & Gamble and Burlington Northern Santa Fe Railway haveadopted our Tablet PC as their standard rugged tablet computer.

We have a sales team of 17 individuals that havegeographic responsibilities for direct and indirect sales opportunities. Oursales team works closely with our distribution partners in defined regionsbased upon a standard agreement. Our distribution partners are currentlyselling our products in the public safety, utility, field service, logisticsand military markets.

Our total revenue grew25.7% from fiscal 2006 to fiscal 2007. Our revenue from Europe, as well as fromother parts of the world, has generally been steady due to strong market demandfor our iXTM line of Tablet PCs. Our revenue outside of North America was 33.3%of total revenue in fiscal year 2007 as compared to 36.6% of total revenue infiscal year 2006.

**Marketing**

We have marketingprograms aimed at increasing awareness of our products and services, productmanagement and corporate communications. Key elements of our marketing programinclude:

·       Participationin targeted industry trade shows and conferences;

·       Editorialcoverage and advertisements placed in targeted vertical market, technology andbusiness mediums, including specific industry publications;

·       Productmarketing refinement by obtaining customer feedback through data collected byour customer support team, as well as through surveys;

·       Distributionsales support through defined training programs;

·       Useof our web site for communications, as well as customer and channel supportcapabilities; and

·       Inclusionof customers, industry experts and others in the product development andtesting cycles.

We also market our products through a number ofdifferent industry participants, including independent software vendors withapplication software for a specific industry, systems integrators that bringelements such as wireless communication systems to the project, agents thatspecialize in rugged mobile computing devices and other consultants.

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An increasing number ofcompanies and agencies have workforces that require mobile computers that canendure and perform reliably in challenging work environments where dust, shock,vibration, extremely hot or cold temperatures or moisture are present. We believewe provide a competitively priced rugged computer. The market pricing forrugged computers is higher than commercial grade computers used in traditionaloffice settings. We believe the pricing reflects the theory that the total costof ownership of a rugged computer over a three to five year period can besignificantly lower as compared to a non-rugged computer. In fact, several ofour customers have disclosed in our customer-based market researchstudies that they used non-rugged devices and experienced firsthand the directcosts of this decision (*e.g.* morefrequent damage, information retrieval costs, replacement costs), as well asthe indirect costs such as prolonged downtime.

We recognize that, as asmall company, our key to success depends on our ability to provide a betterproduct than our larger competitors and to be more responsive to our customers’needs. Some of our accomplishments, such as the AllVueTM screen and the DualMode functionality, were the result of customer feedback. When embarking on thedevelopment of a new device or an upgrade of an existing one, we devoteresources to soliciting customer feedback. We believe this process, combinedwith our flexibility to make quick decisions and the support of a strongmanufacturing partner, has enabled us to deliver products and technology aheadof our competitors.

*Market Segments*

We target a number ofdifferent sectors where we believe the deployment of rugged mobile computerscan greatly improve operating efficiencies and reduce related costs.

*Logistics.**  *We believe globalization, increasedcompetition and heightened consumer expectations are contributing factors tothe adoption of mobile computing technologies by many leading warehousing,distribution and retail entities. These operations typically require real timeprice modifications, product introductions and transitions, and timelyinventory management. We believe these sectors will continue to automate orderfulfillment, inventory control and management systems as part of an overall effortto integrate enterprise resource planning and supply chain managementinformation systems. Our end-users in this sector include DaimlerChrysler, Andersen Windows and Clare Rose.

*Utilities &Energy.**  *Generally,utilities and energy related companies continuously have to respond tocustomers’ requests and power outages more expeditiously and efficiently toremain competitive. We believe the reliable and real-time movement ofinformation to and from the field is vital to the success of any fieldautomation system. Hydro One utility in Canada is a major end-user inthis sector, as well as Shell Oil.

*Public Safety.**  *Given the focus in the U.S. onsecurity issues and the continued commitment by Federal, state and municipalgovernments on law enforcement, fire and emergency medical services, members ofthe public safety arena are searching for efficiencies that will better enablethem to do their jobs. Rugged mobile computing devices assist these groups in avariety of ways. For example, having a reliable and durable Tablet PC provideslaw enforcement agencies with immediate and reliable access in the field tonational and local criminal databases. In this market segment, our productshave been sold to over 300 public safety organizations in the U.S., includingthe Detroit and Cleveland Police Departments, and multiple internationalorganizations, including the Rome Fire Department.

*Military.**  *As the military continues totransition to commercial and industrial grade rugged mobile computing systems,we expect this segment to represent a significant opportunity for us. Inparticular, we believe the U.S. Department of Defense is generally moving awayfrom full military specifications adherence, except for system-criticaloperations, and instead, is purchasing more commercial, off-the-shelfequipment. Our end-users in this sector include the U.S. Air Force andthe Royal Dutch Air Force.

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*Field Service.**  *According to VDC, the secondlargest market segment for large form factor rugged mobile devices is the fieldservice industry. This market segment includes mobile technicians from thetelecommunications, cable and appliance sectors who typically must have realtime access to critical data including work tickets, schematics, manuals,customer service records, inventory levels and order status. We believe thatcompanies in this market segment recognize that linking field service personnelthrough the entire enterprise system can improve customer response, billing,inventory management and throughput metrics, thereby increasing operationalefficiencies. Our end-users in this market segment include CincinnatiBell, Boeing and HydroChem.

**Research and Development**

We have assembled anexperienced engineering and product development team. Through the collaborationof our employees and engineering and manufacturing partners, we believe we areable to bring significant resources to the research, development and design ofour products.

We seek to design andmanage product life cycles through a controlled and structured process. We seekto involve customers and industry experts from our target markets in thedefinition and refinement of product development. Our product developmentemphasis is placed on meeting industry standards and product specifications,ease of integration, ease of use, cost reduction, design-for manufacturability,quality and reliability.

We continue to invest inresearch and development to enhance and expand our rugged mobile computingsystems. Additional form factors, operating systems and screen technologies areall considered for integration into our rugged platform as we seek to expandinto additional markets. During the fiscal years ended March 31, 2007,2006 and 2005, we spent $2,935,000, $2,402,000 and $2,327,000, respectively, onresearch and development activities.

**Competition**

Competition in ourindustry is intense and is characterized by rapidly changing technologies,evolving industry standards, frequent new product introductions and rapidchanges in customer requirements. To be competitive, we must continue todevelop and introduce, on a timely and cost-effective basis, new products andproduct features that keep pace with technological developments and emergingindustry standards and address the increasingly sophisticated needs of ourcustomers. The principal competitive factors affecting the market for ourproducts are the product’s technical characteristics, price, customer service,reputation in the industry and brand loyalty. We believe that our strongestcompetitive factors are our products’ durability and reputation in theindustry. In order to compete, we must respond promptly and effectively to thechallenges of technological changes and our competitors’ innovations.

Our primary competitors inthe mobile rugged computer market include the following:

*Panasonic.**  *Panasonic is the largest providerof mobile rugged computers and offers a series of traditional and convertiblenotebooks. Panasonic promotes a rugged computer, known as the Toughbook, whichis well known in the industry.

*Itronix.**  *Itronix markets its semi-rugged pentablet computer systems as part of its mobile portfolio, which also includesrugged notebooks. In September 2005, Itronix was acquired by GeneralDynamics Corp.

*Walkabout.**  *Walkabout promotes a Tablet PC asits main product. In June 2005, Walkabout was acquired by DRS Technologies, Inc.,a multibillion dollar supplier to military agencies.

Our primary competitorshave greater financial, technical, and research and development resources andmarketing capabilities than we do.

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**Manufacturing**

We outsource the majorityof our manufacturing services to Wistron, including board production, certainparts procurement, assembly, some quality assurance testing, warranty repairand service. We have a design and manufacturing agreement with Wistron. Wistronmakes computers and components for some of the world’s largest technologycompanies, such as Dell, Inc. and Hewlett-Packard Company. Wistroncollaborates with us on product specifications and provides us with theflexibility to make changes to our products as market conditions change.

Under the terms of ouragreement with Wistron, which we entered into on July 1, 2003, Wistronprovides us with design, manufacturing and support services related to ourruggedized mobile personal computer tablets. Our purchase price of the productsproduced by Wistron is determined based on the specific configuration of thetablet being produced and is subject to a cost reduction plan and volume baseddiscounts. At least quarterly, we meet with Wistron to develop the costreduction plan, which targets a 10% annual cost reduction. The plan takes intoaccount alternative suppliers along with components, design, process changesand other cost savings procedures. Each month we provide Wistron with a sixmonth rolling forecast of the products we anticipate ordering. Wistron has45 days after acceptance of the purchase order to ship the product. Ifproducts ordered during any quarter exceed the volume projected in theforecast, Wistron has agreed to use its reasonable best efforts to deliver theexcess products within 20 days after acceptance of the purchase order.

Wistron has providedseveral warranties to us, including that Wistron has all necessary rightsrequired to sell the products, that each product will be free from any materialdefect for a period of 36 months, that the products will be free from anyliens, encumbrances or defects in title and that the products will comply withall specifications. So long as we are meeting our target volumes, Wistronagrees not to design, engineer, manufacture or sell any rugged mobile tabletthat is competitive with ours. The term of the agreement is for five years andautomatically renews for additional one year terms, unless either partyprovides written notice of its intent to terminate the agreement at least120 days prior to the expiration of any renewal term.

We maintain build-to-ordercapabilities and quality control functions in-house, which are theresponsibility of our production and engineering teams. This includesmanufacture engineering, development of production and assembly testprocedures, definition of quality assurance program and development of testfixtures, build-to-order production and “out-of-box” quality assurance testing.

**Intellectual Property**

Our performance andability to compete are dependent to a significant degree on our proprietarytechnology. We rely primarily upon a combination of patent, copyright and tradesecret laws and license agreements to establish and protect proprietary rightsin our products and technology. We have four U.S. patents and one Canadianpatent, along with two U.S. patent applications and one Canadian patentapplication. We are seeking to obtain patent protection for certain keycomponents of our technology. It may be possible for a third party to copy orotherwise obtain and use our products or technology without authorization or todevelop similar technology independently. In addition, effective patent,copyright and trade secret protection may be unavailable or limited in certainforeign countries.

**Employees**

As at May 31, 2007,we had 72 full-time employees, of which 42 were employed in the operations,engineering, research and development and customer support areas, 10 wereinvolved in corporate and administrative areas, and 20 were employed in salesand marketing. Our employees are not represented by a union or other collectivebargaining unit and we have never experienced a work stoppage. We believe thatour employee relations are good.

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**Trademarks and Service Marks**

Trademarks or trade namesof Xplore Technologies Corp. used in this Annual Report on Form 10-Kinclude: “iXTM” and “AllVueTM.” Each trademark, trade name or service mark of anyother company appearing in this Annual Report on Form 10-K belongsto its holder.

**Corporate Information**

Our predecessor entity,Xplore Technologies Inc., was incorporated under the laws of the Province ofOntario on August 20, 1996. That company was subsequently continued underthe federal laws of Canada on March 22, 2000 and, on March 25, 2000,was amalgamated with Xplore Technologies Corp. under the federal laws of Canadato continue as Xplore Technologies Corp. On June 20,2007, we changed our jurisdiction of incorporation from the federaljurisdiction of Canada to the State of Delaware. The address of ourregistered office in Delaware is 160 Greentree Drive, Suite 101, Dover,Delaware 19904 and the name of our registered agent at that addressis National Registered Agents, Inc.

Our principal executiveoffices are located at 14000 Summit Drive, Suite 900, Austin, Texas 78728and our telephone number is (512) 336-7797. We maintain an Internetwebsite at www.xploretech.com. The information contained on our website is notincluded as a part of, or incorporated by reference into, this Annual Report onForm 10-K.

**Available Information**

We have filed this AnnualReport on Form 10-K with the Securities and Exchange Commission the(“SEC”). You may read and copy this Annual Report on Form 10-K atthe SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.20549. You may also obtain copies of this Annual Report on Form 10-Kby mail from the Public Reference Section of the SEC at prescribed rates.To obtain information on the operation of the Public Reference Room, you cancall the SEC at 1-800-SEC-0330. The SEC also maintains anInternet website that contains reports, proxy and information statements andother information regarding issuers, including Xplore Technologies, that fileelectronically with the SEC. The address of the SEC’s Internet website ishttp://www.sec.gov.

**Item1A.**                Risk Factors

There are many risks thataffect our business and results of operations, some of which are beyond ourcontrol. If any of the following risks actually occur, our business, financialcondition or operating results could be materially harmed. This could cause thetrading price of our common stock to decline, and you may lose all or part ofyour investment.

**Risks Relating to our Business**

*We have a history of net losses, we anticipateadditional losses and may never become profitable.*

We have incurred netlosses in each fiscal year since our inception. For our fiscal year ended March 31,2007, we incurred a net loss of approximately $6.6 million. In addition, as of March 31,2007, our accumulated deficit was approximately $92 million. Our losseshave resulted primarily from expenses incurred in research and development ofour technology and products and from expenses incurred in selling and marketingour products. We expect to continue to incur additional operating lossesthrough fiscal 2008 as we continue our research and development efforts andexpand our sales and marketing activities. We cannot assure you that ourrevenue will increase or that we will be profitable in any future period.

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*If wefail to obtain additional financing when needed, we may be unable to completethe development and commercialization of our rugged notebook and may have tosignificantly delay, scale back or discontinue the development orcommercialization of one or more of our other products.*

Our operations haveconsumed substantial amounts of cash since inception. From our inception in1996, we have financed our operations and met our capital expenditurerequirements primarily from $87.6 million of debt and equity financings.We expect to continue to spend substantial amounts to complete the developmentand commercialization of our rugged notebook and to continue our research and developmentprograms to advance our current product line. As at March 31, 2007, ourworking capital was approximately $5.2 million and our cash and cashequivalents were approximately $1.7 million. We believe that cash flow fromoperations, together with borrowings from our credit facility and, ifnecessary, financial support from Phoenix Venture Fund LLC, our significantshareholder, will be sufficient to fund our anticipated operations for the next12 months. However, we may seek to access the public or private marketswhenever conditions are favorable, even if we do not have an immediate need foradditional capital at that time. It is uncertain whether additional fundingwill be available when we need it on terms that will be acceptable to us or atall. To the extent we raise additional funds by issuing equity, ourshareholders may experience significant dilution. Any debt financing, ifavailable, may require us to agree to restrictive covenants, that couldnegatively impact our ability to conduct our business. If we are not able toobtain financing when needed or on acceptable terms, we would likely be unableto carry out our business plan, and would have to significantly delay, scaleback or discontinue the development or commercialization of one or more of ourproducts, the occurrence of which could significantly harm our business andprospects and could cause our stock price to decline.

*Sinceour revenues are highly dependent on one product family, any significantreduction of sales of this product family would materially harm our operatingresults.*

Because our revenues arederived substantially from sales of our iX104 family of systems, we are highlydependent upon market acceptance of the iX104 product family. We cannot assureyou that the iX104 product family will achieve significant acceptance in themarketplace. Any significant reduction of sales of the iX104 product familywould materially harm our operating results.

*Wemay not be able to develop a rugged notebook or develop a rugged notebook thatis accepted by the market, in which case our planned future growth would benegatively affected.*

We do not currently have aproduct in the rugged notebook market, however, we plan to develop one. We arerelying on this product for our future growth. We cannot assure you that wewill be able to develop a rugged notebook or that any rugged notebook wedevelop will be able to compete or have any success in the marketplace. If weare unable to develop a rugged notebook or if we do develop a rugged notebookbut it is not accepted by the market, our planned future growth would benegatively affected.

*In fiscal year 2006, approximately 10% of our revenuewas derived from one of our value-added resellers. If we are unable to replacerevenues generated from one of our major resellers with revenues from others infuture periods, our revenues may fluctuate and our growth would be limited.*

Historically, in any givenyear a single value-added reseller (or VAR) customer could account for morethan 10% of our revenue. In fiscal year 2007, no one VAR customer accounted forover 10% of  our total revenue, but infiscal year 2006 one VAR customer, Methec, accounted for over 10% of our totalrevenue and in fiscal year 2004, one VAR, one distributor and one end-useraccounted for over 50% of our total revenue. If we are unable to replacerevenues generated from one of our major value-added resellers with revenuesfrom others in future periods our revenues may fluctuate and our growth would belimited.

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*We experience lengthy sales cycles for our productsand the delay of an expected large order could result in a significantunexpected revenue shortfall.*

The purchase of an iX104system is often an enterprise-wide decision for prospective end-usercustomers, which requires us to engage in sales efforts over an extended periodof time and to provide a significant level of education to prospective end-usercustomers regarding the uses and benefits of such systems. As a result, ourproducts generally have a lengthy sales cycle ranging from several months toseveral years. If sales from a specific end-user customer forecasted arenot realized, we may not be able to generate revenue from alternative sourcesin time to compensate for the shortfall. In addition, the loss or delay of anexpected large order could result in a significant unexpected revenueshortfall. To the extent that significant contracts are entered into andperformed earlier than expected, operating results for subsequent periods maybe adversely affected.

*We are dependent on Wistron to manufacture ourproducts and our reliance subjects us to significant operational risks, any ofwhich would impair our ability to deliver our products to our customers shouldthey occur.*

We rely primarilyon Wistron for the manufacture of our products and expect to continue to do sofor the foreseeable future. Our reliance on Wistron involves a number of risks,including:

·       reducedmanagement and control of component purchases;

·       reducedcontrol over delivery schedule and quality assurance;

·       reducedcontrol over manufacturing yields;

·       lackof adequate capacity during periods of excess demand;

·       limitedwarranties on products supplied to us;

·       potentialincreases in prices;

·       interruptionof supplies from assemblers as a result of fire, natural calamity, strike orother significant events; and

·       misappropriationof our intellectual property.

Our business is thereforedependent upon Wistron for their manufacturing abilities. During the fiscalyears ended March 31, 2007, 2006, and 2005, we purchased approximately$16.3 million, $17.2 million and $9.1 million, respectively, inproducts from Wistron. Our agreement with Wistron expires in 2008 and may notbe renewed. We cannot assure you that Wistron will continue to work with us,that they will be able to meet our manufacturing needs in a satisfactory andtimely manner, that Wistron has the required capacity to satisfy ourmanufacturing needs or that we can obtain additional or alternativemanufacturers when and if needed. The availability to us of Wistron, and theamount and timing of resources to be devoted to these activities is not withinour control, and we cannot assure you that we will not encounter manufacturingproblems that would materially harm our business. The loss of Wistron, asignificant price increase, an interruption of supply or the inability toobtain additional or an alternative manufacturer when and if needed wouldimpair our ability to deliver our products to our customers.

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*We face competition from companies that have greaterresources than we do and we may not be able to effectively compete againstthese companies.*

We operate in ahighly competitive industry. Many of our competitors, such as Walkabout in thetablet area and Panasonic in the notebook markets, have much greater financial,technical, research and development resources and production and marketingcapabilities than we do. The principal competitive factors in our industryinclude:

·       productperformance, features and reliability;

·       price;

·       namerecognition in the marketplace; and

·       productavailability and lead times.

If we are unable tosuccessfully compete with our competitors our sales would suffer and as aresult our financial condition would be adversely affected.

*If we are unable tosuccessfully protect our intellectual property, our competitive position willbe harmed.*

Our ability to compete isheavily affected by our ability to protect our intellectual property. We relyon a combination of patents, copyright and trademark laws, trade secret,confidentiality procedures and contractual provisions to protect ourproprietary rights. The steps we take to protect our technology may beinadequate. Existing trade secret, trademark and copyright laws offer onlylimited protection. Unauthorized parties may attempt to copy aspects of ourproducts or obtain and use information which we regard as proprietary. Policingunauthorized use of our products is difficult, time consuming and costly. Wecannot assure you that our means of protecting our proprietary rights will beadequate or that our competitors will not independently develop similartechnology, the effect of either of which would harm our competitive positionin the market.

*Others could claim that we infringe on theirintellectual property rights, which may result in costly and time consuminglitigation and could delay the development and commercialization of ourproducts.*

We are not aware that ourproducts infringe on the proprietary rights of third parties. There can be noassurance, however, that third parties will not claim such infringement by usor our licensees with respect to current or future products. Any such claims,with or without merit, could be time consuming, result in costly litigation,cause product shipment delays or require us to enter into a royalty orlicensing agreement, any of which could delay the development andcommercialization of our products. If we are unable to obtain a requiredlicense, our ability to sell or use certain products may be impaired. Inaddition, if we fail to obtain a license, or if the terms of the license areburdensome to us, our operations could be materially harmed.

*We are subject to risks by doing business outside ofthe United States which could impair our ability to grow our revenues.*

In the two fiscalyears ended March 31, 2007 and March 31, 2006, approximately 44% and46%, respectively, of our revenue was comprised of sales made outside of theUnited States. Our operations may be materially and adversely affected by manyrisks related to doing business outside of the United States, including:

·       increasesin duty rates, exchange or price controls;

·       governmentalcurrency controls;

·       importrestrictions;

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·       political,social and economic changes and disruptions;

·       incertain jurisdictions, reduced protection for our intellectual property rights;and

·       difficultyin enforcing contracts or legal rights under foreign legal systems.

The occurrence of any onethese risks could impair our ability to grow our revenues.

*If we are unable toattract or retain key personnel we may not be able to execute our businessstrategy.*

Our operations aredependent on the abilities, experience and efforts of a number of keypersonnel, including our Chairman, Philip S. Sassower, Mark Holleran, ourPresident and Chief Operating Officer, Michael J. Rapisand, our Chief FinancialOfficer, and Gregory E. Arends, our Vice President of Engineering. Shouldany of these persons or other key employees be unable or unwilling to continuein our employ, our ability to execute our business strategy may be adverselyaffected. In addition, our success is highly dependent on our continuingability to identify, hire, train, motivate and retain highly qualifiedmanagement, technical and sales and marketing personnel. Competition for suchpersonnel is intense. We may be unable to attract and retain the personnelnecessary for the development of our business. The inability to attract orretain qualified personnel in the future or delays in hiring skilled personnelcould harm our relations with our customers and our ability to respond totechnological change which would prevent us from executing our businessstrategy.

**Risks Relating toOwnership of our Common Stock**

*Two of our shareholders, Philip S. Sassower andPhoenix Venture Fund LLC, own in the aggregate approximately 35.6% of ourvoting securities and thus have effective control over matters requiringshareholder approval.*

One of our shareholders,Phoenix Venture Fund LLC, is co-managed by Philip S. Sassower, ourChairman and Chief Executive Officer, and Andrea Goren, one of our directors,and beneficially owns, in the aggregate, approximately 23.6% of our outstandingvoting securities. In addition, Mr. Sassower, together with entitiescontrolled by him, beneficially own approximately 12.0%, in the aggregate, ofour outstanding voting securities. Thus, Phoenix Venture Fund and Mr. Sassowertogether control approximately 35.6% of our outstanding voting securities.Accordingly, Phoenix Venture Fund and Mr. Sassower have the ability toexercise significant influence (and have effective control) over mattersgenerally requiring shareholder approval, including the election of directorsand the approval of significant corporate transactions, which could have theeffect of delaying or preventing a third party from acquiring control over us.

*Some of the rights granted to the holders of our Series APreferred Shares could prevent a potential acquirer from buying our company.*

Holders of our Series APreferred Shares, which include Phoenix Venture Fund and Mr. Sassower,have the right to block the company from consummating a merger, consolidation,sale of substantially all of its assets or liquidation. Phoenix Venture Fundand Mr. Sassower together control more than 70.4% of the outstanding Series APreferred Shares. Accordingly, the holders of our Series A PreferredShares could prevent the consummation of a transaction in which ourshareholders could receive a substantial premium over the current market pricefor their shares.

*The anti-takeovereffect of certain of our charter provisions could adversely affect holders ofour common stock.*

Our authorized capitalconsists of preferred stock issuable in one or more series. Our board ofdirectors has the authority to issue preferred shares and determine the price,designation, rights, preferences, privileges, restrictions and conditions,including voting and dividend rights, of those shares 

12

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withoutany further vote or action by shareholders. The rights of the holders of commonstock will be subject to, and may be adversely affected by, the rights ofholders of any preferred stock that may be issued in the future. The issuanceof additional preferred stock, while providing desirable flexibility inconnection with possible acquisitions and other corporate purposes, could makeit more difficult for a third party to acquire a majority of our outstandingvoting shares, which could deprive our holders of common stock of a premiumthat they might otherwise realize in connection with a proposed acquisition ofour company.

*Many factors canadversely affect the price of our common stock.*

The trading priceof our common shares has been highly volatile and may continue to fluctuatesubstantially. We believe that a variety of factors have caused and could inthe future cause the stock price of our common stock to fluctuatesignificantly, including:

·       announcementsof developments related to our business;

·       quarterlyfluctuations in our actual or anticipated operating results;

·       announcementsof technological innovations;

·       newproducts or product enhancements introduced by us or by our competitors;

·       developmentsin patents and other intellectual property rights and litigation;

·       developmentsin our relationships with our third party manufacturers and/or strategicpartners;

·       developmentsin our relationships with our customers and/or suppliers; and

·       generalconditions in the worldwide economy.

In addition, in recentyears the stock market in general and the market for shares of smallcapitalization technology companies in particular has experienced substantialprice and volume fluctuations, which have often been unrelated ordisproportionate to the operating performance of affected companies. Anyfluctuations in the future could adversely affect the market price of ourcommon stock and the market price of our common stock may decline.

*Dividends are notexpected to be paid on our common stock.*

We have never paid cashdividends on our common stock. Our current policy is to retain any futureearnings to finance the future development and expansion of our business. Anyfuture determination about the payment of dividends will be made at thediscretion of our board of directors and will depend upon our earnings, capitalrequirements, operating and financial conditions and on such other factors theboard of directors deems relevant. Under the terms of our certificate ofincorporation, we are prohibited from paying dividends on our common stockunless and until all accrued and unpaid dividends (which are paid in commonstock) are paid on our shares of Series A and Series B PreferredStock. Furthermore, under the terms of our loan agreement with a commercialbank, we are prohibited from paying cash dividends.

**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

We maintain our corporatefunctions along with sales support, marketing, finance, engineering andoperating groups at a leased premises totaling approximately 21,700 square feetat 14000 Summit Drive, Suite 900, Austin, Texas. The lease expires on August 31,2009, and has a current annual base rent of approximately $232,000. We have theoption to renew this lease for an additional three years. We also 

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lease asatellite office in Helsinki, Finland, on a three-month renewable basis.We believe that our existing leases will be renegotiated as they expire or thatalternative properties can be leased on acceptable terms. We also believe thatour present facilities are suitable for continuing our existing and plannedoperations.

**Item 3.**                        LegalProceedings

On November 9, 2006,we issued a Statement of Claim against Deloitte & Touche LLP (which werefer to as Deloitte) in the Ontario Superior Court of Justice. In theStatement of Claim, we have alleged negligence against Deloitte with respect tothe auditing services provided to us in connection with its audit in accordancewith Canadian generally accepted accounting principles of our 2002, 2003 and2004 audited financial statements. The Statement of Claim seeks damages in theamount of Cdn. $4,070,000 for direct and indirect losses. On December 22,2006, Deloitte filed an answer to the Statement of Claim.

**Item 4.**                        Submissionof  Matters to a Vote of Security Holders

No matter was submitted toa vote of our shareholders, though the solicitation of proxies our otherwise,during the fourth quarter of fiscal 2007.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.

**Market Information**

Our common stock is listedon the Toronto Stock Exchange and is traded under the symbol “XPL.” We may seekapproval to list our common stock on a national stock exchange or stock marketin the United Sates. We have one class of common equity and two classes ofpreferred shares. As of May 31, 2007, there were 338 holders of record ofour common shares. The following table sets forth, for the periods indicated,the high and low sales price of our common stock on the Toronto Stock Exchange.

| **PERIOD**                                 | ** ** | ** **        | ** ** | **High**          | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-------------------|------------|---------|------------|
| ** **                                 | ** ** | **(Cdn. $)** | ** ** | **(Cdn. $)** | ** ** |
| **Fiscal Year Ended March 31 2006:**  |       |              |       |              |       |    |       |   |   |
| First Quarter                              |       |              | 1.14       |              |       |    | 0.35       |   |   |
| Second Quarter                             |       |              | 1.10       |              |       |    | 0.70       |   |   |
| Third Quarter                              |       |              | 0.88       |              |       |    | 0.51       |   |   |
| Fourth Quarter                             |       |              | 0.68       |              |       |    | 0.37       |   |   |
| **Fiscal Year Ended March 31, 2007:** |       |              |       |              |       |    |       |   |   |
| First Quarter                              |       |              | 0.50       |              |       |    | 0.30       |   |   |
| Second Quarter                             |       |              | 0.68       |              |       |    | 0.35       |   |   |
| Third Quarter                              |       |              | 0.46       |              |       |    | 0.36       |   |   |
| Fourth Quarter                             |       |              | 0.50       |              |       |    | 0.32       |   |   |

 

**Dividend Policy**

We have not declared or paid any dividends on ourcommon stock during our last five fiscal years. Our preferred shares carry anannual 5% dividend, payable quarterly in shares of our common stock.

The payment of cashdividends on our common stock in the future will depend on our earnings,capital requirements, and operating and financial conditions and on such otherfactors as our board of directors may consider appropriate. Under the terms ofour certificate of incorporation, we are prohibited from paying dividends onour common stock unless and until all accrued and unpaid dividends are paid onour Series A and Series B Preferred Stock. Furthermore, under theterms of our loan agreement with a commercial bank, we are prohibited frompaying cash dividends without the bank’s prior written consent. We currentlyexpect to use all available funds to finance the future development andexpansion of our business and do not anticipate paying dividends on our commonstock in the foreseeable future.

**Recent Sales ofUnregistered Securities**

On May 30, 2006, we completed a recapitalizationpursuant to which approximately $18.9 million of indebtedness, representedby 10% secured debentures in the original principal amount of approximately$17.8 million and accrued interest of approximately $1.1 million was exchangedfor 55,520,542 of our Series A Preferred Shares. This transaction wasexempt from registration under the Securities Act of 1933 (the “Act”) pursuantto Section 3(a)(9) as the securities were exchanged by us with ourexisting security holders and no commission or other remuneration was paid orgiven for soliciting the exchange. The Series A Preferred Shares areconvertible initially on a one-for-one basis into shares of common stock at anytime at the option of the holder and will convert upon the occurrence ofspecified events. The conversion rate is subject to adjustment for stockdividends, splits, combinations and similar events. In the event that the weissue additional securities at a purchase price less than the then current Series APreferred Share conversion price, such conversion price will be adjusted inaccordance with the formula specified in our certificate of incorporation.

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On July 6, 2006 andJuly 31, 2006, we issued 2,920,585 and 5,031,768 Series A PreferredShares, respectively, at an offering price of $0.34 per share resulting ingross proceeds of approximately $2.7 million. The proceeds were used forworking capital and general corporate purposes. The issuance of Series APreferred Shares in these two transactions was exempt from the registrationrequirements of the Act pursuant to Section 4(2) thereof andRegulation D promulgated thereunder, based upon representations that weobtained from each purchaser that such purchaser was an “accredited investor”as such term is defined in Rule 501(a) of Regulation D.

On August 9, 2006 we issued 9,988,513 Series BPreferred Shares at an offering price of $0.34 per share resulting in grossproceeds of approximately $3.4 million. The proceeds were used for workingcapital and general corporate purposes. The issuance of Series B PreferredShares in this transaction was exempt from the registration requirements of theAct pursuant to Section 4(2) thereof and Regulation D promulgatedthereunder, based upon representations that we obtained from each purchaserthat such purchaser was an “accredited investor” as such term is defined in Rule 501(a) ofRegulation D. The Series B Preferred Shares are convertible initially on aone-for-one basis into shares of common stock at any time at the option of theholder and will convert upon the occurrence of specified events. The conversionrate is subject to adjustment for stock dividends, splits, combinations andsimilar events. In the event that the we issue additional securities at apurchase price less than the then current Series B Preferred Shareconversion price, such conversion price will be adjusted in accordance with theformula specified in our certificate of incorporation.

On September 22, 2006, we issued 2,848,253 commonshares at an offering price of $0.35 per share resulting in gross proceeds ofapproximately $1.0 million. The proceeds were used for working capital andgeneral corporate purposes. The issuance of common shares in this transactionwas exempt from the registration requirements of the Act pursuant to Section 4(2) thereofand Regulation D promulgated thereunder, based upon representations that weobtained from each purchaser that such purchaser was an “accredited investor”as such term is defined in Rule 501(a) of Regulation D.

Duringour fiscal year ended March 31, 2007, we issued a total of 244,483 commonshares to Martin Janis & Company, Inc. in return for $119,190 of investorrelations services provided to us by Martin Janis. The issuance of commonshares was exempt from the registration requirements of the Act pursuant to Section 4(2) asthe transaction did not involve a public offering. The shares were issued asfollows:

| **Date Issued**     | ** ** | **Number of Shares** | ** ** | **Price Per Share** | ** ** |
|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| April 13,  2006     |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| May 18, 2006        |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| June 14,  2006      |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| July 17,  2006      |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| August 21,  2006    |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| September 20,  2006 |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| October 17,  2006   |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| November 15,  2006  |       |                           | 17,102     |                          |       |   | $ | 0.58 |   |   |
| March 13, 2007      |       |                           | 107,667    |                          |       |   | $ | 0.37 |   |   |

 

**Item 6.**                        SelectedFinancial Data.

The table below presents our selected historicalconsolidated financial data. The statement of operations data for the yearsended March 31, 2007, 2006 and 2005 and the balance sheet data as of March 31,2007 and 2006 are derived from our audited consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K. The statementof operations data for the years ended March 31, 2004 and 2003 and thebalance sheet data as of March 31, 2005, 2004 and 2003 are derived fromour audited consolidated financial statements not included in this AnnualReport on Form 10-K. The 

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results included below andelsewhere are not necessarily indicative of our future performance. You shouldbe read this information together with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our consolidated financialstatements and related notes included elsewhere in this Annual Report on Form 10-K.

See Note 2(b) to our 2007 consolidatedannual financial statements for a discussion regarding the restatement of our2006 and 2005 financial statements.

| ** **                                                                                                             | ** ** | **Year Ended March 31,**                                                           | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2007**                                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                             | ** ** | ** **                                                                                        | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | **(In thousands of U.S. dollars, except per share data)** | ** ** |
| **STATEMENT OF OPERATIONS DATA:**                                                                                      | ** ** | ** **                                                                                        | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                                                |       | $                                                                                                 | 34,534     |   |   | $ | 27,480 |   |   | $ | 17,530 |   | $ | 24,631 |   | $ | 15,091 |   |
| Cost of revenue                                                                                                        |       | 24,723                                                                                            |       |   | 20,671 |   |   | 13,860 |   | 20,880 |   | 12,357 |   |
| Gross profit                                                                                                           |       | 9,811                                                                                             |       |   | 6,809 |   |   | 3,670 |   | 3,751 |   | 2,734 |   |
| Expenses:                                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Sales, marketing  and support                                                                                          |       | 6,094                                                                                             |       |   | 5,284 |   |   | 4,839 |   | 4,504 |   | 5,644 |   |
| Product research,  development and engineering                                                                         |       | 2,935                                                                                             |       |   | 2,402 |   |   | 2,327 |   | 2,523 |   | 3,472 |   |
| General  administration                                                                                                |       | 5,058                                                                                             |       |   | 4,143 |   |   | 4,179 |   | 4,616 |   | 4,135 |   |
|                                                                                                                   |       | 14,087                                                                                            |       |   | 11,829 |   |   | 11,345 |   | 11,643 |   | 13,251 |   |
| Loss from  operations                                                                                                  |       | (4,276                                                                                            | )          |   | (5,020 | ) |   | (7,675 | ) | (7,892 | ) | (10,517 | ) |
| Interest and  other expense                                                                                            |       | (2,339                                                                                            | )          |   | (3,966 | ) |   | (2,826 | ) | (43,526 | ) | (1,486 | ) |
| Net loss                                                                                                               |       | $                                                                                                 | (6,615     | ) |   | $ | (8,986 | ) |   | $ | (10,501 | ) | $ | (12,248 | ) | $ | (12,003 | ) |
| Deemed dividends  related to beneficial conversion feature of convertible Preferred Shares and  Convertible Debentures |       | $                                                                                                 | (3,381     | ) |   | N/A |   |   | N/A |   | N/A |   | N/A |   |
| Dividends  attributable to Preferred Shares                                                                            |       | (885                                                                                              | )          |   | N/A |   |   | N/A |   | N/A |   | N/A |   |
| Net loss  attributable to common shareholders                                                                          |       | $                                                                                                 | (10,881    | ) |   | N/A |   |   | N/A |   | N/A |   | N/A |   |
| Loss per share                                                                                                         |       | $                                                                                                 | (0.11      | ) |   | $ | (0.16 | ) |   | $ | (0.21 | ) | $ | (0.40 | ) | $ | (0.51 | ) |
| Deemed dividends  related to beneficial conversion feature of convertible Preferred Shares and  Convertible Debentures |       | (0.06                                                                                             | )          |   | N/A |   |   | N/A |   | N/A |   | N/A |   |
| Dividends  attributable to Preferred Shares                                                                            |       | (0.01                                                                                             | )          |   | N/A |   |   | N/A |   | N/A |   | N/A |   |
| Loss per share  attributable to common shareholders                                                                    |       | $                                                                                                 | (0.18      | ) |   | N/A |   |   | N/A |   | N/A |   | N/A |   |

 

| ** **                           | ** ** | **As of March 31,**                     | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | ** **                                             | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **(In thousands of U.S. dollars)** | ** ** |
| **BALANCE SHEET DATA:**              | ** ** | ** **                                             | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Current assets                       |       | $                                                      | 10,529     |   | $ | 9,208 |   |   | $ | 6,622 |   |   |   | $ | 8,589 |   |   | $ | 9,675 |   |
| Current liabilities                  |       | 5,319                                                  |       | 13,714 |   |   | 14,786 |   |   |   | 12,526 |   |   | 6,784 |   |
| Working capital  (deficit)           |       | 5,210                                                  |       | (4,506 | ) |   | 8,164 |   |   |   | 1,063 |   |   | 2,891 |   |
| Total assets                         |       | 11,114                                                 |       | 11,224 |   |   | 7,094 |   |   |   | 9,383 |   |   | 10,971 |   |
| Long-term  debt                      |       | 250                                                    |       | 11,523 |   |   | — |   |   |   | 7,099 |   |   | 3,714 |   |
| Total liabilities                    |       | 5,569                                                  |       | 25,237 |   |   | 14,786 |   |   |   | 14,625 |   |   | 10,498 |   |
| Shareholders’  equity (deficit) |       | 5,545                                                  |       | (14,013 | ) |   | (7,692 | ) |   |   | (5,242 | ) |   | 473 |   |
|                                      |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operation.

*You should read the following discussion together with“Selected Financial Data” and our consolidated financial statements and therelated notes included elsewhere in this Annual Report on Form  10-K.This discussion contains forward-looking statements, which involve risks anduncertainties. Our actual results may differ materially from those we currentlyanticipate as a result of many factors, including the factors we describedunder “Risk Factors” and elsewhere in this Annual Report on From 10-K.*

**General**

We engineer, develop,integrate and market rugged, mobile computing systems. Our products andfeatures are designed to enhance the ability of persons to perform their joboutside of traditional office settings. Our line of iXTM Tablet PCs are designedto operate in challenging work environments, such as extreme temperatures,repeated vibrations or dirty and dusty conditions. Our products can be fittedwith a wide range of performance-matched accessories, including multipledocking station solutions, wireless connectivity alternatives, globalpositioning system modules, biometric and smartcard modules, as well astraditional peripherals like keyboards, mouses and cases.

We have undergonesignificant changes over the past few years, including the hiring of a newmanagement team, the establishment of a new sales team that expanded our marketfocus from primarily small public safety organizations to markets includingFortune 500 and Global 2000 companies, improvements in our products andoperational processes, a recapitalization that involved the conversion ofapproximately $19 million in debt (including accrued interest) to equitythrough the issuance of Series A Preferred Stock, and the relocation ofour headquarters from Mississauga, Ontario to Austin, Texas.

Our predecessor entity,Xplore Technologies Inc., was incorporated under the laws of the Province ofOntario on August 20, 1996. That company was subsequently continued underthe federal laws of Canada on March 22, 2000 and, on March 25, 2000,was amalgamated with Xplore Technologies Corp. under the federal laws of Canadato continue as Xplore Technologies Corp. On June 20,2007, we changed our jurisdiction of incorporation from the federaljurisdiction of Canada to the State of Delaware.

**Critical Accounting Policies**

Our consolidated financialstatements and accompanying notes included in this Annual Report on Form 10-Kare prepared in accordance with U.S. generally accepted accounting principles.Preparing financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenueand expenses, and related disclosure of contingent assets and liabilities.These estimates and assumptions are affected by management’s application ofaccounting policies. Estimates are deemed critical when a different estimatecould have reasonably been used or where changes in the estimates arereasonably likely to occur from period to period, and would materially impactour financial condition, changes in financial condition or results ofoperations. Our significant accounting policies are discussed in Note 2 ofthe Notes to our Annual Consolidated Financial Statements as of March 31,2007 and 2006 and for each of years in the three year period ended March 31,2007. On an ongoing basis, we evaluate our estimates, including those relatedto our revenue recognition, inventory valuation, warranty reserves, toolingamortization, financial instruments, and income taxes. We base our estimates onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates.

Our critical accountingpolicies are as follows:

*Revenue Recognition.**  *Our revenue is derived from thesale of rugged, mobile technology which includes rugged mobile computers andrelated accessories. Our customers are predominantly resellers. However, inlimited circumstances we sell directly to end-users. We follow the principlesof Staff 

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AccountingBulletins 101 and 104, and other related pronouncements. Revenue is recognized,net of an allowance for estimated returns, when title and risks of ownershipare transferred to the customer, and all significant contractual obligationshave been satisfied, the sales price is fixed or determinable and the abilityto collect is reasonably assured. Our revenue recognition criteria havegenerally been met when the product has been shipped. Shipments are based onfirm purchase orders from our customers with stated terms. The shipping termsare F.O.B. shipping point. We do not have installation, training and othercommitments subsequent to shipment that are other than incidental. Our pricesare determined based on negotiation with our customers and are not subject toadjustment. Generally, we do not hold inventory at our resellers and we do notexpect resellers to hold inventories of our products other than in limitedcircumstances where such inventory is monitored by us. As a result, we expectreturns to be minimal. Our allowance for returns is calculated and regularlyreviewed based on historical experience. We have not had material adjustmentsas our returns have been minimal.

*Warranty Reserves.**  *Provisions are made at the time ofsale for warranties, which are based on our experience and monitored regularly.The revenue related to warranty is recognized when our obligations are coveredby a warranty coverage agreement provided by a third party. If our estimatesfor warranties and returns are too low, additional charges will be incurred infuture periods and these additional charges could have a material adverseeffect on our financial position and results of operations. Our estimates havenot required significant adjustment due to actual experience.

*Inventory Valuation.**  *We adjust our inventory values sothat the carrying value does not exceed net realizable value. The valuation ofinventory at the lower of average cost or net realizable value requires us touse estimates regarding the amount of current inventory that will be sold andthe prices at which it will be sold and our assessment of expected orders fromour customers. Additionally, the estimates reflect changes in our products orchanges in demand because of various factors, including the market for ourproducts, obsolescence, technology changes and competition. While the estimatesare subject to revisions and actual results could differ, our experience isthat the estimates overseen by current management have not been required to be adjustedbased on actual results. Accordingly, while any change to the estimates couldhave a material impact, there have been no material corrections to originallyprovided amounts.

*Tooling Amortization.**  *We amortize tooling costs over atwo year period or estimated life, whichever is shorter. Those costs arerecorded as a cost of revenue, subject to an assessment that future revenuewill be sufficient to fully recover the cost of the tooling. This assessmentrequires an assessment of the market for our products and our future revenueexpectations. On a quarterly basis, this assessment is reviewed and the cost oftooling is written down to its net realizable value if its recoverability isnot reasonably expected based on estimates of future revenue. We have notdetermined that useful life was less than two years. Accordingly, we have notrecorded material adjustments.

*Income Taxes.**  *We have significant valuationallowances that we intend to maintain until it is more likely than not thedeferred tax assets will be realized. Our income tax expense recorded in thefuture will be reduced to the extent of decreases in our valuation allowances.

Changes in the tax lawsand rates could also affect recorded deferred tax assets and liabilities in thefuture. We are not aware of any such changes that would have a material effecton our results of operations, cash flows or financial position.

*Financial Instruments.**  *The debentures and the warrants weissued have been valued separately using the Black-Scholes methodology.The debentures reflected in our financial statements at their discounted valueand the difference between this discount amount and the face value of thedebentures, which is repayable at maturity, was amortized as additionalnon-cash interest expense during the term of the debentures. The determinationof the value attributed to the warrants and debentures required the use ofestimates and judgments particularly related to the assumptions used in theBlack-Scholes calculation. In addition, options to acquire common sharesissued to employees have been valued using a Black-Scholes calculationand their valuation is impacted by the assumptions used in this calculation.

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**Recent Accounting Pronouncements**

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”).SFAS 154 replaces APB No. 20, “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements” and establishesretrospective application as the required method for reporting a change inaccounting principle. SFAS 154 provides guidance for determining whetherretrospective application of a change in accounting principle is impracticableand for reporting a change when retrospective application is impracticable. Thereporting of a correction of an error by restating previously issued financialstatements is also addressed. SFAS 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. We do not believe that the adoption of SFAS 154 in fiscal 2007 willhave a material impact on our consolidated balance sheets and statements ofoperations, shareholders’ equity and cash flows.

In December 2004,FASB issued SFAS No. 123R which revises SFAS No. 123 and is effectivefor small business issuers as of the beginning of the first interim or annualreporting period after December 31, 2005 with early adoption permitted.SFAS No. 123R requires public entities to recognize the cost of allshare-based payments to employees, including grants of stock options, at thefair value of the award at the date of the grant. The cost will be recognizedover the period during which an employee is required to provide service inexchange for the award—the requisite service period (usually the vestingperiod). No compensation cost is recognized for share-based payments for whichemployees do not render the requisite service. Employee share purchase planswill not result in recognition of compensation cost if certain conditions aremet; those conditions are much the same as the related conditions in Statement123. We have, as described in Note 11 to the consolidated financialstatements included herein, adopted the provision of SFAS 123R beginningwith the year ended March 31, 2004.

We have valued the optionsseparately using the Black-Scholes option pricing model using discountrates of approximately 4.8%, 4.2% and 3.8% and volatility of 113%, 127% and 83%respectively, and no dividends for the years ended March 31, 2007, 2006and 2005. Compensation costs of $819,000, $522,000, and $305,000 have beenrecorded for the years ended March 31, 2007, 2006 and 2005, respectively.

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments.” which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155permits hybrid financial instruments that contain an embedded derivative thatwould otherwise require bifurcation to irrevocably be accounted for at fairvalue, with changes in fair value recognized in the statement of income. Thefair value election may be applied on an instrument-by-instrumentbasis. SFAS No. 155 also eliminates a restriction on the passivederivative instruments that a qualifying special purpose entity may hold. SFAS No. 155is effective for those financial instruments acquired or issued after December 1,2006. At adoption, any difference between the total carrying amount of theindividual components of the existing bifurcated hybrid financial instrumentand the fair value of the combined hybrid financial instrument will berecognized as a cumulative-effect adjustment to beginning retainedearnings. We do not expect the new standard to have any material impact on ourfinancial position or results of operations.

In March 2006, theFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,an amendment of FASB Statement No. 140.” SFAS No. 156 requires allseparately recognized servicing assets and servicing liabilities to beinitially measured at fair value, if practicable. The standard permits anentity to subsequently measure each class of servicing assets or servicingliabilities at fair value and report changes in fair value in the statement ofincome in the period in which the changes occur. SFAS No. 156 is effectivefor our company as of April 1, 2007. We do not expect the new standard tohave any material impact on our financial position or results of operations.

In February 2007, theFASB issued SFAS  No. 159, “The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115.” This statement allows companies to elect to measure certain eligiblefinancial instruments and other items at fair value. Companies may choose tomeasure items at fair value at a specified election date, and subsequentunrealized gains and losses are recorded in income at each subsequent reportingdate. SFAS No. 159 is 

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effectivefor fiscal years beginning after November 15, 2007, with earlier adoptionpermitted under certain circumstances. We are required to adopt SFAS No. 159no later than the first quarter of fiscal 2009. We do not expect the newstandard to have a material impact on our financial position or results of operations.

In September 2006,the SEC issued SAB 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.”  This document provides interpretive guidanceon the consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. SAB 108requires registrants to quantify errors using both the iron curtain method, andthe rollover method, and requires adjustment if either method indicates amaterial error. The rollover method quantifies a misstatement’s effect on thecurrent year’s income statement, which does not consider the effects ofcorrecting the portion of the current year balance sheet misstatement thatoriginated in prior years. The iron curtain method quantifies errors as thecumulative amount by which the balance sheet for the current year is misstated,irrespective of the misstatement’s years of origination. SAB 108 is effectivefor fiscal years ending after November 15, 2006, and is effective for usin fiscal 2007. The adoption of SAB 108 did not have any other material impactson our financial position or results of operations.

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans—an amendment of FASB Statements No. 87,88, 106 and 132 (R).”  The statementrequires companies to report the funded status of their defined benefit pensionplans on the balance sheet. Changes in the funded status in the year in whichthe changes occur are recorded through other comprehensive income. Thestatement requires that companies measure plan assets and obligations as of theend of the company’s fiscal year. The statement also requires enhanced disclosuresrelated to defined benefit pension plans. SFAS No. 158 is effective as ofthe end of our first fiscal year ending after December 15, 2006. Theadoption of SFAS No. 158 did not have a material impact on our financialposition or results of operations.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.”  The statement clarifies the definition offair value, establishes a framework for measuring fair value, and expands thedisclosure requirements regarding fair value measurements. SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007, with earlieradoption permitted. We are required to adopt SFAS No. 157 no later thanthe fist quarter of fiscal 2008. We do not expect the adoption of SFAS No. 157to have a material impact on our financial position or results of operations.

In July 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109 (FIN 48).”  FIN 48 prescribes a comprehensive model forrecognizing, measuring, presenting and disclosing in the financial statementstax positions taken or expected to be taken on a tax return, including adecision on whether or not to file in a particular jurisdiction. Under FIN 48,a tax benefit from an uncertain position may be recognized only if it is “morelikely than not” that the position is sustainable based on its technical merits.FIN 48 is effective for fiscal years beginning after December 15.2006, andwe will adopt FIN 48 beginning in the first quarter of fiscal 2008. Theadoption of FIN 48 will not have a material impact on our financial position orresults of operations.

**Restatement**

Subsequent to theirissuance, we determined that our 2006, 2005 and 2004 annual consolidatedfinancial statements should be restated. The restatement reflected twoadjustments related to amounts recorded with respect to our December 17,2004 convertible debenture financing (see “—Liquidity and Capital Resources”).The value assigned to the common share purchase warrants issued in thefinancing was increased from $945,000 to $2,234,000. In addition, therestatement reflected recognition of a beneficial conversion feature valued at$2,766,000. These amounts were recorded as discounts to the face amount of the December 17,2004 convertible debentures and were recognized as non-cash interest expenseduring the term of the debentures.

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In addition, therestatement adjusted the timing of the recognition of non-cash interest expensefor long-term debentures. The extension of the maturity dates of thesedebentures were originally accounted for as settlements of the original debtsand related unamortized discounts were immediately expensed. The restatementreflected these transactions as modifications and accounted for the effects ofthe restructurings prospectively from the time of the restructurings. Theunamortized discounts at the time of the restructurings have been accordinglyrecognized over the new term of the debentures.

In our annual financialstatements, the restatement reflected that our interest expense and net losswere understated by $2,413,000 and $1,610,000 for 2006 and 2005, respectively,and interest expense and net loss were overstated by $451,000 for 2004. Lossper share increased by $0.04 per share in 2006 and $0.01 per share in 2005 andwas reduced by $0.01 per share in 2004. Debentures were overstated by $482,000in 2006 and $2,895,000 in 2005, additional paid-in capital was understated by$4,055,000 in 2006 and 2005 and accumulated deficit was understated by$3,573,000 in 2006 and $1,160,000 in 2005.

The restatement is furtherdescribed in Note 2(b) to our consolidated annual financialstatements. The following management’s discussion and analysis of financialcondition and results of operations gives effect to the restatement.

**Results of Operations**

*Revenue.**  *We derive revenue from sales of ourrugged wireless Tablet PC systems which encompass a family of active pen andtouch Tablet PC computers, embedded wireless, desktop, vehicle, fork truckdocking stations and a range of supporting performance matched accessories,peripherals and support services. Our revenue also includes service revenuederived from installation related services and out-of-warranty repairs.

*Cost of Revenue.**  *Cost of revenue consists of thecosts associated with manufacturing, assembling and testing our products,related overhead costs, maintenance, compensation and other costs related tomanufacturing support, including depreciation of tooling assets. We usecontract manufacturers to manufacture our products and supporting components,which represents a significant part of our cost of revenue. In addition, thecosts associated with providing warranty repairs, as well as the costsassociated with generating service revenue, are included in cost of revenue.

*Gross Profit.**  *Gross profit has been, and willcontinue to be, affected by a variety of factors, including competition, theproduct mix and average selling prices of products, maintenance, new productintroductions and enhancements, the cost of components and manufacturing labor,fluctuations in manufacturing volumes, component shortages, the mix ofdistribution channels through which our products are sold, and warranty costs.

*Sales, Marketing andSupport.**  *Sales,marketing and support expenses include salaries, commissions, agent fees andcosts associated with co-operative marketing programs, as well as otherpersonnel-related costs, travel expenses, advertising programs, tradeshows and other promotional activities associated with the marketing andselling of our products. We are expanding our sales operations in order toincrease awareness and sales of our products. We also believe part of ourfuture success will be dependent upon establishing successful relationshipswith a variety of resellers. We expect that sales and marketing expenses willincrease in absolute dollars as we expand our sales efforts, hire additionalsales and marketing personnel and initiate additional marketing programs.

*Product Research,Development and Engineering.**  *Product research, development and engineeringexpenses consist of salaries and related expenses for development andengineering personnel, and non-recurring engineering costs, including prototypecosts, related to the design, development, testing and enhancement of ourproduct families. We expense our research and development costs as they areincurred. There may be components of our research and development efforts thatrequire significant expenditures, the timing of which can cause quarterlyfluctuation in our expenses.

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*General Administration.**  *General administration expensesconsist of salaries and related expenses for finance, accounting, legal, humanresources and information technology personnel, professional fees and corporateexpenses, and costs associated with being a public company, includingregulatory compliance costs.

*Interest.**  *Interest expense includes intereston all debenture and short-term promissory note borrowings, interest onborrowings related to the bank revolving credit facility, non-cash interestcharges representing the amortization of the debenture discount andamortization of deferred financing costs consisting principally of legal feesrelated to the financing transactions. Debentures issued in fiscal 2005 wereoriginally reflected in the financial statements at their discounted value andthe difference between this discount amount and the face value of thedebentures, which is repayable at maturity, has been amortized as additionalnon-cash interest expense during the term of the debentures. Interest on ourone outstanding debenture is accrued at a rate of 10% per annum and paidsemi-annually.

*Other Income and Expenses.**  *Other income and expenses includesgains and/or losses on dispositions of assets, foreign exchange and othermiscellaneous income and expense.

***Fiscal Year Ended March 31,2007 vs. Fiscal Year Ended March 31, 2006***

*Revenue.**  *Total revenues for the fiscal yearended March 31, 2007 were $34,534,000 compared to $27,480,000 for thefiscal year ended March 31, 2006, an increase of $7,054,000. Revenue forfiscal year 2007 increased over the prior year revenue by approximately 26%. Forthe year ended March 31, 2007, approximately 89%, of the revenue growthwas due to unit sales growth attributable to an increase in the size of oursales force by approximately 10% in fiscal 2007 combined with the momentum froman increased focus on the Fortune 500/Global 2000 markets, which provide forlarger unit orders. For year ended March 31, 2007, the remaining 11%, ofrevenue growth was due to the favorable impact of pricing. Our average sellingprice improved by approximately 11% for the year ended March 31, 2007,primarily due to a change in our product mix. In fiscal year 2007, we did notexperience significant changes in prices charged for our products.Approximately 20% of the prior year product mix, as compared to less than 1% ofthe current year product mix, consisted of the discontinued Renegade productlines that were heavily discounted.

We operate in one segment,the sale of rugged mobile wireless Tablet PC computing systems. The majority ofour revenue was derived from sales in the United States. Canada was the onlycountry outside of the United States that accounted for more than 10% of ourrevenue during the year ended March 31, 2007, with 10.7% of the totalrevenue. The Netherlands was the only country outside of the United States thataccounted for more than 10% of our revenue during the year ended March 31,2006 with 12.6% of the total revenue. At March 31, 2007, there were twocustomers with a receivable balances that were greater than 10% of theoutstanding receivables, Hewlett Packard Company accounted for 23% and SimcoeMuskoka District Health Unit accounted for 18%. Both receivables were collectedsubsequent to our fiscal year end.

We have a number ofcustomers, however, in a given year a single customer can account for asignificant portion of our sales. For the fiscal year ended March 31, 2007, there were no customers thataccounted for more than 10% of our total revenue. For the fiscal year ended March 31,2006, we had one customer that represented more than 10% of our total revenueand that customer was located in the Netherlands.

*Cost of Revenue.**  *Total cost of revenue for the yearended March 31, 2007 was $24,723,000 compared to $20,671,000 for the yearended March 31, 2006, an increase of $4,052,000. Cost of revenue increasedby approximately 20% from fiscal year 2006 to fiscal year 2007, and most ofthis was attributable to an approximately 26% increase in revenue relatedrespective increases in product sales from fiscal year 2006 to fiscal year2007. We rely on a single supplier for the majority of our finished goods. At March 31,2007 and 2006, we owed $2,095,000 and $3,497,000, respectively, recorded inaccounts payable and accrued 

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liabilities. Theyear to date inventory purchases and engineering services from this supplier atMarch 31, 2007 and 2006 were $16,275,000 and $17,255,000, respectively.

*Gross Profit.**  *Total gross profit increased by$3,002,000 to $9,811,000 (28.4% of revenue) for the year ended March 31,2007 from $6,809,000 (24.8% of revenue) for the year ended March 31, 2006.The improvement in gross profit as a percentage of revenue for the year ended March 31,2007 as compared to the prior year was due to the more favorable Centrino-basedproduct mix. The prior year product mix included sales of the older generationRenegade product lines that had been discontinued and as such discountedsignificantly below the Centrino-based product lines. The Renegade unitsales for the year ended March 31, 2006 were 19.8% of total units sold ascompared to less than one percent of total units sold in the year ended March 31,2007. The favorable impact of the product mix shift was slightly offset by anincrease in tooling amortization associated with the new C3 product lines whichbecame available in the second quarter of fiscal 2007. The increase in toolingcharges reduced the gross margin percentages by 0.6% for the year ended March 31,2007.

*Sales, Marketing andSupport Expenses.**  *Sales,marketing and support expenses for the year ended March 31, 2007 were$6,094,000 compared to $5,284,000 for the year ended March 31, 2006. This$810,000 increase was largely due to additional marketing activities consistingof increases in marketing co-operative development charges of $190,000, andpromotional costs and tradeshow activities related to the new C3 product lineof $216,000. Additionally, the overall increase included $314,000 of additionalcommissions commensurate with the increase in revenue. There was also a shiftin personnel expenses with headcount reductions in marketing and increasedheadcount in sales. The larger sales force accounted for increases in travel,phone and administrative costs aggregating $186,000.

*Product Research, Developmentand Engineering Expenses.**  *Product research, development and engineeringexpenses for the year ended March 31, 2007 increased by $533,000 to$2,935,000 when compared to $2,402,000 for the year ended March 31, 2006. Forthe year ended March 31, 2007, additional engineers required for newdevelopment projects increased related headcount costs over the prior year by$296,000 and certification costs increased by $321,000. These increases wereoffset by a larger net reduction of $884,000 in non-recurring engineeringcosts. This decline resulted from the timing of development projects. The 2007fiscal year projects principally included initial development activitiesrelated to a rugged notebook and renewal of existing product offerings ascompared to the prior year period. This included the completion of the DualMode AllVueTM tablet functionality released in early 2006, completion of alow-cost docking solution and initial development activity for the C3 tablet(which is RoHs compliant) that was released in the second quarter of fiscal2007. We expect our research and development costs to increase during the nextyear as we develop a new family of rugged products.

*General AdministrationExpenses.**  *Generaladministration expenses for the year ended March 31, 2007 were $5,058,000compared to $4,143,000 for the year ended March 31, 2006. A significantportion of the $915,000 increase was related to our corporate migration to theUnited States and are non-recurring. These include legal costs of approximately$501,000, principally related to our corporate migration. Fiscal 2007 alsoincluded approximately $568,000 for consulting services related to ourmigration and funding strategies, of which $236,000 is a non-cash charge forthe value of warrants issued for such services. The increase includes $184,000for headcount costs associated with the staffing or upgrading of key positionsthat were vacant in the prior year, including that of our President and ChiefOperating Officer. The headcount increase included $26,000 of one-time charges.Also, $50,000 of the general administrative increase is part of a non-cashcharge for the value assigned to stock options. These increases were offset bya one-time charge in the prior year of $175,000 for payments made in 2006 to ourformer Chief Executive Officer. In addition to the factors noted above, generaladministration costs for the year ended March 31, 2007 includesnon-recurring relocation costs of $60,000 for our new President and ChiefOperating Officer.

For fiscal years 2007 and2006, the fair value of employee stock-based compensation expense was$819,000 and $522,000, respectively. This expense was recorded in the employeerelated functional 

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classification.The increase in expense was primarily attributable to an option grant to all ofour employees in August 2006.

Depreciation andamortization expenses for fiscal years 2007 and 2006 were $579 000 and$464,000, respectively. This increase is related to depreciation of the WC3tooling which began in September 2006.

*Interest Expense.**  *Interest expense for the year endedMarch 31, 2007 was $1,467,000 compared to $4,867,000 for the year ended March 31,2006. Included in interest expense was non-cash interest expense associatedwith the amortization of deferred financing costs and debenture discounts.Non-cash interest expense for the year ended March 31, 2007 and 2006 was$979,000 and $3,048,000, respectively. This decrease was principally due to thetiming of the December 17, 2004 debenture financing and the discountsrelated to warrants issued and beneficial conversion feature. In addition, thecharge for the year ended March 31, 2007 was related to a portion of thevalue assigned to warrants issued to short-term debenture holders for theextension of the maturity date of the debentures to June 30, 2006. Theremaining unamortized value assigned to warrants of $424,000 was recorded as aloss on extinguishment of debt when the related short-term debentures andaccrued interest were exchanged for Series A Preferred Shares on May 30,2006. Also, in connection with December 17, 2004 financing, we issuedconvertible debentures that have a beneficial conversion feature as a result ofan in-the-money conversion at the commitment date. The value of the beneficialconversion feature of $2,766,000 was determined as the difference between theeffective conversion price and the Toronto Stock Exchange closing market priceof our common shares as of the financing’s commitment date multiplied by thenumber of shares into which the December 17, 2004 debentures areconvertible. The value of the beneficial conversion feature is presented as anunamortized discount to the December 17, 2004 debentures with anoffsetting amount to additional paid-in capital. The discount amount wasrecorded as additional non-cash interest expense during the term of thedebentures. The charge for the year ended March 31, 2006 was related tothese debenture discounts associated with the December 17, 2004 financing.The December 17, 2004 debentures and accrued interest were exchangedfor Series A Preferred Shares on May 30, 2006, and the remainingunamortized value assigned to the warrants and beneficial conversion feature of$408,000 was recorded as a loss on extinguishment of debt during the yearended  March 31, 2007. The decreasein interest paid in cash was attributable to our recapitalization completed in May 2006and the reduction in working capital borrowings since we raised capital throughprivate placements in our second quarter of fiscal 2007.

*Other Income (Expense).**  *Other income (expense) for the yearended March 31, 2007 was ($40,000) compared to $901,000 for the year endedMarch 31, 2006, an absolute difference of $941,000. The period ended March 31, 2006 included $877,000 ofother income resulting primarily for the sale of previously developed ruggedhandheld technology to a foreign value added reseller.

*Net Loss.**  *The net loss for the year ended March 31,2007 was $6,615,000 ($0.11 per share) compared to a net loss of $8,986,000($0.16 per share) for the year ended March 31, 2006.

*Net Loss Attributable toCommon Shareholders.**  *Infiscal 2007, we issued Series A and B Preferred Shares that earn acumulative 5% dividend. For the year ended March 31, 2007, there wereaccrued dividends of $798,000. Additionally, our convertible Series A and Series BPreferred Shares have beneficial conversion features as a result of an in-the-moneyconversion option at the respective dates of commitment. For each issuance ofthese Preferred Shares, the value of the beneficial conversion feature wasdetermined as the difference between the effective conversion price and theclosing market price of our common shares as reported on the Toronto StockExchange as of the related financing’s commitment date multiplied by the numberof shares into which the Preferred Shares are convertible. The value of thebeneficial conversion features are presented as deemed dividends to thepreferred shareholders with an offsetting amount to additional paid-in capital.Since the Preferred Shares are immediately convertible into common stock by theholders at any time, we recorded non-cash charges (deemed dividends) inconnection with the Preferred Share financings aggregating approximately$3,381,000 during the year ended March 31, 

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2007. These non-cashcharges increased the net loss attributable to common shareholders andincreased the loss per share attributable to the common shareholders by $0.07for the year ended March 31, 2007.

***Fiscal Year Ended March 31,2006 vs. Fiscal Year Ended March 31, 2005***

*Revenue.**  *Total revenue for the year ended March 31,2006 was $27,480,000 compared to $17,530,000 for the year ended March 31,2005, an increase of $9,950,000. An increase in unit sales growth accounted forapproximately 95% of the revenue increase. The unit growth was attributable toa full year of sales of our Centrino-based tablet, our second generationof the iX104 tablet, that was available for approximately one quarter in theprior year. Centrino-based unit sales increased approximately 300% andaccounted for approximately 80% of the fiscal 2006 product mix as compared toapproximately 30% of the fiscal 2005 product mix. The increase in Centrinounits was offset by an approximate 57% decline in the first generation iX104unit sales. The first generation iX104 accounted for approximately 20% of thefiscal 2006 product mix as compared to approximately 70% of the fiscal 2005product mix. We believe the processing power of the Centrino-based tabletand, most notably, our AllVueTM outdoor readable display technology contributedto the increase in Centrino unit sales. Additionally, fiscal year 2006 had afull year’s benefit of approximately half of our new sales team established inthe first half of fiscal year 2005. The new team was part of our strategy toexpand our market focus from primarily small public safety organizations tomarkets including Fortune 500/Global 2000 companies. Improvements in averageunit sales price accounted for approximately 5% of the revenue increase. Thiswas most notably attributable to the improved functionality and premiumassociated with the Dual Mode AllVueTM screens introduced in late fiscal 2006.

We operate in one segment,the sale of rugged mobile wireless Tablet PC computing systems. European sales,as well as sales from other parts of the world outside of North America, havebeen growing due to strong demand for our Tablet PC. From fiscal year 2005 tofiscal year 2006, our sales outside of North America grew from 22% to 37% oftotal sales, with Europe contributing most of this growth. In fact, revenuefrom Europe in fiscal year 2006 was $8,629,000, over three times the prior year’samount of $2,752,000.

The majority of ourrevenue is derived from sales in the U.S. Other than the Netherlands, with12.5% of the total revenue, no other country besides the U.S. accounted formore than 10% of our total revenue in fiscal year 2006. In fiscal year 2005,there was no one country, other than the U.S., that accounted for more than 10%of our total revenue. In fiscal years ended March 31, 2006 and 2005,revenues from customers within the U.S. totaled approximately$14.8 million and $13.1 million, respectively, and revenues fromcustomers outside the U.S. totaled approximately $12.7 million and$4.4 million, respectively.

We have a number ofcustomers, however, in a given year a single customer can account for asignificant portion of our sales. For the fiscal year ended March 31,2006, we had one customer that represented more than 10% of our total revenueand that customer was located in the Netherlands. In fiscal year 2005, therewere no customers that accounted for more than 10% of our total revenue.

*Cost of Revenue.  **Total cost of revenue for the yearended March 31, 2006 was $20,671,000 compared to $13,860,000 for the yearended March 31, 2005, an increase of $6,811,000. Cost of revenue increasedby approximately 49% from fiscal year 2005 to fiscal year 2006, and most ofthis was attributable to the approximately 57% increase in revenue from fiscalyear 2005 to fiscal year 2006. The cost of revenue did not grow at the samerate as revenue in fiscal year 2006. This was in part because the toolingdepreciation expense for fiscal year 2006 was less than fiscal year 2005 byapproximately $450,000 as the majority of the tooling assets became fullydepreciated during fiscal year 2005.*

*Gross Profit.**  *Total gross profit increased by$3,139,000 to $6,809,000 (24.8% of revenue) for the year ended March 31,2006 from $3,670,000 (20.9% of revenue) for the year ended March 31, 2005.This increase was due to increased revenues driven by a 54% increase in unitsales as well as a reduction in tooling depreciation as noted above.

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*Sales, Marketing andSupport.**  *Sales,marketing and support expenses for the year ended March 31, 2006 were$5,284,000 compared to $4,839,000 for the year ended March 31, 2005, anincrease of $445,000. This increase was primarily commission costs of $380,000commensurate with the increase in revenue, as well as $124,000 of travelrelated expense and advertising costs of $66,000, offset by ($204,000) of headcount related costs. We plan to continue investing in sales generationactivities as we grow our revenues.

*Product Research,Development and Engineering.**  *Product research, development and engineeringexpenses for the year ended March 31, 2006 were $2,402,000 compared to$2,327,000 for the year ended March 31, 2005, an increase of $75,000. Bothfiscal years had comparable levels of headcount and development activities.Fiscal year 2005 included costs related to our Centrino® based product that wascompleted in the third quarter of fiscal 2005, as well as some of thedevelopment costs for a rugged handheld product completed in the second quarterof fiscal 2005. We sold the handheld technology during the second quarter offiscal year 2006. The fiscal year 2006 development costs related principally toenhancement initiatives for our Centrino® based tablet, including the new DualMode AllVueTM functionality.

*General Administration.**  *General administration expenses forthe year ended March 31, 2006 were $4,143,000 compared to $4,179,000 forthe year ended March 31, 2005, a decrease of $36,000. Included in fiscalyear 2006 was a charge of approximately $1,025,000 for estimated costs toaddress and resolve the matters identified in a notification received from theOntario Securities Commission (“the OSC”) in June 2005. Without givingeffect to the OSC charge, general administration expenses declined by$1,061,000. This reduction was partially due to efficiencies gained from costmaintenance programs implemented in the middle of fiscal year 2005 andmaintained during fiscal year 2006, including reductions of $344,000 inheadcount related costs. In addition, fiscal year 2005 included non-recurringlegal costs of approximately $717,000 related to our successful defense ofcertain litigation, various non-recurring expenses associated with our physicalmigration to the U.S. that was completed during the second quarter of fiscalyear 2005, and increased administrative costs related to regulatory compliancerequirements. All of the defense litigation matters were settled and the suitsagainst us were dismissed in October 2004. The benefit of these expensereductions were partially offset in fiscal year 2006 by a charge of $175,000representing future cash payments for separation pay to our former ChiefExecutive Officer who resigned in September 2005.

For fiscal years 2006 and2005, the fair value of employee stock-based compensation expense was$522,000 and $305,000, respectively. This expense was recorded in the employeerelated functional classification. The increase in expense was primarilyattributable to an option grant to all of our employees in January 2006.Fiscal year 2006 has a full year of expense for this grant as compared to onlyone quarter of expense in fiscal year 2005.

Depreciation andamortization expenses for fiscal years 2006 and 2005 were $464,000 and$645,000, respectively. The majority of the fiscal year 2005 expense related tothe amortization of tooling costs of approximately $450,000, which wereexpensed over a two year period and recorded in cost of revenue. The majorityof the tooling assets were fully depreciated at March 31, 2005, whichaccounted for the decline from fiscal year 2005 to 2006. This decline waspartially offset by an increase in the amount of depreciation of approximately$204,000 related to our Centrino-based demonstration units in fiscal year2006. The cost of demonstration units was depreciated on a straight-line basisover six months. The remaining depreciation expense was recorded in generaladministration and increased by $65,000 related to the new fixed assetsassociated with the relocation to Austin, Texas.

*Interest.**  *Interest expense for the year endedMarch 31, 2006 was $4,867,000 compared to $2,818,000 for the year ended March 31,2005, an increase of $2,049,000. Non-cash interest expense associated with theamortization of debenture discounts was $3,048,000 for fiscal year 2006 and$1,920,000 for fiscal year 2005. The fluctuation was principally attributableto the timing of the debenture financing as well as that the December 17,2004 debentures had a beneficial conversion feature with a value of $2,766,000.Fiscal 

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year 2006 included$150,000 of deferred financing costs as compared to $21,000 in fiscal year2005. The increase was attributable to an increase in the number of financingtransactions. Interest on debenture and short-term borrowings was $1,548,000for fiscal year 2006 and $877,000 for fiscal year 2005. The increase inoutstanding borrowings accounted for the increase in interest expense. Intereston our bank revolving credit facility was $121,000 in fiscal year 2006 and nilin fiscal year 2005, as the facility was established in fiscal year 2006.

*Other Income and Expenses.**  *Other income for the year ended March 31,2006 was $901,000 compared to other expenses of $8,000 for the year ended March 31,2005, a net increase of $909,000. In August 2005, we sold a previouslydeveloped rugged handheld technology to a foreign value added reseller. Thesale agreement provided for an initial payment of approximately $900,000, whichwe received on August 5, 2005, and a future payment of approximately$700,000, net of our share of future development costs, upon the completion ofcertain agreed upon production activities by a third party manufacturer. As of March 31,2006, the agreed upon production activities was not completed and it isuncertain as to whether the purchaser would complete its obligations under thesale agreement. The proceeds received in August 2005, net of relatedselling expenses, in the amount of $877,000 have been reflected in other incomefor fiscal year 2006. Our investment in the rugged handheld technology waspreviously expensed when incurred since the expenditures were research anddevelopment related. The technology was in a development stage and did notaccount for any of our revenue.

*Net Loss.**  *The net loss for the year ended March 31,2006 was $8,986,000 ($0.16 per share) compared to a net loss of $10,501,000($0.21 per share) for the year ended March 31, 2005. The decrease in theamount of net loss was primarily due to the year-over-year increases in revenueand gross margin and relatively smaller increases in operating expensescompared to the prior period, offset by the increase in non-cash interestexpense.

**Liquidity and Capital Resources**

The rate of growth in thetablet market for our products and our success in gaining market share has beenless than we anticipated. We have incurred net losses in each fiscal year sinceour inception and we expect to report operating losses through the end of ourfiscal year ending March 31, 2008. As at March 31, 2007, our workingcapital was $5,210,000 and our cash and cash equivalents were $1,711,000. Frominception we have financed our operations and met our capital expenditurerequirements primarily from the gross proceeds of private and public sales of debtand equity securities totaling approximately $87.6 million.

***Prior Financings***

In December 2004, wecompleted a $5 million private placement of 10% secured convertibledebentures and common share purchase warrants to acquire an aggregate of9,100,000 common shares at $0.55 per share. The principal amount of eachdebenture was convertible, at the holder’s option, into common shares at aconversion price of $0.44 per share. Interest accrued on the debentures couldbe paid, at the option of the holder, by the issuance of our common shares. Thedebentures had an original maturity date of October 31, 2005, which wasextended to April 30, 2007.

In April 2005, weentered into a loan and security agreement with a commercial bank that enabledus to finance certain eligible accounts receivable up to a maximum $2,625,000.In September 2005, we replaced that credit facility with a new two-year $5million credit facility with the same commercial bank. In February 2007,we amended the terms of this credit facility. Under the amended terms, we mayfinance up to the lesser of $8 million or 80% of our U.S. and Canadian accountsreceivable outstanding for 90 days or less, plus 80% of our foreign accountsreceivable (up to $2.5 million) plus 25% of eligible inventory (up to $1,750,000).Borrowings under the amended credit facility continue to bear interest at primerate plus 2.25% (or prime plus 2.5% in the case of borrowings related to ourinventory). Under the amended terms, the maturity date for borrowings underthis credit facility was extended to March 31, 2008. Borrowings are 

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securedby all our assets and intellectual property. Pursuant to the terms of varioussubordination agreements between us and the commercial bank, a debenture holderand a supplier, the commercial bank has a first priority security interest inall of our assets, the supplier has a priority security interest in certain ofour trade debts, and the debenture holder has a security interest in all of ourassets. The loan agreement contains a number of financial and operationalcovenants, including that we have a minimum tangible net worth of at least$3,750,000 at all times and a minimum excess availability of $750,000. As of June 20,2007, we are in compliance with such covenants. As of June 20, 2007, therewas no borrowings outstanding under this credit facility.

In May and July 2005,we received aggregate gross proceeds of $3 million from one of ourprincipal shareholders, Phoenix Venture Fund LLC (which we refer to asPhoenix), an affiliate of Phoenix and another lender, in connection with theissuance of 10% secured promissory notes in the aggregate principal amount of$3 million. The notes had an original maturity date of August 31,2005, which was subsequently extended to September 15, 2005. The proceedswere used for working capital and development purposes. The notes were paid infull on September 15, 2005 as part of a later financing with Phoenix.

On September 15,2005, we entered into a debenture purchase agreement with Phoenix and otherlenders, including an affiliate of Phoenix (which we refer to as the Lenders),whereby the Lenders agreed to provide an aggregate of $5 million offinancing to us. The debentures had an original maturity date of March 31,2006 and borrowings under those debentures bore interest at 10% per annum. Weinitially drew on the facility and issued debentures to the Lenders in theaggregate amount of $3 million. We used the gross proceeds to re-paypromissory notes in the aggregate amount of $3 million previously issuedby our subsidiary in May and July 2005. On September 29, 2005, November 4,2005 and November 7, 2005, we made additional draws on the facility andissued debentures to the Lenders in the aggregate amount of $2 million.The proceeds were used for working capital and general corporate purposes. Inconnection with this financing, the maturity date of all of our otheroutstanding debentures was extended to April 30, 2007.

We agreed to issuewarrants to the holders of such debentures in the event that any these debentureswere not paid in full on or prior to March 31, 2006 entitling the holderto purchase that number of our common shares equal to the number of dollarsrepresenting the aggregate amount then due on such holder’s debenture. Sincethe debentures were not repaid on March 31, 2006, on April 10, 2006we issued warrants to purchase 5,235,343 of our common shares to the Lenders atan exercise price of Cdn.$0.45. The warrants are exercisable through April 10,2008 and the exercise price of the warrants was based on the average currentmarket price of our common shares for the five days before the date ofissuance. In contemplation of our recapitalization (described immediatelybelow), the maturity date of the debentures was extended to June 30, 2006.

On April 20, 2006, weentered into a financing agreement with Phoenix pursuant to which Phoenixagreed, at its sole discretion, to provide up to $5 million in financingto us. In connection with the financing, we issued Phoenix a 10% secureddebenture in the aggregate principal amount of $1.0 million, which had amaturity date of June 30, 2006. The debenture and related accrued andunpaid interest were exchanged for 2,970,185 Series A Preferred Shares aspart of the recapitalization discussed below. The remaining $4 millionbalance under the financing could be funded at any time through June 30,2006 (subsequently amended to July 31, 2006), in Phoenix’s solediscretion, through the issuance of additional Series A Preferred Shares,at a purchase price of $0.34 per share, to Phoenix and/or its assigns.

On April 21, 2006, weentered into an exchange and purchase agreement pursuant to which our debentureholders agreed to exchange approximately $18.9 million of indebtedness for55,520,542 of our Series A Preferred Shares. This recapitalization wascompleted on May 30, 2006. The recapitalization represented the conversionof all of our outstanding 10% secured debentures (except for one debenture inthe aggregate principal amount of $250,000), including accrued interest.

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On July 6, 2006,pursuant to the terms of the April 2006 financing agreement, we issued2,920,585 Series A Preferred Shares in a private placement resulting ingross proceeds of approximately $993,000, which were used for working capital andgeneral corporate purposes. On July 31, 2006, pursuant to the terms of theApril 2006 financing agreement, we issued 5,031,768 Series APreferred Shares in a private placement resulting in gross proceeds ofapproximately $1.7 million, which were used for working capital andgeneral corporate purposes.

On August 9, 2006, weissued 9,988,513 Series B Preferred Shares resulting in gross proceeds ofapproximately $3.4 million. The net proceeds from this offering are beingused for working capital and general corporate purposes. On September 22,2006, we issued 2,848,253 common shares resulting in gross proceeds ofapproximately $1.0 million. The net proceeds from this offering are beingused for working capital and general corporate purposes.

In 2007, our principal shareholder, Phoenix, agreed toprovide or arrange to provide us with additional financing, to the extentnecessary, to fund our planned operations through March 31, 2008.

We believe that cash flowfrom operations, together with borrowings from our credit facility and, ifnecessary, financial support from Phoenix will be sufficient to fund ouranticipated operations, working capital, capital spending and debt service forthe next 12 months. However, we may seek to access the public or privatemarkets whenever conditions are favorable even if we do not have an immediateneed for additional capital at that time.

**Cash Flow Results**

Thetable set forth below provides a summary statement of cash flows for theperiods indicated:

| ** **                                       | ** ** | **Year Ended March 31,**              | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | ** **                                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                       | ** ** | **(in thousands of US dollars)** | ** ** |
| Cash used in  operating activities               |       | $                                                    | (3,339     | ) |   | $ | (8,668 | ) |   |   | $ | (6,317 | ) |   |
| Cash provided by  (used in) investing activities |       | (567                                                 | )          |   | 288 |   |   |   | (332 | ) |   |
| Cash provided by  financing activities           |       | 5,561                                                |       |   | 7,194 |   |   |   | 7,177 |   |   |
| Cash and cash  equivalents                       |       | 1,711                                                |       |   | 56 |   |   |   | 1,242 |   |   |
|                                                  |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Fiscal2007.**  *Cashused in operating activities in fiscal year 2007 was $3,339,000. While our netloss was $6,615,000, our net cash used was lower in fiscal year 2007 ascompared to fiscal year 2006 primarily due to increased revenues, a prior yearnon-recurring, non-operating $877,000 gain on the sale oftechnology, a $74,000 decrease in inventory, a $205,000 decrease in accountsreceivable that are offset by a $599,000 increase in cash applied to accountspayable.

Cash used in investment activities consists ofadditions to fixed assets, principally tooling equipment, for our new products,and demonstration units. Net cash provided by investing activities was due tothe $877,000 of net proceeds from the sale of technology.

Cash provided by financing activities for the yearsended March 31, 2007 and 2006 was $5,561,000 and $7,194,000, respectively.In fiscal year 2007, as a result of the facility being paid down, netborrowings from the working capital facility were ($1,672,000), while in theprior year the net borrowings from the working capital facility were$1,582,000. The 2007 financing activities reflect $7,233,333 raised through theJuly 2006 Series A Preferred Shares, the August 2006 Series BPreferred Shares and the September 2006 common shares private placements.In fiscal 2006 we raised $5,612,000 through the issuance of debentures andcommon shares.

*Fiscal2006.**  *Cashused in operating activities in fiscal year 2006 was $8,668,000. While our netloss was $8,986,000, our net cash used was higher in fiscal year 2006 ascompared to fiscal year 2005 primarily 

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due to increases inaccounts receivable of $2,750,000, inventory of $759,000 offset by an increasein accounts payable of $897,000 commensurate with the increases in revenue andrelated activities in our business.

Cash provided by investing activities in fiscal year2006 represented the net proceeds from the sale of technology of $877,000 lessadditions to capital assets of $589,000. Additions in the 2006 fiscal year wereprincipally comprised of the use of our Centrino® based tablets for sales andmarketing demonstrations and internal use.

The cash provided by financing activities of$7,194,000 is comprised of $1,582,000 of net borrowings from the bankindebtedness, $5 million of proceeds from the issuance of short-termdebentures and $612,000 of proceeds from the issuance of shares in connectionwith warrants and options that were exercised in fiscal year 2006.

*Fiscal2005.**  *Cashused in operating activities in fiscal year 2005 was $6,317,000. While our netloss was $8,891,000, our net cash used was lower due to significantimprovements in our collections processes and business practices that resultedin a $3,452,000 reduction in accounts receivable during fiscal year 2005. At March 31,2005, accounts receivable were $1,863,000 as compared to $5,315,000 at March 31,2004 even though approximately $5 million of sales product was shipped inthe fourth quarter of each fiscal year. The benefit of the accounts receivablereduction was diminished by an $896,000 increase in inventory necessary tofulfill demand related to our Centrino® based tablets, which were new to themarketplace at the end of the 2005 fiscal year.

The additions to capital assets of $332,000 representall of the cash used in investing activities. Additions in the 2005 fiscal yearwere principally comprised of the use of our new Centrino® based tablets formarketing demonstrations and internal use.

The cash provided byfinancing activities of $7,177,000 in fiscal year 2005 is due to the timing ofrelated funding. In fiscal year 2005, we received approximately $800,000 in April 2004in connection with the issuance of common shares, shortly after the end of the2004 fiscal year and $5 million in the December 2004 privateplacement.

**Off-Balance SheetArrangements**

We have no off-balancesheet arrangements.

**Tabular Disclosureof Contractual Obligations**

At March 31,2007, our contractual obligations consisted of the following:

| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Bank indebtedness                |       | —                                    |       | — |   | — |   |   | — |   |   |   | — |   |   |
| Debentures(1)                    |       | $                                         | 250,000    |   | — |   | $ | 250,000 |   |   | — |   |   |   | — |   |   |
| Operating leases                 |       | 642,000                                   |       | $ | 261,000 |   | 381,000 |   |   | — |   |   |   | — |   |   |
| Purchase  obligations            |       | 2,402,000                                 |       | 2,402,000 |   | — |   |   | — |   |   |   | — |   |   |
| Total                            |       | 3,294,000                                 |       | 2,663,000 |   | 631,000 |   |   | — |   |   |   | — |   |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          On May 30, 2006, wecompleted a recapitalization pursuant to which approximately $18,877,000 ofindebtedness, represented by 10% secured debentures in the original principalamount of $17,755,000 and accrued interest of $1,122,000, was exchanged for55,520,542 Series A Preferred Shares. As of  March 31, 2007, we have one secureddebenture outstanding in an aggregate principal amount of $250,000 due on April 30,2009.

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Our future contractualobligations include future minimum lease payments under non-cancelableoperating leases primarily related to our corporate headquarters in Austin,Texas. At March 31, 2007, we had purchase obligations to certain contractmanufacturers and other inventory suppliers of approximately $2.4 millionrelated to inventory and product development items extending into fiscal year2008.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk.

Market risk sensitiveinstruments include all financial or commodity instruments and other financialinstruments (such as investments and debt) that are sensitive to future changesin interest rates, current exchange rates, commodity prices or other marketfactors. We are exposed to market risk related to changes in interest andforeign currency exchange rates, each of which could adversely affect the valueof our current assets and liabilities. At March 31, 2007, we had cash andcash equivalents consisting of cash on hand and highly liquid money marketinstruments with original terms to maturity of less than 90 days. We donot believe that our results of operations or cash flows would be affected toany significant degree by a sudden change in market interest rates relative toour cash and cash equivalents, given our current ability to hold our moneymarket investments to maturity. We do not enter into foreign exchange contractsto manage exposure to currency rate fluctuations related to our United Statesdollar denominated cash and money market investments.

**Item 8.**                        FinancialStatements and Supplementary Data.

The financial statementsand other financial information required by this Item are listed in Item 15 of Part IVand are contained on pages F-1 through F-25 of this AnnualReport on Form 10-K and incorporated in this Item 8 by reference.

**Item 9.**                        Changesin Disagreements With Accountants on Accounting and Financial Disclosure.

None.

**Item 9A.**                Controlsand Procedures.

As of the end of the period covered by this AnnualReport on Form 10-K, we carried out, under the supervision and withthe participation of our management, including our chief executive officer andchief financial officer, an evaluation of the effectiveness of our “disclosurecontrols and procedures” (as the term is defined under the Rules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended, or the Exchange Act). Based on this evaluation, our chief executiveofficer and chief financial officer have concluded that our disclosure controlsand procedures are effective to ensure that material information is recorded,processed, summarized and reported by management on a timely basis in order tocomply with our disclosure obligations under the Exchange Act, and the rules andregulations promulgated thereunder.

Further, based on anevaluation carried out under the supervision and with the participation of ourmanagement, including our chief executive officer and chief financial officer,there were no changes in our internal controls over financial reporting duringthe fourth fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

**Item 9A(T).**                               Controlsand Procedures.

Not applicable.

**Item 9B.**               OtherInformation.

None.

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**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance.

**Directors andExecutive Officers**

Thefollowing table sets forth certain information concerning the directors andexecutive officers of our company as of May 31, 2007:

| **Name**             | ** ** | ** ** | ** ** | **Age** | ** ** | **Positions with our Company**                   | ** ** |
|----------------------|------------|------------|------------|---------|------------|-----------------------------------------------------------------|------------|
| Philip S.  Sassower  |       |       | 67         |    |       | Chairman  of the Board of Directors and Chief Executive Officer |       |
| Mark Holleran        |       |       | 49         |    |       | President  and Chief Operating Officer                          |       |
| Michael J.  Rapisand |       |       | 47         |    |       | Chief  Financial Officer and Corporate Secretary                |       |
| Gregory E. Arends    |       |       | 48         |    |       | Vice  President of Engineering                                  |       |
| Andrea Goren         |       |       | 39         |    |       | Director                                                        |       |
| Thomas F.  Leonardis |       |       | 63         |    |       | Director                                                        |       |
| Brian E. Usher-Jones |       |       | 61         |    |       | Director                                                        |       |

 

*Philip S. Sassower*has served as our Chief Executive Officer sinceFebruary 2006 and has been a director of our company and served asChairman of the Board of Directors since December 2004. Mr. Sassoweris the Chief Executive Officer of SG Phoenix LLC, a private equity firm, andhas served in that capacity since May 2003. Mr. Sassower has alsobeen Chief Executive Officer of Phoenix Enterprises LLC, a private equity firm,and has served in that capacity since 1996. Mr. Sassower served asChairman of the Board of Communication Intelligence Corp., an electronicsignature solution provider, from 1998 to 2002 and Chairman of the Board ofNewpark Resources, Inc., an environmental services company, from 1987 to1996.

*Mark Holleran*has served as our President and Chief OperatingOfficer since February 2006. Mr. Holleran served as Vice President ofSales from April 2003 to February 2006. Prior to joining our company,Mr. Holleran was a consultant with the consulting firm of CoxConsulting Ltd. from 2002 to 2003. Prior to that, Mr. Holleran servedas President and Chief Executive Officer of Wavestat Wireless Inc., adeveloper of wireless products, from 2000 to 2002. Mr. Holleran served asVice-President—Sales and Marketing at Cabletron Systems of Canada from 1996 to1999.

*Michael J. Rapisand*has served as our Chief Financial Officer andCorporate Secretary since August 2004. Prior to joining our company, Mr. Rapisandserved as Chief Financial Officer of TippingPoint Technologies, Inc., anetwork-based security hardware manufacturer, from October 2002 to March 2004.Prior to that, Mr. Rapisand served as Chief Financial Officer and VicePresident of ThinkWell Corporation, a publishing company, from October 2001to September 2002. From March 1997 to July 2001, Mr. Rapisandserved as Finance Director of Dell Inc. In October 2006, Mr. Rapisandbecame a director of DataMetrics Corporation, a designer and manufacturer ofrugged electronic products.

*Gregory E. Arends*has served as our Vice President of Engineering sinceMarch 2006. Prior to joining our company, Mr. Arends was EngineeringManager at Grayhill, Inc., a manufacturer of switches, keypads and mobilecomputers, from February 2002 to March 2006.

*Andrea Goren*has been a director of our company since December 2004.Mr. Goren is a Managing Director of SG Phoenix LLC, a private equity firm,and has served in that capacity since May 2003 and has been associatedwith Phoenix Enterprises LLC since January 2003. Prior to that, Mr. Gorenserved as Vice President of Shamrock International, Ltd., a private equityfirm, from June 1999 to December 2002.

*Thomas F. Leonardis*has been a director of our company since June 2005.Mr. Leonardis has been President and Chief Executive Officer of EmberIndustries, Inc., a contract electronics manufacture, since 

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*November 2001.Mr. Leonardis has been a director of DataMetrics Corporation, a designerand manufacturer of rugged electronic products, since November 2001.*

*Brian E. Usher-Jones*has been a director of our company since 1996.Since 1992, Mr. Usher-Jones has been self-employed as a merchantbanker. Mr. Usher-Jones is currently a director of Wireless AgeCommunications Inc. From November 2000 to September 2006, Mr. Usher-Jonesserved as Chairman and Chief Executive Officer of Oromonte Resources Inc.,a mining exploration company. From November 2002 to September 2005, Mr. Usher-Jonesserved as Chairman of Greenshield Resources Ltd., a mining explorationcompany. From April 1997 to June 2004, Mr. Usher-Jonesserved as a director of Calvalley Petroleum Inc., an oil explorationcompany. From June 2001 to July 2004, Mr. Usher-Jonesserved as a director of Pivotal Self-Service Technologies Inc., whichinstalls ATM machines. From January 2001 to December 2003, Mr. Usher-Jonesserved as Chairman of International Vision Direct, an internet seller of contactlenses. Mr. Usher-Jones served as Treasurer and Interim ChiefFinancial Officer of our company from August 1996 to November 1997and from August 2001 to December 2001.

There are no familyrelationships between any director or executive officer of the Company.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Our company did not have aclass of equity securities registered pursuant to Section 12 of theSecurities Exchange Act of 1934 during the fiscal year ended March 31,2007.

**Code of Ethics**

We have not yet adopted acode of ethics. However, we are currently developing a code of ethics whichwill apply to the members of our board of directors, our officers, includingour principal executive officer and principal financial officer, and all of ourother employees.

**Audit Committee**

The members of our AuditCommittee are Brian E. Usher-Jones, Andrea Goren and Thomas Leonardis. OurBoard of Directors has determined that Brian E. Usher-Jones meets the criteriaof an “audit committee financial expert” as that term is defined in the rules andregulations promulgated under the Securities Exchange Act of 1934. Mr. Usher-Jonesis an independent director as defined under the rules of The Nasdaq StockMarket. Mr. Usher-Jones’ background and experience include being achartered accountant and Chief Financial Officer of Nesbitt, Thomson andCompany.

**Item 11.**                 ExecutiveCompensation

**ExecutiveCompensation**

*CompensationDiscussion and Analysis*

The compensation of our executives is designed toattract, as needed, individuals with the skills necessary for us to achieve ourobjectives, retain individuals who perform at or above our expectations andreward individuals fairly over time. Our executives’ compensation has threeprimary components: base salary; an annual cash incentive bonus; and equity-basedcompensation. In addition, we provide our executives with benefits that aregenerally available to our salaried employees.

As a small company, we recognize that while we mustpay salaries which help us to attract and retain talented executives who willhelp our company grow, we must do so within budgetary constraints. We rewardoutstanding performance with cash bonuses which are based on financialmeasures, such as revenue and EBITDA targets, and the achievement of strategic goalsand corporate milestones. In addition, we reward our executives with equity-basedcompensation as we believe equity compensation 

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provides an incentive toour executive officers to build value for our company over the long-term andaligns the interests of our executive officers and shareholders. Generally, weuse stock options as our equity-based compensation because we believethat options generate value to the recipient only if the price of our commonstock increases during the term of the option. Other than in the event of achange of control, the stock options granted to our executives vest solelybased on the passage of time. We believe these elements support our underlyingphilosophy of attracting and retaining talented executives while remaining withinour budgetary constraints and also creating cash incentives which rewardcompany-wide and individual performance and aligning the interests of ourexecutive officers with those of our shareholders by providing our executiveofficers equity-based incentives to ensure motivation over the long-term.

Our board of directors has not adopted any formal orinformal policies or guidelines for allocating compensation between long-termand currently paid out compensation, between cash and non-cash compensation, oramong different forms of compensation. We review the total compensation we payour executives and we do not believe that compensation derived from onecomponent should increase or reduce compensation from another component. Wedetermine the appropriate level for each compensation component separately.

We review annually our executive’s cash compensationand option holdings to determine whether they provide adequate incentives andmotivation to our executives and whether they adequately compensate them.

We account for the equitycompensation expense for our executives under the rules of SFAS No. 123(R),which require us to estimate and record an expense for each award of equitycompensation over the service period of the award. We also record cash compensationas an expense at the time the obligation is accrued. Until we achieve sustainedprofitability, the availability to us of a tax deduction for compensationexpense is not material to our financial position. We structure cash incentivebonus compensation so that it is taxable to our executives at the time itbecomes available to them.

*Elements of OurCompensation Program*

The individual elements of our compensation programare as follows:

*BaseCompensation.**  *Itis our policy that the base salaries paid to our executive officers shouldreflect the individual responsibility and experience of the executive officerand the contribution that is expected from the executive officer. To date, ourcompensation committee has not specifically benchmarked the remuneration of ourexecutive officers to that of other companies and has not established any peergroups for comparison purposes. In the past, the compensation of our namedexecutive officers, other than Philip S. Sassower who receives nocompensation for his services as Chief Executive Officer, was determined basedon negotiations between us and the named executive officer. In each instance,the compensation for the executive officer was more than he received in hisprior position. The compensation committee is in the process of conducting astudy to compare the remuneration of our executive officers to the remunerationfor similar executives in the relevant labor markets. In the case of a newlyhired executive officer, the individual’s performance and compensation level inhis or her prior positions will also be a determining factor. Base salaries arereviewed by the compensation committee on an annual basis to satisfy thesecriteria.

During our 2007 fiscal year, the base salary of MarkHolleran, our President and Chief Operating Officer, was increased from$200,000 to $250,000 after his relocation from Canada to Austin, Texas,pursuant to the terms of his employment agreement. Also during our 2007 fiscalyear, Michael J. Rapisand, our Chief Financial Officer, received a meritincrease in his base salary from $145,000 to $180,000, and Gregory Arends, ourVice President of Engineering, received a merit increase in his base salaryfrom $120,000 to $135,000.

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*CashIncentive Bonuses.**  *Ourexecutive officers are eligible for annual incentive bonuses if they meet keyfinancial and operational objectives. The payment of cash incentive bonuses toexecutive officers are based on our compensation committee’s assessment of theperformance of the company and each executive officer measured againstfinancial objectives, strategic goals and corporate milestones. Thesefinancial, strategic and corporate objectives include revenue and EBITDAtargets, product development objectives and corporate milestones such as thecompletion of financings. Our compensation committee may in its discretionaward a cash incentive bonus to an executive officer for partial achievement ofsuch executive officer’s objectives. The total amount of the cash incentivebonus available to an executive officer is either based upon a percentage ofsuch executive officer’s base salary or a fixed dollar amount. Bonuses arereviewed by the compensation committee on an annual basis. Furthermore, inrecognition of an executive officer’s exceptional performance our board ofdirectors may award a performance bonus in excess of that executive officer’smaximum cash incentive bonus.

Each of our executive officers (other thanPhilip S. Sassower) participates in his own individual Management byObjectives plan, which we refer to as a MBO plan. Under the terms of MarkHolleran’s MBO plan, Mr. Holleran has the opportunity to earn a cash bonusof up to 100% of his base salary based on his achievement of objectives in thefollowing weighted categories: revenues (40%), EBITDA performance (20%), newproduct development (15%), additional financings (10%), retention of staff(7.5%) and hiring new employees (7.5%). Under the terms of Michael J.Rapisand’s MBO plan, Mr. Rapisand has the opportunity to earn a cash bonusof up to 40% of his base salary based on his achievement of objectives in thefollowing weighted categories: revenues (40%), EBITDA performance (20%),additional financings (20%) and completion of our corporate migration (20%). Underthe terms of Gregory Arends’ MBO plan, Mr. Arends has the opportunity toearn a cash bonus of up to $50,000 based on his achievement of objectives inthe following weighted categories: new product development (25%), currentproduct innovations (25%), revenues (20%), EBITDA performance (15%) and hiringnew employees (15%).

Our compensation committee has not established all ofthe quantitative targets to be achieved by us or our executive officers inconnection with the payment of the cash incentive bonuses listed above. As aresult, there is no mathematical formula to be used in determining cashincentive bonuses for our executive officers. Instead, the annual cashincentive bonuses are within the discretion of our compensation committee andthe compensation committee will consider the factors listed in each executiveofficer’s MBO plan in determining the annual cash inventive bonus, if any,earned by each executive officer.

*Equity-BasedCompensation.**  *Weuse stock options to reward long-term performance and to ensure that ourexecutive officers have a continuing stake in our long-term success. Authorityto make stock option grants to our executive officers rests with our board ofdirectors. In determining the size of stock option grants, our board of directorsconsiders our actual performance against our strategic plan, individualperformance, the extent to which shares subject to previously granted optionsare vested and the recommendations of our Chief Executive Officer and othermembers of senior management.

We do not have any program, plan or obligation thatrequires us to grant equity compensation on specified dates. We grant stockoptions at regularly scheduled meetings of our board of directors. Theauthority to make equity grants to our executive officers rests with our boardof directors, although, as noted above, our board of directors does, indetermining the grants of equity awards, consider the recommendations of ourChief Executive Officer and other members of senior management. All stock optionsgranted have an exercise price equal to the closing price of our common stockon the Toronto Stock Exchange on the date that the grant action occurs.

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With respect to establishing compensation for ourexecutive officers, we do not have any formal policies in determining howspecific forms of compensation are structured or implemented to reflect theindividual performances and/or individual contributions to the specific itemsof our company’s performance. In addition, we have no policies regarding theadjustment or recovery of awards or payments if the relevant performancemeasures upon which such award or payment was based are restated or otherwiseadjusted in a manner that would reduce the size of an award or payment.

With respect to newly hired employees, our practice istypically to make stock grants at the first meeting of our board of directorsfollowing such employee’s hire date. We do not have any program, plan orpractice to time stock options grants with the release of material non-publicinformation. We do not time, nor do we plan to time, the release of materialnon-public information for the purposes of affecting the value of executivecompensation.

On August 29, 2006,our board of directors awarded to our named executive officers and directors agrant of options intended to compensate them for the dilution to their previousissued options which occurred as a result of our May 2006 recapitalization,pursuant to which we issued over 55.5 million Series A PreferredShares in exchange for approximately $18.9 million of debt.

*EmploymentAgreements*

*Mark Holleran*

On June 30, 2006, we entered into an employmentagreement with Mark Holleran, our President and Chief Operating Officer. Theagreement is for a period of two years, and may be renewed for an additionalone year period. In consideration for his services, during the term Mr. Holleranis entitled to receive a base salary, currently of $250,000 per year, subjectto any increase as may be approved by our board of directors. Mr. Holleranis also entitled to receive a performance bonus of up to 100% of his basesalary based on his achievement of objectives in the following categories:revenues, hiring new employees, product development, retention of staff, EBITDAperformance and additional financing. In addition, we may award, in our solediscretion, Mr. Holleran additional performance bonuses in recognition ofhis performance. In connection with entering into the employment agreement, Mr. Holleranwas awarded options to purchase 1.2 million common shares at a price of$0.34 per share. The options will vest in equal annual installments over aperiod of three years. As part of this grant, Mr. Holleran agreed to theextinguishment of any options previously granted to him that did not vest on orbefore June 22, 2006.

Mr. Holleran is also eligible to participate in atransaction bonus pool in the event of the sale of our company during the termof Mr. Holleran’s employment agreement. The amount of the transactionbonus pool will be based upon the total consideration received by ourshareholders from the sale of our company, less our transaction expenses. Mr. Holleranwill be entitled to receive 50% of the total amount of the transaction bonuspool, while 30% will be allocated to our Chief Financial Officer and theremaining 20% will be distributed among our senior management team as decidedby our board of directors.

If we do not renew Mr. Holleran’s employment agreementafter the initial period of two years, he will be entitled to continue toreceive his base salary for an additional period of one year, less any amountshe earns from any employment or self-employment during that time. Mr. Holleranwill also be entitled to receive an amount equal to the average of hisperformance bonus paid to him during the term of his employment agreement. Inaddition, Mr. Holleran may be eligible to continue to participate in ourgroup health plans during this one year period.

As part of the employmentagreement, we agreed to reimburse Mr. Holleran up to $80,000 of hisexpenses incurred in connection with his relocation from Toronto, Canada toAustin, Texas. We also agreed that if we terminate Mr. Holleran’semployment without cause during the term of his employment agreement, inaddition to any payments due to him under the terms of the agreement, we willreimburse 

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Mr. Holleranup to $80,000 of his expenses incurred in connection with his relocation backto Canada. The employment agreement also contains customary non-compete,non-solicitation, non-disparagement and confidentiality provisions.

*Severance andChange in Control Benefits*

Mark Holleran, our President and Chief OperatingOfficer, has a provision in his employment agreement that gives him severancebenefits if his employment is terminated without cause. In addition, hisemployment agreement provides for the acceleration of his then unvested optionsfollowing a change in control of our company. Mr. Holleran will also receivea transaction bonus if our company is sold during the term of his employment.The amount of the transaction bonus will be based upon the total considerationreceived by our shareholders from the sale of our company, less our transactionexpenses. Mr. Holleran will be entitled to receive 50% of the total amountof the transaction bonus pool that is eligible to be paid to our executives. Inaddition, under the terms of our transaction bonus pool, our Chief FinancialOfficer, Michael J. Rapisand, will receive 30% and the remaining 20% willbe distributed among our senior management team as decided by our board ofdirectors.

We have chosen to providethese benefits to our executives because we believe we must remain competitivein the marketplace. These severance and acceleration provisions and estimatesof these change of control and severance benefits are described in the sectionentitled “—Estimated Payments and Benefits Upon Termination or Change inControl” below.

*Pension Benefits*

We do not sponsor any qualifiedor non-qualified defined benefit plans. We do maintain a 401(k) plan forour employees, including our executive officers, however, we do not matchcontributions made by our employees, including contributions made by ourexecutive officers.

*NonqualifiedDeferred Compensation*

We do not maintain anynon-qualified defined contribution or deferred compensation plans. Our board ofdirectors may elect to provide our executive officers and employees withnon-qualified defined contribution or deferred compensation benefits if itdetermines that doing so is in our best interests.

*Other Benefits*

Our executive officers areeligible to participate in all of our employee benefit plans, such as medical,dental, vision, group life and disability insurance and our 401(k) plan,in each case on the same basis as our other employees.

*Impact ofRegulatory Requirements*

*Deductibilityof Executive Compensation.**  *Our executive officer’s MBO plans and our stockoption plan do not currently provide compensation that qualifies as “performance-basedcompensation” within the meaning of Section 162(m) of the InternalRevenue Code of 1986, as amended. Accordingly, compensation in excess of$1 million paid to a named executive officer during any one year that isattributable to one of those arrangements would not currently be deductible forU.S. federal income tax purposes. We may, in the future, reevaluate those plansand redesign them so that compensation attributable to one or both of thoseplans would qualify as “performance-based compensation” within themeaning of Section 162(m) and would be deductible for U.S. federalincome tax consequences.

*Accounting for Stock-BasedCompensation.**  *Webegan accounting for stock-based payments in accordance with therequirements of FASB Statement 123(R) for the fiscal year ended March 31,2004.

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*Stock OwnershipRequirements*

We do not currently haveany requirements or guidelines relating to the level of ownership of our commonstock by our directors or executive officers.

*Role of theExecutive Officers in Determining Executive Compensation*

The compensation of ourChief Executive Officer (Philip S. Sassower) and President and Chief OperatingOfficer (Mark Holleran) is determined by our compensation committee. Mr. Sassowerdoes not receive a salary in connection with his services as Chief ExecutiveOfficer. Mr. Holleran has no role in determining his own compensation. Ourcompensation committee consults with Mr. Sassower in connection with Mr. Holleran’scompensation and with Mr. Sassower and Mr. Holleran with respect tothe compensation for our other executive officers.

**SummaryCompensation Table for Fiscal Year 2007**

Thefollowing table sets forth the compensation earned by or awarded to, asapplicable, our principal executive officer, principal financial officer andother executive officers during our fiscal year ended March 31, 2007, suchofficers are referred to herein as the “named executive officers.”

| **Name and  Principal Position**                | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary  US($)** | ** ** | **Bonus  US($)** | ** ** | **Option  Awards  US($)(1)** | ** ** | **All Other  Compensation  US($)** | ** ** | **Total  US($)** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------|------------|-------------------|------------|------------------|------------|------------------------------|------------|-----------------------------------------|------------|------------------|------------|
| Philip S.  Sassower—Chief Executive Officer(2)       |       | 2007       |       | —   |       | —            |       | 55,004           |       |                         | 3,750      | (3)                                     |       | 58,754           |       |
| Mark  Holleran—President and Chief Operating Officer |       | 2007       |       | 230,743  |       | 147,934           | (4)        | 177,714          |       |                         | 60,059     | (5)                                     |       | 616,450          |       |
| Michael J.  Rapisand—Chief Financial Officer         |       | 2007       |       | 167,010  |       | 50,400            | (6)        | 115,578          |       |                         | —     |                                    |       | 282,588          |       |
| Gregory Arends—Vice  President of Engineering        |       | 2007       |       | 132,308  |       | 20,500            | (7)        | 50,624           |       |                         | 65,780     | (8)                                     |       | 269,212          |       |

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(1)          Option award amountsincluded in this table reflect the compensation cost for the fiscal year ended March 31,2007, related to all options granted to the named executive officer, calculatedin accordance with SFAS 123(R) and using a Black-Scholesvaluation model.

(2)          Mr. Sassower doesnot receive a salary in connection with his services as our Chief ExecutiveOfficer. Mr. Sassower is the Chairman of the Board of Directors.

(3)          Represents fees paid to Mr. Sassowerfor attending meetings of our Board of Directors.

(4)          Represents bonuscompensation earned by Mr. Holleran pursuant to his Management ByObjectives (MBO) plan and a discretionary award granted by our board ofdirectors for his efforts in managing our sales team. Under the terms of Mr. Holleran’sMBO plan, he had the opportunity to earn a cash bonus of up to 100% of his basesalary ($250,000) based on the achievement of objectives in the followingweighted categories: revenues (40%), EBITDA performance (20%), new productdevelopment (15%), additional financings (10%), retention of staff (7.5%) andhiring new employees (7.5%). For purposes of our named executive officers’ MBOplans, we define EBITDA as earnings before, interest, taxes, depreciation,amortization and non-cash transactions (such as stock compensation expense,services paid with stock and amortization of values assigned to warrants issuedin financings).

(5)          Represents reimbursementfor actual out-of-pocket relocation costs incurred by Mr. Holleran.

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(6)          Represents bonuscompensation earned by Mr. Rapisand pursuant to his MBO plan. Under theterms of Mr. Rapisand’s MBO plan, he had the opportunity to earn a cashbonus of up to 40% of his base salary ($72,000) based on his achievement ofobjectives in the following weighted categories: revenues (40%), EBITDAperformance (20%), additional financings (20%) and completion of our corporatemigration (20%).

(7)          Represents bonuscompensation earned by Mr. Arends pursuant to his MBO plan. Under theterms of Mr. Arends’ MBO plan, he had the opportunity to earn a cash bonusof up to $50,000 based on his achievement of objectives in the followingweighted categories: new product development (25%), current product innovations(25%), revenues (20%), EBITDA performance (15%) and hiring new employees (15%).

(8)          Representsreimbursement for actual out-of-pocket relocation costs incurred byMr. Arends.

**Grants ofPlan-Based Awards During Fiscal Year 2007**

Thefollowing table sets forth each grant of an award made to a named executiveofficer during our fiscal year ended March 31, 2007 under any of ourincentive plans or equity plans.

| Name                                                     | ** ** | ** ** | ** ** | **Grant Date** | ** ** | **All other Option  Awards: Number  of Securities  Underlying  Options  (#)(1)** | ** ** | **Exercise or  Base Price of  Option Awards  C($/Sh)** | ** ** | **Grant Date  Fair Value  of Stock  and Option  Awards  C($)** | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Philip S.  Sassower—Chief Executive Officer         |       | 8/29/2006  |       |                | 200,000    |                                                                                                 |       |                                                                       | $          | 0.44                                                                               |       |   |   | $ | 62,000 |   |   |
| Mark Holleran—President and Chief Operating Officer |       | 6/30/2006  |       |                | 1,200,000  |                                                                                                 |       |                                                                       | $          | 0.38                                                                               |       |   |   | $ | 312,000 |   |   |
|                                                     |       | 8/29/2006  |       |                | 1,566,668  |                                                                                                 |       |                                                                       | $          | 0.44                                                                               |       |   |   | $ | 485,667 |   |   |
| Michael J. Rapisand—Chief Financial Officer         |       | 8/29/2006  |       |                | 830,000    |                                                                                                 |       |                                                                       | $          | 0.44                                                                               |       |   |   | $ | 257,300 |   |   |
| Gregory Arends—Vice President of Engineering        |       | 6/20/2006  |       |                | 500,000    |                                                                                                 |       |                                                                       | $          | 0.31                                                                               |       |   |   | $ | 110,000 |   |   |
|                                                     |       | 8/29/2006  |       |                | 500,000    |                                                                                                 |       |                                                                       | $          | 0.44                                                                               |       |   |   | $ | 155,000 |   |   |

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(1)          All options are grantedunder our Amended and Restated Share Option Plan.

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**Outstanding EquityAwards at 2007 Fiscal Year-End**

Thefollowing table sets forth the equity awards outstanding at March 31, 2007for each of the named executive officers.

|                                       | ** ** | **Option Awards** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| **Name**                              | ** ** | ** **             | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of Securities  Underlying  Unexercised  Options  (#) Unexercisable** | ** ** | **Option Exercise  Price C($)** | ** ** | **Option  Expiration  Date** | ** ** |
| Philip S. Sassower—              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Chief Executive Officer               |       |                   | 50,000     |   |   |   | 100,000 | (1) |   |   | $ | 0.93 |   |   | 06/21/2010 |   |
|                                       |       |                   | 50,000     |   |   |   | 150,000 | (2) |   |   | $ | 0.44 |   |   | 08/29/2011 |   |
| Mark Holleran—                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| President and Chief Operating Officer |       |                   | 175,000    |   |   |   | — |   |   |   | $ | 0.46 |   |   | 05/20/2008 |   |
|                                  |       |                   | 78,334     |   |   |   | — |   |   |   | $ | 0.56 |   |   | 01/06/2010 |   |
|                                  |       |                   | 113,334    |   |   |   | — |   |   |   | $ | 0.93 |   |   | 06/21/2010 |   |
|                                  |       |                   |       |   |   |   | 1,200,000 | (3) |   |   | $ | 0.38 |   |   | 06/30/2011 |   |
|                                  |       |                   |       |   |   |   | 1,566,668 | (4) |   |   | $ | 0.44 |   |   | 08/29/2011 |   |
| Michael J. Rapisand—             |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Chief Financial Officer               |       |                   | 83,334     |   |   |   | 41,666 | (5) |   |   | $ | 1.12 |   |   | 08/11/2009 |   |
|                                       |       |                   | 528,750    |   |   |   | 176,250 | (6) |   |   | $ | 0.56 |   |   | 01/06/2010 |   |
|                                       |       |                   | —     |   |   |   | 830,000 | (7) |   |   | $ | 0.44 |   |   | 08/29/2011 |   |
| Gregory Arends—                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Vice President of Engineering         |       |                   |       |   |   |   | 500,000 | (8) |   |   | $ | 0.31 |   |   | 06/20/2011 |   |
|                                  |       |                   | —     |   |   |   | 500,000 | (9) |   |   | $ | 0.44 |   |   | 08/29/2011 |   |
|                                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          50,000 options vested onJune 21, 2007 and 50,000 options vest on June 21, 2008.

(2)          50,000 options vest on August 29,2007, 50,000 options vest on August 29, 2008 and 50,000 options vest on August 29,2009.

(3)          400,000 options vest on June 30,2007, 400,000 options vest on June 30, 2008 and 400,000 options vest on June 30,2009.

(4)          522,223 options vest on August 29,2007, 522,223 options vest on August 29, 2008 and 522,222 options vest on August 29,2009.

(5)          These options vest on August 11,2007.

(6)          These options vest on January 6,2008.

(7)          276,667 options vest on August 29,2007, 276,667 options vest on August 29, 2008 and 276,666 options vest on August 29,2009.

(8)          166,667 options vestedon June 20, 2007, 166,667 options vest on June 20, 2008 and 166,666options vest on June 20, 2009.

(9)          166,667options vest on August 29, 2007, 166,667 options vest on August 29,2008 and 166,666 options vest on August 29, 2009.

*Option Exercisesand Stock Vested*

None of our executiveofficers exercised any options during our fiscal year ended March 31,2007.

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*Estimated Paymentsand Benefits Upon Termination or Change in Control*

***Holleran Employment Agreement***

Thefollowing table describes the potential payments and benefits payable to Mr. Holleran,our President and Chief Operating Officer, upon termination of his employmentby us without cause, as if his employment terminated as of the March 30,2007, the last business day of our last fiscal year. If Mr. Holleran’semployment is terminated by us without cause, as a result of his death ordisability, by us for cause or voluntary by Mr. Holleran, he is entitledto receive any earned or accrued, but unpaid, base compensation and bonus andall accrued but unused vacation days through the termination date.

| **Payments and  Benefits** | ** ** | ** ** | ** ** | **Termination  by Company  Without  Cause(1)** | ** ** |
|---------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Compensation:                   |       |       |       |                                                |       |
| Base salary(2)                  |       |       | $          | 250,000                                             | (4)        |   |
| Performance bonus(3)            |       |       | $          | 147,934                                             | (5)        |   |
| Benefits and  Perquisites:      |       |       | $          | 93,716                                              | (6)        |   |

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(1)          For purposes of Mr. Holleran’semployment agreement, “cause” includes, among other things, (i) hiswillful failure to perform his duties under his employment agreement, (ii) anyintentional act of fraud, embezzlement or theft involving more than a nominal amountof our assets or property, (iii) any material damage to our assets,business or reputation resulting from his intentional or grossly negligentconduct, (iv) his intentional wrongful disclosure of material confidentialinformation, (v) his intentional engagement in competitive activity whichwould constitute a breach of his employment agreement and/or his duty ofloyalty, (vi) his intentional breach of any material employment policy, or(vii) his ineligibility for any reason to work lawfully in the UnitedStates for a period of four consecutive months.

(2)          Assumes that there is noearned but unpaid base salary at the time of termination.

(3)          Assumes that there is noearned but unpaid bonus at the time of termination.

(4)          Mr. Holleran isentitled to receive his base salary in effect immediately prior to histermination of employment for a period of 12-months commencing on thetermination date, subject to reduction by any amounts he earns during the 12-monthperiod.

(5)          Under the terms of Mr. Holleran’semployment agreement, he is entitled to receive as severance an amount equal tothe average of his performance bonuses paid to him during the two calendaryears preceding his termination. Since the terms of Mr. Holleran’sperformance bonus were established in fiscal year 2007 and the severance amountrelated thereto is based on an average of performance bonuses paid to him fortwo calendar years, this table assumes such average is equal to the amount paidto Mr. Holleran in fiscal year 2007. During the past year, Mr. Holleranhad the opportunity to earn a cash performance bonus of up to 100% of his basesalary based on his achievement of objectives in the following weightedcategories: revenues (40%), EBITDA performance (20%), new product development(15%), additional financings (10%), retention of staff (7.5%) and hiring newemployees (7.5%).

(6)          Representspayments of $1,143 a month to pay the cost of Mr. Holleran’s continuedparticipation in our group health plans under COBRA during the 12-monthseverance period and a maximum of $80,000 which Mr. Holleran is entitledto be reimbursed for his relocation costs back to Canada.

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***Change in Control Benefits***

Under the terms of our Share Option Plan, upon achange in control of our company all outstanding options will immediately vestand become exercisable. A “change of control” means the occurrence of (i) aperson, including the person’s affiliates and any other person acting jointlyor in concert with that person, becoming the beneficial owner of, or exercisingcontrol over, more than 50.1% of the total voting power of our common stock; or(ii) our company consolidating with, or merging with or into, anotherperson or selling, transferring, leasing or otherwise disposing of all orsubstantially all of our assets to any person, or any person consolidatingwith, or merging with or into, our company, in any such event pursuant to atransaction in which our outstanding shares of common stock are converted intoor exchanged for cash, securities or other property, except for any suchtransaction in which the holders of our then outstanding common stock receivevoting securities, or securities exchangeable at the option of the holder intovoting securities, of the surviving person which constitute a majority of thevoting securities.

The following table sets forth the potential paymentsto our named executive officers as if we had a change of control as of the March 30,2007, the last business day of our last fiscal year.

| **Name**                                                  | ** ** | ** ** | ** ** | **Transaction Bonus Pool(1)** | ** ** | **Market Value of Accelerated Options** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| Philip S.  Sassower—Chief Executive Officer          |       |       | —     | (2)                                     |       |                                                        | —     | (3) |   |
| Mark  Holleran—President and Chief Operating Officer |       |       | $          | 1,020,071                               | (4)        |                                                        |       | — | (5) |   |
| Michael J.  Rapisand—Chief Financial Officer         |       |       | $          | 612,042                                 | (6)        |                                                        |       | — | (7) |   |
| Gregory Arends—Vice President  of Engineering        |       |       | —     | (8)                                     |       |                                                        | $          | 8,748 | (9) |   |
|                                                           |            |            |            |                                         |            |                                                             |            |  |  |  |  |  |  |

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(1)          Our named executiveofficers (except for Philip S. Sassower) are eligible to participate in atransaction bonus pool designed to incentivize and reward our executives whoare employed by us upon the sale of our company. Under the transaction bonuspool, an amount equal to 5% of the per share sales consideration up to $0.34and 10% of the remaining per share consideration received through such sale, ineach case after deducting the transaction expenses, will be allocated to thetransaction bonus pool. For example, if a sale of our company is completed andeach holder of our common stock will receive $1.00 per share after transactionexpenses, the transaction bonus pool will be equal to 5% on the first $0.34 pershare and 10% on the balance per share ($0.66 per share). The participation inthe transaction bonus pool will be allocated as follows: 50% to Mark Holleran,our President and Chief Operating Officer, 30% to Michael J. Rapisand, ourChief Financial Officer, and the balance to our then current senior managementteam, as decided by our board of directors, in consultation with Mr. Holleran.

(2)          Mr. Sassower is noteligible to participate in the transaction bonus pool.

(3)          Pursuant to the terms ofour Share Option Plan, all outstanding options shall immediately vest upon theoccurrence of a change of control of our company. Assuming a market price of$0.33 per share, which represents the closing price of our common shares on March 30,2007 as reported by the Toronto Stock Exchange, converted into U.S. dollarsbased upon the Bank of Canada’s closing exchange rate, the exercise price ofall of the options held by such executive officer would be below the marketprice and thus the accelerated options would have a value of nil.

(4)          Assuming (i) a pershare sales price of $0.33, which represents the closing price of our commonshares on March 30, 2007 as reported by the Toronto Stock Exchange,converted into U.S. dollars based upon the Bank of Canada’s closing exchangerate, and (ii) transaction costs of 10% of the total proceeds, theaggregate transaction bonus pool would be $2,040,141. Mr. Holleran wouldbe entitled to receive 50% of the transaction bonus pool.

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(5)          Pursuant to the terms ofour Share Option Plan, all outstanding options shall immediately vest upon theoccurrence of a change of control of our company. Assuming a market price of$0.33 per share, which represents the closing price of our common shares on March 30,2007 as reported by the Toronto Stock Exchange, converted into U.S. dollarsbased upon the Bank of Canada’s closing exchange rate, the exercise price ofall of the options held by such executive officer would be at or below themarket price and thus the accelerated options would have a value of nil.

(6)          Assuming (i) a pershare sales price of $0.33, which represents the closing price of our commonshares on March 30, 2007 as reported by the Toronto Stock Exchange,converted into U.S. dollars based upon the Bank of Canada’s closing exchangerate, and (ii) transaction costs of 10% of the total proceeds, theaggregate transaction bonus pool would be $2,040,141. Mr. Rapisand wouldbe entitled to receive 30% of the transaction bonus pool.

(7)          Pursuant to the terms ofour Share Option Plan, all outstanding options shall immediately vest upon theoccurrence of a change of control of our company. Assuming a market price of$0.33 per share, which represents the closing price of our common shares on March 30,2007 as reported by the Toronto Stock Exchange, converted into U.S. dollarsbased upon the Bank of Canada’s closing exchange rate, the exercise price ofall of the options held by such executive officer would be below the marketprice and thus the accelerated options would have a value of nil.

(8)          Assuming (i) a pershare sales price of $0.33, which represents the closing price of our commonshares on March 30, 2007 as reported by the Toronto Stock Exchange,converted into U.S. dollars based upon the Bank of Canada’s closing exchangerate, and (ii) transaction costs of 10% of the total proceeds, theaggregate transaction bonus pool would be $2,040,141, of which, after paymentsof $1,020,071 to Mr. Holleran and $612,042 to Mr. Rapisand, $408,028would be available for distribution to our senior management team. Thus, atthis time, it is not possible to determine the amount that Mr. Arendswould receive, but in no event would the amount exceed $408,028.

(9)          Basedupon a market price of $0.33 per share, which represents the closing price ofour common shares on March 30, 2007 as reported by the Toronto StockExchange, converted into U.S. dollars based upon the Bank of Canada’s closingexchange rate.

***Director Compensation***

In June 2006, ourboard of directors approved a director compensation plan pursuant to which wewill pay our directors a fee to attend board meetings. Under the plan, eachdirector receives $1,500 for each board meeting he attends in person and $750for each board meeting he attends by teleconference. In addition, from time totime, we grant options to our directors to purchase shares of our common stock.We also reimburse our directors for out-of-pocket expenses incurred inconnection with attending our board and board committee meetings. Compensationfor our directors, including cash and equity compensation, is determined, andremains subject to adjustment, by our board of directors.

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**Fiscal Year 2007Director Compensation**

The following table setsforth compensation information for the Company’s directors, who are not namedexecutive officers, for our fiscal year ended March 31, 2007.

| **Name**             | ** ** | ** ** | ** ** | **Fees Earned  or Paid in  Cash ($)** | ** ** | **Option  Awards($)(1)** | ** ** | **Total ($)** | ** ** |
|----------------------|------------|------------|------------|-----------------------------------------------------------|------------|--------------------------|------------|--------------------|------------|
| Brian E. Usher-Jones |       |       | 3,750      |                                                      |       |                     | 22,500     |               |       |   | 26,250 |   |   |
| Andrea Goren         |       |       | 3,750      |                                                      |       |                     | 55,044     |               |       |   | 58,794 |   |   |
| Thomas F. Leonardis  |       |       | 3,750      |                                                      |       |                     | 55,044     |               |       |   | 58,794 |   |   |
| Richard Hamm(2)      |       |       | —     |                                                      |       |                     | —     |               |       |   | — |   |   |

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(1)          Option award amountsreflect the compensation cost for our directors for the fiscal year ended March 31,2007, calculated in accordance with SFAS 123(R) and using a Black-Scholesvaluation model.

(2)          Mr. Hamm resignedfrom our board of directors on May 31, 2006. Mr. Hamm received nocompensation during fiscal year 2007.

**Agreements withFormer Chief Executive Officer**

*Brian R. Groh*

Brian R. Groh, our former President and ChiefExecutive Officer, entered into a corporate relocation agreement with ourcompany in September 2005. In addition to the reimbursement of certainrelocation costs and expenses related to his relocation to Austin, Texas, theagreement provided for an annual salary of $200,000, of which $150,000 and$175,000 were paid in cash and $50,000 and $25,000 in stock compensation in thefirst year and second year, respectively. In 2004, Mr. Groh also receivedoptions to purchase 150,000 common shares under our Share Option Plan.

Effective January 3,2006, in connection with his resignation from our company, we entered into anagreement with Mr. Groh whereby, among other things, we agreed to pay hima total of $175,000, consisting of an up-front payment of $25,000 and12 monthly payments of $12,500 each, and extend the maturity date of hisoptions to purchase 95,672 of our common shares to April 28, 2006 and hisoptions to purchase 570,334 of our common shares to November 1, 2006. Inreturn, Mr. Groh agreed to terminate his prior agreement with us and acknowledgedthat he was not entitled to any payments or benefits from our company otherthan as set forth in the separation agreement. The agreement also containsprovisions prohibiting Mr. Groh from soliciting any of our employees orcompeting against us for a period of one year. We made our last payment to Mr. Grohin October 2006 and on November 1, 2006, all of his options topurchase our common shares expired unexercised.

**Stock Option Plan**

We maintain a stock option plan (which we refer to asthe Plan), the purpose of which is to attract, retain and motivate eligiblepersons whose contributions are important to our success and to advance theinterests of our company by providing such persons with the opportunity,through stock options, to acquire a proprietary interest in our company.

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Pursuant to the Plan, our board of directors isauthorized, from time to time in its discretion, to issue to directors,officers, employees and consultants of our company and its affiliates optionsto acquire common stock of our company at such prices as may be fixed by ourboard of directors at that time; provided, however, that the option exerciseprice shall in no circumstances be lower than the market price of our commonstock at the date the option is granted. Options granted under the Plan aregenerally non-assignable, are exercisable for a term not exceeding10 years and generally vest over a three year period in three annualinstallments, as determined by our board of directors.

The number of shares of common stock issuable uponexercise of options granted to insiders at any time pursuant to the Plan cannotexceed 10% of our total issued and outstanding shares of common and preferredstock, and the number of shares issued to insiders, within any one year period,under the Plan cannot exceed 10% of our total issued and outstanding shares.

Subject to certain specific listed exceptions and toany express resolution passed by our board of directors with respect to anoption granted under the Plan, an option and all rights to purchase commonstock shall expire and terminate immediately upon the person who holds suchoption ceasing to be a director, officer, employee or consultant of our companyand its affiliates.

Our board ofdirectors may amend the Plan at any time, provided, however, that no suchamendment may materially and adversely affect any option previously grantedunder the Plan without the consent of the holder of the option, except to theextent required by law. Without limiting the generality of the foregoing, our boardof directors may, without shareholder approval, make amendments to the Plan forany of the following purposes:

·       changingthe eligibility for and limitations on participation in the Plan;

·       changingthe terms on which options may be granted and exercised including, theprovisions relating to exercise price, vesting, expiration, assignment andcertain other adjustments;

·       makingany addition to, deletion from or alteration of the provisions of the Plan thatis necessary to comply with applicable law or the requirements of anyregulatory authority or stock exchange;

·       correctingor rectifying any ambiguity, defective provision, error or omission in thePlan; and

·       changingthe provisions relating to the administration of the Plan;

provided, that if any such amendment would lead to asignificant or unreasonable dilution of our outstanding common stock or provideadditional material benefits to insiders, shareholder approval of suchamendment must be obtained.

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We currently have26,800,000 shares of common stock reserved for issuance under the Plan, whichrepresents approximately 19.5% of our total issued and outstanding shares ofcommon and preferred stock.

**CompensationCommittee Interlocks and Insider Participation**

The compensation committee currently consists ofThomas F. Leonardis, Andrea Goren and Brian E. Usher-Jones. Mr. Gorenis co-manager of the managing member of Phoenix Venture Fund LLC, one of ourprincipal shareholders. Mr. Usher-Jones served as our Interim ChiefFinancial Officer from August 1996 to November 1997 and from August 2001to December 2001.

On September 15, 2005, we entered into adebenture purchase agreement with Phoenix Venture Fund LLC (which we refer toas Phoenix), Andrea Goren, a director and member of our compensation committee,is one of the co-managers of the managing member of Phoenix, MAG Multi Corp.(which we refer to as MAG), an entity affiliated with Alex Goren, the father ofAndrea Goren and others (which we refer to as the Lenders), whereby the Lendersagreed to provide an aggregate of $5 million of financing to us. Thedebentures had an original maturity date of March 31, 2006, which wassubsequently amended to June 30, 2006. Borrowings under those debenturesbore interest at 10% per annum. We initially drew on the facility and issueddebentures to the Lenders in the aggregate amount of $3 million. We usedthe gross proceeds to re-pay promissory notes in the aggregate amount of$3 million previously issued by our subsidiary in May and July 2005.On September 29, 2005, November 4, 2005 and November 7, 2005, wemade additional draws on the facility and issued debentures to the Lenders inthe aggregate amount of $2 million. The proceeds were used for workingcapital and general corporate purposes. In connection with this financing, thematurity date of all of our other outstanding debentures was extended to April 30,2007. Of this $5 million facility, we issued debentures in an aggregateprincipal amount of $4 million to Phoenix, $250,000 to JAG MultiInvestments LLC (which we refer to as JAG), an entity affiliated with AlexGoren, the father of Andrea Goren, and $250,000 to MAG (MAG subsequently soldits debenture to JAG on March 31, 2006).

Since the debentures issued pursuant to the September 2005debenture purchase agreement were not paid in full by March 31, 2006, inaccordance with the terms of that agreement, we were required to issue warrantsto the holders of those debentures entitling the holders to purchase that numberof shares of our common stock equal to the number of dollars representing theaggregate amount then due on such holders’ debentures. Thus, on April 10,2006, we issued to Phoenix and JAG warrants to purchase 4,199,452 and 511,199,respectively, shares of our common stock at an exercise price of Cdn.$0.45. Thewarrants are exercisable through April 10, 2008 and the exercise price ofthe warrants was based on the average current market price of our common sharesfor the five days before the date of issuance.

On April 21, 2006, we entered into a financingagreement with Phoenix pursuant to which Phoenix agreed, at its solediscretion, to provide us with up to $5 million in financing. Inconnection with this financing, we issued a 10% secured debenture in theaggregate principal amount of $1 million to Phoenix, which had a maturity dateof June 30, 2006. The debenture (including accrued and unpaid interest)was exchanged for 2,970,185 Series A Preferred Shares in connection withthe completion of our May 2006 recapitalization. The remaining$4 million balance under the financing could be funded at any time throughJune 30, 2006 (subsequently amended to July 31, 2006), in Phoenix’ssole discretion, through the issuance of additional Series A PreferredShares, at a purchase price of $0.34 per share. Phoenix assigned its right topurchase $2,703,800 of the remaining $4 million debentures tonon-affiliated third parties (except for $50,000 which was assigned to MichaelJ. Rapisand, our Chief Financial Officer).

On April 21, 2006, we entered into a purchase andexchange agreement with Phoenix and other debenture holders, whereby thedebenture holders agreed to exchange their outstanding debentures for our Series APreferred Shares at the rate of one Series A Preferred Share for every$0.34 of principal and 

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accrued and unpaidinterest. On May 30, 2006, we completed a recapitalization, pursuant towhich approximately $18.9 million of indebtedness, representing all of ouroutstanding 10% secured debentures, including accrued interest (except for onedebenture in the aggregate principal amount of $250,000), was exchanged for55,520,542 of our Series A Preferred Shares. Pursuant to thisrecapitalization, we issued 31,032,014 Series A Preferred Shares toPhoenix in exchange for debentures in the aggregate principal amount of$9,900,000, and 2,497,976 Series A Preferred Shares to JAG in exchange fordebentures in the aggregate principal amount of $820,000. Furthermore, as partof the recapitalization, we issued 1,097,985 Series A Preferred Shares toGoren Brothers LP, an entity affiliated with Alex Goren, the father of AndreaGoren, in exchange for debentures in the aggregate principal amount of$360,000, which debentures were originally issued in November 2002.

In 2007, Phoenix agreed to provide or arrange toprovide us with additional financing, to the extent necessary, to fund ourplanned operations through March 31, 2008.

Withrespect to transactions involving indebtedness of which Mr. Goren is arelated party to, the following table sets forth the largest aggregateprincipal amount of indebtedness outstanding during our last fiscal year, theamount thereof outstanding as of March 31, 2007, the amount of principalpaid during our last fiscal year, the amount of interest paid during our lastfiscal year and the interest rate payable on the indebtedness:

| **Related Party**     | ** ** | ** ** | ** ** | **Largest  Aggregate  Amount of  Principal  Outstanding  During Fiscal  2007** | ** ** | **Amount of  Principal  Outstanding  as of  March 31,  2007** | ** ** | **Amount of  Principal  Paid During  Fiscal Year  2007** | ** ** | **Amount of  Interest  Paid  During  Fiscal  Year  2007** | ** ** | **Interest  Rate** | ** ** |
|----------------------------|------------|------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------|------------|
| Phoenix Venture  Fund LLC  |       |       | $          | 9,900,000                                                                                |       |                                                                         |       | —                                                                  |       |                                                           | $          | 9,900,000          |       | $ | 157,260 |   |   | 10 | % |   |
| JAG Multi  Investments LLC |       |       | $          | 820,000                                                                                  | (1)        |                                                                         |       | —                                                                  |       |                                                           | $          | 820,000            | (1)        | $ | 13,479 |   |   | 10 | % |   |
| Goren Brothers LP          |       |       | $          | 360,000                                                                                  |       |                                                                         |       | —                                                                  |       |                                                           | $          | 360,000            |       | $ | 5,918 |   |   | 10 | % |   |

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(1)          Includesa debenture in the aggregate principal amount of $250,000 originally issued toMAG Multi Corp. and subsequently sold to JAG Multi Investment LLC duringfiscal year 2006.

**Report of theCompensation Committee**

Our Compensation Committee has reviewed and discussedthe Compensation Discussion and Analysis required by Item 402(b) ofRegulation S-K with management. Based on such review and discussions, theCompensation Committee recommended to our Board of Directors that theCompensation Discussion and Analysis be included in this Annual Report on Form 10-K.

THECOMPENSATION COMMITTEE:THOMAS F. LEONARDIS, CHAIRMANANDREA GORENBRIAN USHER-JONES

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**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

**SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

Thefollowing table sets forth certain information regarding beneficially ownershipof our capital stock as of May 31, 2007 by (i) each person known byus to be the beneficial owner of more than 5% of any class of our votingsecurities, (ii) each of our directors, (iii) each of our “namedexecutive officers” and (iv) our directors and executive officers as agroup.

|                                                                       | ** ** | **Common Shares  Beneficially Owned** | ** ** | **Series A Preferred Shares  Beneficially Owned** | ** ** | **Series B Preferred  Shares  Beneficially Owned** | ** ** | ** **                                           | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Name of  Beneficial Owner(1)**                            | ** ** | ** **                                      | ** ** | **Number of  Common  Shares(2)**                                 | ** ** | **Percentage  of  Class(3)**                                      | ** ** | **Number of  Series A  Preferred  Shares** | ** ** | **Percentage  of Class(4)** | ** ** | **Number of  Series B  Preferred  Shares** | ** ** | **Percentage  of Class(5)** | ** ** | **Percentage  of  Combined  Classes(6)** | ** ** |
| Philip S. Sassower                                                    |       |                                            | 3,510,782  | (7)                                                                   |       |                                                              | 5.4        | %                                                    |       |   | 13,676,370 | (17) |   |   | 21.5 | % |   |   | — |   |   |   | — |   |   |   | 12.4 | % |   |
| Mark Holleran                                                         |       |                                            | 766,668    | (8)                                                                   |       |                                                              | 1.2        | %                                                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | * |   |   |
| Michael J. Rapisand                                                   |       |                                            | 617,136    | (9)                                                                   |       |                                                              | 1.0        | %                                                    |       |   | 147,059 |   |   |   | * |   |   |   | — |   |   |   | — |   |   |   | * |   |   |
| Gregory E. Arends                                                     |       |                                            | 166,667    | (10)                                                                  |       |                                                              | *          |                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | * |   |   |
| Brian E. Usher-Jones                                                  |       |                                            | 463,750    | (11)                                                                  |       |                                                              | *          |                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | * |   |   |
| Andrea Goren                                                          |       |                                            | 160,000    | (12)                                                                  |       |                                                              | *          |                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | * |   |   |
| Thomas F. Leonardis                                                   |       |                                            | 150,000    | (13)                                                                  |       |                                                              | *          |                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | * |   |   |
| Phoenix Venture Fund LLC                                              |       |                                            | 14,495,550 | (14)                                                                  |       |                                                              | 18.8       | %                                                    |       |   | 31,032,014 | (18) |   |   | 48.9 | % |   |   | — |   |   |   | — |   |   |   | 30.2 | % |   |
| 110 East 59th Street New York, NY 10022                          |       |                                            |       |                                                                  |       |                                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Alex and James Goren                                                  |       |                                            | 670,891    | (15)                                                                  |       |                                                              | 1.0        | %                                                    |       |   | 3,595,961 | (19) |   |   | 5.7 | % |   |   | — |   |   |   | — |   |   |   | 3.1 | % |   |
| 150 East 52nd Street  New York, NY 10022                         |       |                                            |       |                                                                  |       |                                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| William Freas                                                         |       |                                            | 95,279     |                                                                  |       |                                                              | *          |                                                 |       |   | — |   |   |   | — |   |   |   | 2,941,177 |   |   |   | 29.4 | % |   |   | 2.2 | % |   |
| c/o Joseph Gunnar & Co.  30 Broad Street  New York, NY 10004 |       |                                            |       |                                                                  |       |                                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ross Irvine                                                           |       |                                            | 30,567     |                                                                  |       |                                                              | *          |                                                 |       |   | — |   |   |   | — |   |   |   | 1,000,000 |   |   |   | 10.0 | % |   |   | * |   |   |
| c/o Sky Capital LLC  110 Wall Street  New York, NY 10005              |       |                                            |       |                                                                  |       |                                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| All directors and executive officers as  a group (7 persons)     |       |                                            | 5,835,003  | (16)                                                                  |       |                                                              | 8.7        | %                                                    |       |   | 13,823,429 | (20) |   |   | 21.8 | % |   |   | — |   |   |   | — |   |   |   | 14.0 | % |   |
|                                                                       |            |                                                 |            |                                                                       |            |                                                                   |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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                  * Represents lessthan 1% of class or combined classes.

          (1) Except asotherwise indicated above, the address of each shareholder identified is c/oXplore Technologies Corp., 14000 Summit Drive, Suite 900, Austin, Texas78728. Except as indicated in the other footnotes to this table, each personnamed in this table has sole voting and investment power with respect to allshares of stock beneficially owned by that person.

          (2) Options andwarrants exercisable within 60 days of the record date are deemed outstandingfor the purposes of computing the percentage of shares owned by that person,but are not deemed outstanding for purposes of computing the percentage ofshares owned by any other person.

          (3) Based on64,152,832 common shares issued and outstanding as of May 31, 2007.

          (4) Based on63,472,895 Series A Preferred Shares issued and outstanding as of May 31,2007.

          (5) Based9,988,513 Series B Preferred Shares issued and outstanding as of May 31,2007.

          (6) Based on64,152,832 common shares, 63,472,895 Series A Preferred Shares and9,988,513 Series B Preferred Shares issued and outstanding as of May 31,2007.

          (7) Includes2,229,676 common shares owned of record by Phoenix Enterprises Family Fund,LLC, an entity controlled by Mr. Sassower, 150,000 common shares that Mr. Sassowerhas the right to acquire under outstanding options exercisable within60 days after May 31, 2007, 524,692 common shares that Mr. Sassowerhas the right to acquire under outstanding warrants 

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exercisable within60 days after May 31, 2007, owned of record by The Philip S. Sassower1996 Charitable Remainder Annuity Trust, an entity controlled by Mr. Sassower,and 330,414 common shares owned of record by The Philip S. Sassower 1996Charitable Remainder Annuity Trust. Does not include 14,495,550 common sharesbeneficially owned by Phoenix Venture Fund LLC, of which Mr. Sassower isthe co-manager of the managing member. Mr. Sassower disclaims anybeneficial ownership of the shares held by Phoenix Venture Fund LLC.

          (8) Includes766,668 common shares that Mr. Holleran has the right to acquire underoutstanding options exercisable within 60 days after May 31, 2007.

          (9) Includes612,084 common shares that Mr. Rapisand has the right to acquire underoutstanding options exercisable within 60 days after May 31, 2007.

    (10) Includes166,667 common shares that Mr. Arends has the right to acquire underoutstanding options exercisable within 60 days after May 31, 2007.

    (11) Includes200,000 common shares that Mr. Usher-Jones has the right to acquireunder outstanding options exercisable within 60 days after May 31,2007.

    (12) Includes150,000 common shares that Mr. Goren has the right to acquire underoutstanding options exercisable within 60 days after May 31, 2007.Does not include 14,495,550 common shares beneficially owned by Phoenix VentureFund LLC, of which Mr. Goren is the co-manager of the managing member. Mr. Gorendisclaims any beneficial ownership of the shares held by Phoenix Venture FundLLC.

    (13) Includes150,000 common shares that Mr. Leonardis has the right to acquire underoutstanding options exercisable within 60 days after May 31, 2007.

    (14) Includes of13,117,452 common shares that Phoenix Venture Fund LLC has the right to acquireunder outstanding warrants exercisable within 60 days after May 31,2007. Voting and investment power over these shares is held equally by PhilipSassower and Andrea Goren. Messrs. Sassower and Goren disclaim anybeneficial ownership of the shares held by Phoenix Venture Fund LLC.

    (15) Consists of110,932 common shares owned of record by and 511,199 common shares subject towarrants exercisable within 60 days after May 31, 2007 owned by JAGMulti Investment LLC and 48,760 common shares owned of record by Goren BrothersLP. Voting and investment power over these shares is held equally by Alex Gorenand James Goren.

    (16) Includes2,195,419 common shares our directors and executive officers have the right toacquire under outstanding options exercisable within 60 days after May 31,2007 and 524,692 common shares our directors and executive officers have theright to acquire under outstanding warrants exercisable within 60 daysafter May 31, 2007. Does not include 14,495,550 common shares beneficiallyowned by Phoenix Venture Fund LLC. Philip S. Sassower and Andrea Goren are co-managersof the managing member of Phoenix Venture Fund LLC. Mr. Sassower and Mr. Goreneach disclaim any beneficial ownership of the shares held by Phoenix VentureFund LLC.

    (17) Includes5,171,847 Series A Preferred Shares owned of record by Phoenix EnterprisesFamily Fund, LLC and 7,135,973 Series A Preferred Shares owned of recordby The Philip S. Sassower 1996 Charitable Remainder Annuity Trust, entitiescontrolled by Mr. Sassower. Does not include 31,032,014 Series APreferred Shares beneficially owned by Phoenix Venture Fund LLC. Mr. Sassoweris the co-manager of the managing member of Phoenix Venture Fund LLC. Mr. Sassowerdisclaims any beneficial ownership of the shares held by Phoenix Venture FundLLC.

    (18) Voting andinvestment power over these shares is held equally by Philip Sassower andAndrea Goren. Messrs. Sassower and Goren disclaim any beneficial ownershipof the shares held by Phoenix Venture Fund LLC.

    (19) Consists of2,497,976 Series A Preferred Shares owned of record by JAG MultiInvestment LLC and 1,097,985 Series A Preferred Shares owned of record byGoren Brothers LP. Voting and investment power over these shares is heldequally by Alex Goren and James Goren.

    (20) Does notinclude 31,032,014 Series A Preferred shares beneficially owned by PhoenixVenture Fund LLC. Philip S. Sassower and Andrea Goren are co-managers of themanaging member of Phoenix Venture Fund LLC. Mr. Sassower and Mr. Goreneach disclaim any beneficial ownership of the shares held by Phoenix VentureFund LLC.

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**Equity Compensation Plan Information**

Thefollowing table sets out information with respect to compensation plans underwhich equity securities of our company were authorized for issuance as of March 31,2007.

| **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 reflected in the  first column)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 10,921,922 |                                                                                                                                             |       |                                                                                                        | C$0.91     |                                                                                                                                                                                                                        |       |   | 14,617,303 |   |   |
| Equity  compensation plans not approved by security holders |       |       | N/A        |                                                                                                                                             |       |                                                                                                        | N/A        |                                                                                                                                                                                                                        |       |   | — |   |   |
| **Total**                                                   |       |       | 10,921,922 |                                                                                                                                             |       |                                                                                                        | C$0.91     |                                                                                                                                                                                                                        |       |   | 14,617,303 |   |   |

 

**Item13.**                 CertainRelationships and Related Transactions, and Director Independence

**Certain Relationships and Related Transactions**

On September 15,2005, we entered into a debenture purchase agreement with Phoenix Venture FundLLC, which we refer to as Phoenix (Mr. Sassower, our Chairman of the Boardand Chief Executive Officer, and Andrea Goren, a director of our company and amember of our compensation committee, are the co-managers of the managingmember of Phoenix), the Philip S. Sassower 1996 Charitable Remainder AnnuityTrust, which we refer to as the Sassower Trust (Philip S. Sassower, ourChairman of the Board and Chief Executive Officer, is the sole Trustee of theSassower Trust), and MAG Multi Corp., which we refer to as MAG (an entityaffiliated with Alex Goren, the father of Andrea Goren), which we refer to asthe Lenders, whereby the Lenders agreed to provide us with an aggregate of$5 million of financing. The debentures had an original maturity date of March 31,2006, which was subsequently amended to June 30, 2006. Borrowings underthose debentures bore interest at 10% per annum. We initially drew on thefacility and issued debentures to the Lenders in the aggregate amount of$3 million. We used the gross proceeds to re-pay promissory notes in theaggregate amount of $3 million previously issued by our subsidiary in May andJuly 2005. On September 29, 2005, November 4, 2005 and November 7,2005, we made additional draws on the facility and issued debentures to theLenders in the aggregate amount of $2 million. The proceeds were used forworking capital and general corporate purposes. In connection with thisfinancing, the maturity date of all of our other outstanding debentures wasextended to April 30, 2007. Of this $5 million facility, we issueddebentures in an aggregate principal amount of $4 million to Phoenix,$500,000 to the Sassower Trust, $250,000 to JAG Multi Investments LLC (which werefer to as JAG), an entity affiliated with Alex Goren, the father of AndreaGoren, and $250,000 to MAG (MAG subsequently sold its debenture to JAG on March 31,2006).

Since the debenturesissued pursuant to the September 2005 debenture purchase agreement werenot paid in full by March 31, 2006, in accordance with the terms of theagreement, we were required to issue warrants to the holders of thosedebentures entitling the holders to purchase that number of shares of ourcommon stock equal to the number of dollars representing the aggregate amountthen due on such holders’ debenture. On April 10, 2006, we issued toPhoenix, the Sassower Trust and JAG warrants to purchase 4,199,452, 524,692 and511,199, respectively, shares of our common stock at an exercise price ofCdn.$0.45. The warrants are exercisable through April 10, 2008 and theexercise price of the warrants was based on the average current market price ofour common shares for the five days before the date of issuance.

On April 21, 2006, weentered into a financing agreement with Phoenix pursuant to which Phoenixagreed, at its sole discretion, to provide us with up to $5 million infinancing. In connection with this financing, we issued a 10% secured debenturein the aggregate principal amount of $1 million to Phoenix, which had amaturity date of June 30, 2006. The debenture (including accrued andunpaid interest) was exchanged for 2,970,185 Series A Preferred Shares inconnection with the completion of our May 2006 

51

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recapitalization.The remaining $4 million balance under the financing could be funded atany time through June 30, 2006 (subsequently amended to July 31,2006), in Phoenix’s sole discretion, through the issuance of additional Series APreferred Shares, at a purchase price of $0.34 per share, to Phoenix and /orits assigns. Phoenix later assigned its right to purchase $2,703,800 of theremaining $4 million debentures to non-affiliated third parties (exceptfor $50,000 which was assigned to Michael J. Rapisand, our Chief FinancialOfficer). In connection with our May 2006 recapitalization, thesedebentures were subsequently exchanged for 7,952,353 Series A PreferredShares, including 147,059 Series A Preferred Shares issued to Mr. Rapisand.

On April 21, 2006, weentered into a purchase and exchange agreement with Phoenix and other debentureholders, whereby the debenture holders agreed to exchange their outstandingdebentures for our Series A Preferred Shares at the rate of one Series APreferred Share for every $0.34 of principal and accrued and unpaid interest.On May 30, 2006, we completed a recapitalization, pursuant to which approximately$18.9 million of indebtedness, representing all of our outstanding 10%secured debentures, including accrued interest (except for one debenture in theaggregate principal amount of $250,000), was exchanged for 55,520,542 of our Series APreferred Shares. Pursuant to this recapitalization, we issued 45,012,677 Series APreferred Shares to Phoenix, the Sassower Trust, Mr. Sassower and PhoenixEnterprises Family Fund LLC, another entity controlled by Mr. Sassower, inexchange for debentures in the aggregate principal amount of $14,307,500, and2,497,976 Series A Preferred Shares to JAG in exchange for debentures inthe aggregate principal amount of $820,000. Furthermore, as part of therecapitalization, we issued 1,097,985 Series A Preferred Shares to GorenBrothers LP, an affiliated entity of Alex Goren, the father of Andrea Goren, inexchange for debentures in the aggregate principal amount of $360,000, whichdebentures were originally issued in November 2002.

In 2007, Phoenix agreed toprovide or arrange to provide us with additional financing, to the extentnecessary, to fund our planned operations through March 31, 2008.

Withrespect to related party transactions involving indebtedness, the followingtable sets forth the largest aggregate principal amount of indebtednessoutstanding during our last fiscal year, the amount thereof outstanding as of March 31,2007, the amount of principal paid during the our last fiscal year, the amountof interest paid during our last fiscal year, and the interest rate payable onthe indebtedness:

| **Related Party**                                           | ** ** | ** ** | ** ** | **Largest  Aggregate  Amount of  Principal  Outstanding  During Fiscal  Year 2007** | ** ** | **Amount of  Principal  Outstanding  as of March 31,  2007** | ** ** | **Amount of  Principal Paid  During Fiscal  Year 2007** | ** ** | **Amount of  Interest Paid  During  Fiscal Year  2007** | ** ** | **Interest  Rate** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------|------------|
| Phoenix Venture  Fund LLC                                        |       |       | $          | 9,900,000                                                                                          |       |                                                                             |       | —                                                                      |       |                                                                   |       | $                  | 9,900,000  |   |   |   | $ | 157,260 |   |   |   | 10 | % |   |
| The Philip S.  Sassower  1996 Charitable Remainder Annuity Trust |       |       | $          | 2,252,500                                                                                          |       |                                                                             |       | —                                                                      |       |                                                                   |       | $                  | 2,252,500  |   |   |   | $ | 37,027 |   |   |   | 10 | % |   |
| Phoenix Enterprises  Family Fund LLC                             |       |       | $          | 1,625,000                                                                                          |       |                                                                             |       | —                                                                      |       |                                                                   |       | $                  | 1,625,000  |   |   |   | $ | 26,712 |   |   |   | 10 | % |   |
| Philip S.  Sassower                                              |       |       | $          | 430,000                                                                                            |       |                                                                             |       | —                                                                      |       |                                                                   |       | $                  | 430,000    |   |   |   | $ | 7,068 |   |   |   | 10 | % |   |
| JAG Multi  Investments LLC                                       |       |       | $          | 820,000                                                                                            | (1)        |                                                                             |       | —                                                                      |       |                                                                   |       | $                  | 820,000    | (1) |   |   | $ | 13,479 |   |   |   | 10 | % |   |
| Goren Brothers LP                                                |       |       | $          | 360,000                                                                                            |       |                                                                             |       | —                                                                      |       |                                                                   |       | $                  | 360,000    |   |   |   | $ | 5,918 |   |   |   | 10 | % |   |

----

(1)          Includesa debenture in the aggregate principal amount of $250,000 originally issued toMAG Multi Corp. and subsequently sold to JAG Multi Investment LLC duringfiscal year 2006.

*Approval of Related Party Transactions*

Our audit committeereviews and reports to our board of directors on any related party transaction.From time to time, the independent members of our board of directors form an *ad hoc*committee to 

52

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considertransactions and agreements in which a director or executive officer of ourcompany has a material interest. In considering related party transactions, ouraudit committee is guided by its fiduciary duties to our shareholders. Ouraudit committee does not have any written or oral policies or proceduresregarding the review, approval and ratification of transactions with relatedparties.

**Director Independence**

We undertook a review ofthe independence of our directors and, using the definitions and independencestandards for directors provided in the rules of The Nasdaq Stock Market,considered whether any director has a material relationship with us that couldinterfere with his ability to exercise independent judgment in carrying out hisresponsibilities. As a result of this review, we determined that ThomasLeonardis and Brian Usher-Jones are “independent directors” as definedunder the rules of The Nasdaq Stock Market, and that Andrea Goren, amember of our audit committee and compensation committee, is not an independentdirector as defined under the rules of The Nasdaq Stock Market.

**Item14.**                 PrincipalAccounting Fees and Services.

*Principal Accountant Fees*

Thefollowing table summarizes the fees of Mintz & Partners LLP, ourcompany’s principal accountant, billed to us for each of the last two fiscalyears:

| **Fee Category**   | ** ** | ** ** | ** ** | **Fiscal Year  2007** | ** ** | **% of Total** | ** ** | **Fiscal Year  2006** | ** ** | **% of Total** | ** ** |
|-------------------------|------------|------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|--------------------------|------------|
| Audit Fees (1)          | ** ** |       | **$**      | **192,447**                | ** ** |                     |       | **61**                     | **%**      |                     |       | **$** | **286,536** | ** ** |   |   | **99** | **%** |   |
| Audit-Related  Fees (2) | ** ** |       | **—** | ** **                 |       |                     | **—** | ** **                 |       |                     | **—** | ** ** |   |   | **—** | ** ** |   |
| Tax Fees (3)            | ** ** |       | **22,252** | ** **                 |       |                     | **7**      | **%**                      |       |                     | **3,352**  | ** ** |   |   | **1** | **%** |   |
| All Other Fees  (4)     | ** ** |       | **98,905** | ** **                 |       |                     | **32**     | **%**                      |       |                     | **—** | ** ** |   |   | **—** | ** ** |   |
| **Total Fees**          | ** ** |       | **$**      | **313,604**                | ** ** |                     |       | **100**                    | **%**      |                     |       | **$** | **289,888** | ** ** |   |   | **100** | **%** |   |

----

(1)          AuditFees consist of amounts billed for professional services performed for theaudit of our company’s annual financial statements and review of quarterlyfinancial statements, and services that are normally provided in connectionwith statutory and regulatory filings or engagements. Included in these amountsare billings of $76,936 made during the year ended March 31, 2007 and$199,396 made during the year ended March 31, 2006, respectively, relatingto the restatement of our Canadian GAAP 2002, 2003 and 2004 annual financialstatements and 2004, 2005 and first quarter of 2006 interim financialstatements.

(2)          Nofees were billed by Mintz & Partners for assurance and relatedservices reasonably related to the performance of the audit or review of ourcompany’s financial statements, other than Audit Fees, during the last twofiscal years.

(3)          TaxFees consist of amounts billed for professional services performed with respectto tax compliance, tax advice and tax planning. Mintz & Partnersbilled us $22,252 during the year ended March 31, 2007 and $3,352 duringthe year ended March 31, 2006, respectively, for services performed withrespect to tax compliance.

(4)          Mintz &Partners billed us $98,905 for services rendered with respect to ourdomestication.

*Pre-Approval Policy*

All of the audit andnon-audit services performed by Mintz & Partners in connection withbillings rendered in fiscal years 2007 and 2006 were approved by our auditcommittee. Our audit committee has adopted a policy requiring pre-approval ofall services (audit and non-audit) to be performed by Mintz &Partners. In accordance with that policy, our audit committee may delegate toone of its members the approval of such services. In such cases, the itemsapproved will be reported to the audit committee at its next scheduled meetingfollowing such pre-approval.

53

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**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules.

**(a)****          FinancialStatements**

**The index to our financialstatements is found on page F-1 of this Annual Report on Form 10-K.**

(**b)****          Exhibits**

| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Description** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1              |       | Certificate of  Incorporation of Xplore Technologies Corp. (incorporated by reference to  Exhibit 3.1 of the Company’s Registration Statement on Form 8-A,  filed on June 22, 2007, Commission File No. 000-52697)                                                                                                                                                                                                                   |
| 3.2*             |       | By-Laws of Xplore  Technologies Corp.                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1              |       | Specimen Stock  Certificate for Registrant’s Common Stock (incorporated by reference to  Exhibit 4.1 of the Company’s Registration Statement on Form S-4,  filed on February 8, 2007, Registration Statement No. 333-138675)                                                                                                                                                                                                    |
| 4.2              |       | Specimen Stock  Certificate for Registrant’s Series A Preferred Stock (incorporated by  reference to Exhibit 4.2 of the Company’s Registration Statement on  Form S-4, filed on February 8, 2007, Registration Statement  No. 333-138675)                                                                                                                                                                                  |
| 4.3              |       | Specimen Stock  Certificate for Registrant’s Series B Preferred Stock (incorporated by  reference to Exhibit 4.3 of the Company’s Registration Statement on  Form S-4, filed on February 8, 2007, Registration Statement  No. 333-138675)                                                                                                                                                                                  |
| 10.1†       |       | Turnkey Design  and Manufacturing Agreement, by and between Xplore Technologies Corp. and  Wistron Corporation (incorporated by reference to Exhibit 10.1 of the  Company’s Registration Statement on Form S-4, filed on  February 8, 2007, Registration Statement No. 333-138675)                                                                                                                                                   |
| 10.2             |       | Intercreditor,  Trade Credit Restructuring and Security Agreement, dated December 17,  2004, by and among Xplore Technologies Corp., Phoenix Venture Fund LLC, The  Philip S. Sassower 1996 Charitable Remainder Annuity Trust and Wistron  Corporation (incorporated by reference to Exhibit 10.2 of the Company’s  Registration Statement on Form S-4, filed on November 14,  2006, Registration Statement No. 333-138675)    |
| 10.3             |       | December 2004  Debenture Purchase Agreement, dated December 17, 2004, by and among  Xplore Technologies Corp., Phoenix Venture Fund LLC and each of the Lenders  listed on Schedule 1 attached thereto (incorporated by reference to  Exhibit 10.3 of the Company’s Registration Statement on Form S-4,  filed on November 14, 2006, Registration Statement No. 333-138675)                                                |
| 10.4             |       | Loan and Security  Agreement, dated September 15, 2005, as amended, between Silicon Valley  Bank and Xplore Technologies Corporation of America (incorporated by  reference to Exhibit 10.4 of the Company’s Registration Statement on  Form S-4, filed on March 19, 2007, Registration Statement  No. 333-138675)                                                                                                              |
| 10.5             |       | September 2005  Debenture Purchase Agreement, dated September 15, 2005, by and among  Xplore Technologies Corp., Xplore Technologies Corporation of America,  Phoenix Venture Fund LLC and each of the Lenders listed on Schedule 1  attached thereto (incorporated by reference to Exhibit 10.5 of the  Company’s Registration Statement on Form S-4, filed on  November 14, 2006, Registration Statement No. 333-138675) |

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| 10.6   |   | April 2006  Debenture Purchase Agreement, dated April 20, 2006, by and among Xplore  Technologies Corp., Xplore Technologies Corporation of America, Phoenix  Venture Fund LLC and each of the Lenders listed on Schedule 1 attached  thereto (incorporated by reference to Exhibit 10.6 of the Company’s  Registration Statement on Form S-4, filed on November 14,  2006, Registration Statement No. 333-138675) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7   |   | Exchange and  Purchase Agreement, dated April 21, 2006, by and among Xplore  Technologies Corp., Xplore Technologies Corporation of America, Phoenix  Venture Fund LLC and each of the Lenders listed on Schedule 1 attached  thereto (incorporated by reference to Exhibit 10.7 of the Company’s  Registration Statement on Form S-4, filed on November 14,  2006, Registration Statement No. 333-138675)              |
| 10.8   |   | Relocation  Agreement, dated September 6, 2005, by and between Xplore Technologies  Corporation of America and Brian Groh (incorporated by reference to  Exhibit 10.8 of the Company’s Registration Statement on Form S-4,  filed on November 14, 2006, Registration Statement No. 333-138675)                                                                                                                          |
| 10.9   |   | Agreement, dated  as of January 3, 2006, by and among Brian Groh, Xplore Technologies  Corp. and Xplore Technologies Corporation of America (incorporated by  reference to Exhibit 10.9 of the Company’s Registration Statement on  Form S-4, filed on November 14, 2006, Registration Statement  No. 333-138675)                                                                                                       |
| 10.10  |   | Employment  Agreement, dated as of June 30, 2006, by and between Xplore Technologies  Corp. and Mark Holleran (incorporated by reference to Exhibit 10.10 of  the Company’s Registration Statement on Form S-4, filed on November 14,  2006, Registration Statement No. 333-138675)                                                                                                                                     |
| 10.11  |   | Lease Agreement,  dated April 10, 2003, between Summit Tech L.P. and Xplore Technologies  Corp. (incorporated by reference to Exhibit 10.11 of the Company’s  Registration Statement on Form S-4, filed on November 14,  2006, Registration Statement No. 333-138675)                                                                                                                                                   |
| 10.12  |   | Amended and  Restated Share Option Plan, as amended December 6, 2006 (incorporated by  reference to Exhibit 10.12 of the Company’s Registration Statement on  Form S-4, filed on February 8, 2007, Registration Statement  No. 333-138675)                                                                                                                                                                              |
| 21.1   |   | Subsidiaries of  Xplore Technologies Corp. (incorporated by reference to Exhibit 21.1 of  the Company’s Registration Statement on Form S-4, filed on  November 14, 2006, Registration Statement No. 333-138675)                                                                                                                                                                                                              |
| 31.1*  |   | Certification of  Philip S. Sassower, Chief Executive Officer, pursuant to Rule 13a-14(a) under  the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                        |
| 31.2*  |   | Certification of  Michael J. Rapisand, Chief Financial Officer, pursuant to Rule 13a-14(a) under  the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                       |
| 32.1** |   | Certifications of  Philip S. Sassower, Chief Executive Officer, and Michael J. Rapisand, Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                                                                            |

----

*                    Filedherewith.

**             Furnished herewith.

†                    Portions ofthe exhibits to this agreement have been omitted pursuant to a request forconfidential treatment.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, onthis 27th day of June 2007.

|    |   | XPLORE TECHNOLOGIES CORP. |
|--------------|--------|---------------------------|
|    |   | By:             |   | /s/ MICHAEL J. RAPISAND |
|    |   |                 |   | Name: Michael J. Rapisand |
|    |   |                 |   | Title:   Chief  Financial Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

| /s/ PHILIP  S. SASSOWER  |   | Chief Executive Officer                      |   | June 27,  2007 |
|--------------------------|--------|----------------------------------------------|--------|---------------------|
| Philip S. Sassower       |   | (Principal Executive Officer) and Director   |   |                |
| /s/ MICHAEL J. RAPISAND  |   | Chief Financial Officer                      |   | June 27,  2007 |
| Michael J. Rapisand      |   | (Principal Financial and Accounting Officer) |   |                |
| /s/ BRIAN E. USHER-JONES |   | Director                                     |   | June 27,  2007 |
| Brian E. Usher-Jones     |   |                                         |   |                |
| /s/ ANDREA GOREN         |   | Director                                     |   | June 27,  2007 |
| Andrea Goren             |   |                                         |   |                |
| /s/ THOMAS F. LEONARDIS  |   | Director                                     |   | June 27,  2007 |
| Thomas F. Leonardis      |   |                                         |   |                |

 

56

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**INDEX TO FINANCIALSTATEMENTS**

**CONSOLIDATEDFINANCIAL STATEMENTS OFXPLORE TECHNOLOGIES CORP.**

| Report of Independent  Registered Auditors                                                                                                                |   | F-2 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Consolidated  Balance Sheets as at March 31, 2007 and 2006                                                                                           |   | F-3 |   |
| Consolidated Statements of Loss for the Years Ended  March 31, 2007, 2006 and 2005                                                                   |   | F-4 |   |
| Consolidated Statement of Stockholders’ Deficiency for  the Years Ended March 31, 2007, 2006 and 2005        |   | F-5 |   |
| Consolidated Statements of Cash Flows for the Years  Ended March 31, 2007, 2006 and 2005                                                             |   | F-6 |   |
| Notes to the Consolidated Financial Statements                                                                                                            |   | F-7 |   |

 

F-1

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**REPORTOF INDEPENDENT REGISTERED AUDITORS**

To the Board of DirectorsandStockholders of Xplore Technologies Corp.

We have audited the accompanying consolidated balancesheets of Xplore Technologies Corp. and subsidiaries as of March 31, 2007and 2006, and the related consolidated statements of loss, stockholders’deficiency and cash flows for the years ended March 31, 2007, 2006 and2005. These consolidated financial statements are the responsibility of thecompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementspresent fairly, in all material respects, the financial position of XploreTechnologies Corp. and subsidiaries as of March 31, 2007 and 2006, and theresults of its operations and its cash flows for the years ended March 31,2007, 2006 and 2005 in conformity with accounting principles generally acceptedin the United States of America.

As discussed in Note 2 tothe financial statements, previously issued financial statements have beenrestated as disclosed herein.

/s/ MINTZ &PARTNERS LLPCHARTERED ACCOUNTANTSLicensed Public Accountants

North York, OntarioJune 20, 2007

F-2

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**XPLORE TECHNOLOGIES CORP.Consolidated Balance Sheets**(in thousands ofUnited States dollars)

| ** **                                          | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|
| ** **                                          | ** ** | **2007**           | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | ** **         | ** ** | **(Restated)** | ** ** |
| **ASSETS**                                          |       |               |       |   |   |
| CURRENT ASSETS:                                     |       |               |       |   |   |
| Cash and cash equivalents                           |       | $                  | 1,711      |   | $ | 56 |   |
| Accounts receivable (Note 11)                       |       | 4,408              |       | 4,613 |   |
| Inventory (Notes 3 and 5)                           |       | 3,639              |       | 3,713 |   |
| Prepaid expenses and other current assets (Note 3)  |       | 771                |       | 826 |   |
|                                                |       | 10,529             |       | 9,208 |   |
| Fixed assets, net  (Note 4)                         |       | 585                |       | 597 |   |
| Deferred charges  (Note 7)                          |       | —             |       | 1,419 |   |
|                                                |       | $                  | 11,114     |   | $ | 11,224 |   |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**   |       |               |       |   |   |
| CURRENT  LIABILITIES:                               |       |               |       |   |   |
| Accounts payable and accrued liabilities (Note 6)   |       | $                  | 5,319      |   | $ | 7,042 |   |
| Bank indebtedness (Note 5)                          |       | —             |       | 1,672 |   |
| Short-term debentures (Note 7)                      |       | —             |       | 5,000 |   |
| Total current  liabilities                          |       | 5,319              |       | 13,714 |   |
| Debentures (Note  7)                                |       | 250                |       | 11,523 |   |
|                                                |       | 5,569              |       | 25,237 |   |
| Commitments and  contingencies (Notes 3, 11 and 13) |       |               |       |   |   |
| SHAREHOLDERS’  DEFICIENCY:                     |       |               |       |   |   |
| Series A Preferred Shares (Notes 7and 8)       |       | 21,128             |       | — |   |
| Series B Preferred Shares (Note 8)             |       | 2,707              |       | — |   |
| Share capital (Notes 8 and 9)                       |       | 65,812             |       | 63,834 |   |
| Additional paid-in capital (Notes 7, 8 and 9)       |       | 8,959              |       | 7,714 |   |
| Accumulated other comprehensive loss                |       | (1,104             | )          | (1,104 | ) |
| Accumulated deficit                                 |       | (91,957            | )          | (84,457 | ) |
|                                                |       | 5,545              |       | (14,013 | ) |
|                                                |       | $                  | 11,114     |   | $ | 11,224 |   |

 

See accompanying notes to consolidated financialstatements.

F-3

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**XPLORE TECHNOLOGIES CORP.Consolidated Statements of Loss(in thousands of United States dollars, except share and per shareamounts)**

| ** **                                                                                           | ** ** | **Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                           | ** ** | ** **                              | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| REVENUE (Note 12)                                                                                    |       | $                                       | 34,534     |   | $ | 27,480 |   | $ | 17,530 |   |
| COST OF REVENUE                                                                                      |       | 24,723                                  |       | 20,671 |   | 13,860 |   |
| GROSS PROFIT                                                                                         |       | 9,811                                   |       | 6,809 |   | 3,670 |   |
| EXPENSES:                                                                                            |       |                                    |       |   |   |   |   |
| Sales, marketing  and support                                                                        |       | 6,094                                   |       | 5,284 |   | 4,839 |   |
| Product research,  development and engineering                                                       |       | 2,935                                   |       | 2,402 |   | 2,327 |   |
| General  administration (Note 8)                                                                     |       | 5,058                                   |       | 4,143 |   | 4,179 |   |
|                                                                                                 |       | 14,087                                  |       | 11,829 |   | 11,345 |   |
| LOSS FROM  OPERATIONS                                                                                |       | (4,276                                  | )          | (5,020 | ) | (7,675 | ) |
| OTHER INCOME  (EXPENSE):                                                                             |       |                                    |       |   |   |   |   |
| Interest expense  (Notes 5, 7, 11 and 14)                                                            |       | (1,467                                  | )          | (4,867 | ) | (2,818 | ) |
| Loss on  extinguishment of debt (Note 7)                                                             |       | (832                                    | )          | — |   | — |   |
| Other income  (expense) (Note 15)                                                                    |       | (40                                     | )          | 901 |   | (8 | ) |
|                                                                                                 |       | (2,339                                  | )          | (3,966 | ) | (2,826 | ) |
| NET LOSS                                                                                             |       | $                                       | (6,615     | ) | $ | (8,986 | ) | $ | (10,501 | ) |
| Deemed dividends related to beneficial conversion  feature of convertible Preferred Shares (Note 8)  |       | (3,381                                  | )          | — |   | — |   |
| Dividends attributable  to Preferred Shares (Note 8)                                                 |       | (885                                    | )          | — |   | — |   |
| Net loss  attributable to common shareholders (Note 2 (l))                                           |       | (10,881                                 | )          | (8,986 | ) | (10,501 | ) |
| LOSS PER SHARE                                                                                       |       | (0.11                                   | )          | (0.16 | ) | (0.21 | ) |
| Deemed dividends  related to beneficial conversion feature of convertible Preferred Shares  (Note 8) |       | (0.06                                   | )          | — |   | — |   |
| Dividends attributable  to Preferred Shares (Note 8)                                                 |       | (0.01                                   | )          | — |   | — |   |
| Loss per share  attributable to common shareholders  (Note 2 (l))                                    |       | $                                       | (0.18      | ) | $ | (0.16 | ) | $ | (0.21 | ) |
| Weighted average number  of common shares outstanding (Note 2 (l))                                   |       | 59,616,950                              |       | 55,938,753 |   | 50,091,486 |   |

 

See accompanying notes to consolidated financialstatements.

F-4

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**XPLORE TECHNOLOGIES CORP.Consolidated Statements of Stockholders’ Deficiency**(in thousands ofUnited States dollars)

| ** **                                                                                                       | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                         | ** ** | ** **                                 | ** ** | ** **        | ** ** | ** **      | ** ** | **Additional ** | ** ** | **Other**  | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------|------------|------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                       | ** ** | **Preferred Series A**   | ** ** | **Preferred Series B** | ** ** | **Common Shares**             | ** ** | **Paid in**                           | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | ** **           | ** ** |
| ** **                                                                                                       | ** ** | **Number**                         | ** ** | **Amount**                       | ** ** | **Number**                         | ** ** | **Amount**                                 | ** ** | **Number**        | ** ** | **Amount**      | ** ** | **Capital**          | ** ** | **Loss**   | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| ** **                                                                                                       | ** ** | **(Notes 7 and 8)** | ** ** | **(Note 8)**                | ** ** | **(Notes 8 and 9)** | ** ** | **(Notes 7, 8 and 9)** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **           | ** ** |
| Balances, March 31, 2004 (Restated)                                                                         |       | —                             |       |                             | $          | —                             |       |                                       | —     |              |       | $               | —     |                 |       | 38,988,250 |       |        | $          | 57,936     |       |   |   | $ | 2,895 |   |   |   | $ | (33 | ) |   |   | $ | (66,041 | ) |   | $ | (5,243 | ) |
| Warrants exercised                                                                                               |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 11,806,131           |       |       | 2,550      |        |       |       | (2,022     | ) |   |   | — |   |   |   | — |   |   | 528 |   |
| Value assigned to warrants issued (Restated)                                                                     |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 2,234      |   |   |   | — |   |   |   | — |   |   | 2,234 |   |
| Issuance of shares, net of issuance costs of $47                                                                 |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 3,975,041            |       |       | 2,062      |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 2,062 |   |
| Shares issued for services                                                                                       |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 65,360               |       |       | 101        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 101 |   |
| Options issued to employees and directors                                                                        |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 305        |   |   |   | — |   |   |   | — |   |   | 305 |   |
| Options exercised                                                                                                |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 150,835              |       |       | 56         |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 56 |   |
| Foreign currency translation adjustments                                                                         |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | (421 | ) |   |   | — |   |   | (421 | ) |
| Beneficial conversion feature on issuace of  convertible debentures (Restated)                                   |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 2,766      |   |   |   | — |   |   |   | — |   |   | 2,766 |   |
| Net loss (Restated)                                                                                              |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | — |   |   |   | (10,080 | ) |   | (10,080 | ) |
| Balances, March 31, 2005 (Restated)                                                                         |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 54,985,617           |       |       | 62,705     |        |       |       | 6,178      |   |   |   | (454 | ) |   |   | (76,121 | ) |   | (7,692 | ) |
| Warrants exercised                                                                                               |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 2,067,330            |       |       | 963        |        |       |       | (315       | ) |   |   | — |   |   |   | — |   |   | 648 |   |
| Value assigned to warrants issued                                                                                |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 1,329      |   |   |   | — |   |   |   | — |   |   | 1,329 |   |
| Shares issued for services                                                                                       |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 315,440              |       |       | 126        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 126 |   |
| Options issued to employees and directors                                                                        |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 522        |   |   |   | — |   |   |   | — |   |   | 522 |   |
| Options exercised                                                                                                |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 100,000              |       |       | 40         |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 40 |   |
| Foreign currency translation adjustments                                                                         |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | (650 | ) |   |   | — |   |   | (650 | ) |
| Net loss (Restated)                                                                                              |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | — |   |   |   | (8,336 | ) |   | (8,336 | ) |
| Balances, March 31, 2006 (Restated)                                                                         |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 57,468,387           |       |       | 63,834     |        |       |       | 7,714      |   |   |   | (1,104 | ) |   |   | (84,457 | ) |   | (14,013 | ) |
| Warrants exercised                                                                                               |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 454,546              |       |       | 175        |        |       |       | (45        | ) |   |   | — |   |   |   | — |   |   | 130 |   |
| Warrants issued for services                                                                                     |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 471        |   |   |   | — |   |   |   | — |   |   | 471 |   |
| Issuance of common shares, net of issuance costs $38                                                             |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 2,848,253            |       |       | 909        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 909 |   |
| Shares issued for services                                                                                       |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 244,483              |       |       | 96         |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 96 |   |
| Options issued to employees and directors                                                                        |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 819        |   |   |   | — |   |   |   | — |   |   | 819 |   |
| Issuance of Preferred Series A for debt  conversion, net of issuance costs of $364                          |       | 55,520,542                         |       |                             | 18,513     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 18,513 |   |
| Issuance of Preferred Series A, net of issuance  costs of $89                                               |       | 7,952,353                          |       |                             | 2,615      |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 2,615 |   |
| Issuance of Preferred Series B, net of issuance  costs of $488                                              |       | —                             |       |                             | —     |                               |       | 9,988,513                                  |       |              | 2,707      |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 2,707 |   |
| Preferred Series A dividend                                                                                 |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | 2,766,887            |       |       | 715        |        |       |       | —     |   |   |   | — |   |   |   | (790 | ) |   | (75 | ) |
| Preferred Series B dividend                                                                                 |       |                               |       |                             |       |                               |       |                                       |       |              |       |            |       | 316,444              |       |       | 83         |        |       |       |       |   |   |   |   |   |   |   | (95 | ) |   | (12 | ) |
| Beneficial conversion feature on issuance of  Series A & B redeemable convertible Preferred Shares |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | 3,381      |   |   |   | — |   |   |   | — |   |   | 3,381 |   |
| Deemed dividends related to beneficial conversion  feature of convertible Preferred Shares                       |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | (3,381     | ) |   |   | — |   |   |   | — |   |   | (3,381 | ) |
| Net loss                                                                                                         |       | —                             |       |                             | —     |                               |       | —                                     |       |              | —     |            |       | —               |       |       | —     |        |       |       | —     |   |   |   | — |   |   |   | (6,615 | ) |   | (6,615 | ) |
| Balances,  March 31, 2007                                                                                   |       | 63,472,895                         |       |                             | $          | 21,128                             |       |                                       | 9,988,513  |              |       | $               | 2,707      |                 |       | 64,099,000 |       |        | $          | 65,812     |       |   |   | $ | 8,959 |   |   |   | $ | (1,104 | ) |   |   | $ | (91,957 | ) |   | $ | 5,545 |   |

 

See accompany notes to consolidated financial statements.

F-5

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**XPLORE TECHNOLOGIES CORP.Consolidated Statements of Cash Flows**(in thousands ofUnited States dollars)

| ** **                                              | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | ** **                              | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITES:                   |       |                                    |       |   |   |   |   |
| Cash used in operations:                                |       |                                    |       |   |   |   |   |
| Net loss                                                |       | $                                       | (6,615     | ) | $ | (8,986 | ) | $ | (10,501 | ) |
| Items not  affecting cash:                              |       |                                    |       |   |   |   |   |
| Depreciation and amortization                           |       | 579                                     |       | 464 |   | 645 |   |
| Amortization of deferred financing costs                |       | 979                                     |       | 3,048 |   | 1,920 |   |
| Loss on extinguishment of debt                          |       | 832                                     |       | — |   | — |   |
| Stock-based compensation expense                        |       | 819                                     |       | 522 |   | 305 |   |
| Equity instruments issued in exchange for services      |       | 332                                     |       | 126 |   | 101 |   |
| Net gain on sales of technology                         |       | —                                  |       | (877 | ) | — |   |
| Changes in  operating assets and liabilities:           |       |                                    |       |   |   |   |   |
| Accounts receivable                                     |       | 205                                     |       | (2,750 | ) | 3,452 |   |
| Inventory                                               |       | 74                                      |       | (759 | ) | (896 | ) |
| Prepaid expenses and other current assets               |       | 55                                      |       | (353 | ) | (61 | ) |
| Accounts payable and accrued liabilities                |       | (599                                    | )          | 897 |   | (1,282 | ) |
| Net cash used in operating activities                   |       | (3,339                                  | )          | (8,668 | ) | (6,317 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                  |       |                                    |       |   |   |   |   |
| Net proceeds from sales of technology                   |       | —                                  |       | 877 |   | — |   |
| Additions to fixed assets                               |       | (567                                    | )          | (589 | ) | (332 | ) |
| Net cash provided by (used in) investing activities     |       | (567                                    | )          | 288 |   | (332 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                  |       |                                    |       |   |   |   |   |
| Proceeds from bank borrowings                           |       | 21,325                                  |       | 14,592 |   | — |   |
| Repayment of bank indebtedness                          |       | (22,997                                 | )          | (13,010 | ) | — |   |
| Proceeds from notes payable to related party            |       | —                                  |       | 3,000 |   | 2,650 |   |
| Repayment of notes payable to related party             |       | —                                  |       | (3,000 | ) | (2,650 | ) |
| Proceeds on issuance of debentures                      |       | 1,000                                   |       | 5,000 |   | 5,000 |   |
| Proceeds on issuance of common shares                   |       | 944                                     |       | 572 |   | 2,062 |   |
| Proceeds on issuance of Series A Preferred  Shares |       | 2,251                                   |       | — |   | — |   |
| Proceeds on issuance of Series B Preferred  Shares |       | 2,908                                   |       | — |   | — |   |
| Proceeds from exercise of warrants                      |       | 130                                     |       | — |   | — |   |
| Proceeds on exercise of options                         |       | —                                  |       | 40 |   | 115 |   |
| Net cash provided by financing activities               |       | 5,561                                   |       | 7,194 |   | 7,177 |   |
| CHANGE IN CASH  AND CASH EQUIVALENTS                    |       | 1,655                                   |       | (1,186 | ) | 528 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR           |       | 56                                      |       | 1,242 |   | 714 |   |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                 |       | $                                       | 1,711      |   | $ | 56 |   | $ | 1,242 |   |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOWS:                 |       |                                    |       |   |   |   |   |
| Payments for interest                                   |       | $                                       | 339        |   | $ | 730 |   | $ | 823 |   |
| Payments for  income taxes                              |       | $                                       | —     |   | $ | — |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

F-6

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**XPLORE TECHNOLOGIES CORP.Notes to the Consolidated FinancialStatements(in thousands of United States dollars, except share and per share amounts)**

**1.**                 DESCRIPTIONOF BUSINESS

Xplore Technologies Corp. (the “Company”) is engagedin the business of the development, integration and marketing of rugged mobilewireless Tablet PC computing systems. The Company’s products enable theextension of traditional computing systems to a range of field and on-sitepersonnel, regardless of location or environment. Using a range of wirelesscommunication mediums together with the Company’s rugged computing products,the Company’s end-users are able to receive, collect, analyze, manipulate andtransmit information in a variety of environments not suited to traditionalnon-rugged computing devices. The Company’s end-users are in the followingmarkets: utility, warehousing/logistics, public safety, field service,transportation, manufacturing, route delivery, military and homeland security.

As of and for the threeyears ending March 31, 2007 the Company was incorporated under the federallaws of Canada. On June 20, 2007, the Company effected a domesticationunder Section 388 of the Delaware General Corporation Law pursuant towhich the Company’s jurisdiction of incorporation became the State of Delaware.

**2.**                 SIGNIFICANTACCOUNTING POLICIES

The financial statementswere prepared using accounting principles generally accepted in the UnitedStates of America, and reflect the following significant accounting policies:

*a)   Basis ofconsolidation and presentation*

The consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiary, Xplore TechnologiesCorporation of America.

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business. TheCompany has accumulated significant losses as it has been developing itscurrent and next generation rugged computer products. The Company has hadrecurring losses and expects to report operating losses for fiscal 2008. TheCompany believes that cash flow from operations, together with borrowings fromits senior lender and financial support from the Phoenix Venture Fund LLC (“Phoenix”),its significant shareholder, if necessary, will be sufficient to fund theanticipated operations for the next 12 months. These financial statements donot include any adjustments relating to the recoverability and classificationof recorded asset amounts or the amounts and classification of liabilities thatmight be necessary should the Company be unable to continue as a going concernfor a reasonable period of time.

Comparative amounts are reclassified to conform to thecurrent year’s financial statement presentation.

The consolidated financialstatements and accompanying notes are prepared in accordance with U.S.generally accepted accounting principles. Preparing financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities. These estimates and assumptions are affectedby management’s application of accounting policies. Estimates are deemed criticalwhen a different estimate could have reasonably been used or where changes inthe estimates are reasonably likely to occur from period to period, and wouldmaterially impact the Company’s financial condition, changes in financial 

F-7

----

conditionor results of operations. On an ongoing basis, the Company evaluates theestimates, including those related to its revenue recognition, inventoryvaluation, warranty reserves, tooling amortization, financial instruments, andincome taxes. The estimates are based on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates. The significantdifferences between United States and Canadian generally accepted accountingprinciples which would affect the Company’s financial statements for the yearending March 31, 2007 are discussed in Note 17.

*b)   Restatement*

The Company’s 2006 and 2005 annual consolidatedfinancial statements have been restated. The restatement reflects twoadjustments related to amounts recorded with respect to its December 17,2004 convertible debenture financing (see Note 7). The value assigned tocommon share purchase warrants issued in the financing was increased from $945to $2,234. In addition, the restatement reflects the recognition of abeneficial conversion feature valued at $2,766. These amounts were recorded asdiscounts to the face amount of the December 17, 2004 convertibledebentures and were recognized as non-cash interest expense during the term ofthe debentures.

In addition, the restatement adjusted the timing ofthe recognition of non-cash interest expense for long-term debentures. Theextension of the maturity dates of these debentures were originally accountedfor as settlements of the original debts and related unamortized discounts wereimmediately expensed. The restatement reflects these transactions asmodifications and accounts for the effects of the restructurings prospectivelyfrom the time of the restructurings. The remaining unamortized discounts at thetime of the restructurings have been accordingly recognized over the new termof the debentures.

Please see the table below for the effect on eachaccount for each restated period:

Thefollowing table reflects the restatement for each line item on the consolidatedbalance sheet as of March 31, 2006:

| **Line Item**          | ** ** | ** ** | ** ** | **Original  Balance** | ** ** | **Adjustment** | ** ** | **Ending  Balance** | ** ** |
|-----------------------------|------------|------------|------------|-----------------------|------------|----------------|------------|---------------------|------------|
| Debentures                  |       | $          | 12,005     |                  |       | $              | (482       | )                   |       | $ | 11,523 |   |
| Additional  paid-in capital |       | 3,659      |       |                  | 4,055      |           |       | 7,714               |       |
| Accumulated deficit         |       | (80,884    | )          |                  | (3,573     | )              |       | (84,457             | )          |
|                             |            |            |            |                       |            |                |            |                     |            |  |  |  |  |  |

 

Thefollowing table reflects the restatement for each line item on the consolidatedbalance sheet as of March 31, 2005:

| **Line Item**          | ** ** | ** ** | ** ** | **Original  Balance** | ** ** | **Adjustment** | ** ** | **Ending  Balance** | ** ** |
|-----------------------------|------------|------------|------------|-----------------------|------------|----------------|------------|---------------------|------------|
| Debentures                  |       | $          | 11,450     |                  |       | $              | (2,895     | )                   |       | $ | 8,555 |   |
| Additional  paid-in capital |       | 2,123      |       |                  | 4,055      |           |       | 6,178               |       |
| Accumulated deficit         |       | (74,961    | )          |                  | (1,160     | )              |       | (76,121             | )          |
|                             |            |            |            |                       |            |                |            |                     |            |  |  |  |  |  |

 

F-8

----

Thefollowing table reflects the restatement for each line item on the consolidatedstatement of loss for the year ended March 31, 2006:

| **Line Item**                                    | ** ** | ** ** | ** ** | **Original  Balance** | ** ** | **Adjustment** | ** ** | **Ending  Balance** | ** ** |
|-------------------------------------------------------|------------|------------|------------|-----------------------|------------|----------------|------------|---------------------|------------|
| Interest expense                                      |       | $          | 2,454      |                  |       | $              | 2,413      |                |       | $ | 4,867 |   |
| Net loss                                              |       | 6,573      |       |                  | 2,413      |           |       | 8,986               |       |
| Loss per share                                        |       | 0.12       |       |                  | 0.04       |           |       | 0.16                |       |
| Weighted average number  of common shares outstanding |       | 55,939     |       |                  | —     |           |       | 55,939              |       |
|                                                       |            |            |            |                       |            |                |            |                     |            |  |  |  |  |  |

 

Thefollowing table reflects the restatement for each line item on the consolidatedstatement of loss for the year ended March 31, 2005:

| **Line Item**                                    | ** ** | ** ** | ** ** | **Original  Balance** | ** ** | **Adjustment** | ** ** | **Ending  Balance** | ** ** |
|-------------------------------------------------------|------------|------------|------------|-----------------------|------------|----------------|------------|---------------------|------------|
| Interest expense                                      |       | $          | 1,208      |                  |       | $              | 1,610      |                |       | $ | 2,818 |   |
| Net loss                                              |       | 8,891      |       |                  | 1,610      |           |       | 10,501              |       |
| Loss per share                                        |       | 0.18       |       |                  | 0.03       |           |       | 0.21                |       |
| Weighted average number  of common shares outstanding |       | 50,091     |       |                  | —     |           |       | 50,091              |       |
|                                                       |            |            |            |                       |            |                |            |                     |            |  |  |  |  |  |

 

*c)   Cash andcash equivalents*

Cash and cash equivalentscomprise cash and highly liquid investments with original maturities of lessthan ninety days. Cash equivalents are carried at cost, which approximatesmarket value.

*d)   Inventory*

Inventory is recorded atthe lower of average cost determined on a first-in-first-out basis or netrealizable value. The valuation of inventory requires the use of estimatesregarding the amount of current inventory that will be sold and the prices atwhich it will be sold based on an assessment of expected orders for theseproducts from the Company’s customers. Additionally, the estimates reflectchanges in the Company’s products or changes in demand because of variousfactors including the market for the Company’s products, obsolescence, productdiscontinuation, technology changes and competition.

*e)   Fixedassets*

Fixedassets are recorded at cost. The straight line depreciation method is used todepreciate the recorded value of fixed assets over their estimated usefullives.

| **Fixed Asset**    | ** ** | ** **                       | ** ** | **Estimated Useful Lives** | ** ** | ** ** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------|------------|
| Tooling and  fixtures   |       | 2  years                         |       |
| Office equipment        |       | 2  years                         |       |
| Machine equipment       |       | 5  years                         |       |
| Leasehold  improvements |       | lesser  of 5 years or lease term |       |
| Computer  equipment     |       | 2  years                         |       |
| Computer software       |       | 2  years                         |       |
| Demonstration units     |       | 6 months                         |       |

 

The Company performsreviews for the impairment of fixed assets whenever events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable.

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*f)   Deferredcharges*

Deferred charges representdeferred financing costs consisting of the value of warrants issued to holdersof short-term debentures. The value of the warrants was determined using theBlack-Scholes methodology. These charges were amortized over the term of theshort-term debentures. Also included in deferred charges are legal fees relatedto the Company’s recapitalization discussed in Note 7.

*g)   Foreigncurrency translation*

The accounts of certain ofthe Company’s subsidiaries are translated into United States dollars using thetemporal method for integrated operations. Assets and liabilities of a monetarynature are translated at the exchange rate in effect at the balance sheet date,with non-monetary assets and liabilities translated at historical rates. Exchangegains or losses are included in the determination of earnings for the period.Revenues and expenses are translated using weighted average rates. Foreigncurrency transactions are translated at the exchange rate in effect at the dateof the transaction. Foreign currency balances are translated at the exchangerate in effect at the balance sheet date.

*h)   Revenuerecognition*

The Company’s revenue isderived primarily from the sale of its rugged mobile computers. The Company’scustomers are predominantly resellers, however, in limited circumstances, theCompany’s sells directly to end-users. Revenue is recognized, net of anallowance for estimated returns, when title and risk is transferred to thecustomer, all significant contractual obligations have been satisfied, thesales price is fixed or determinable, and the ability to collect is reasonablyassured. The Company’s revenue recognition criteriahave been met generally when the product has been shipped. The shippingterms are FOB shipping point.

*i)   Cost ofrevenue*

The Company’s cost of revenue consists of the costsassociated with manufacturing, assembling and testing its products, relatedoverhead costs, maintenance, compensation and other costs related tomanufacturing support, including the depreciation of tooling assets. TheCompany uses contract manufacturers to manufacture the Company’s products andsupporting components, and a significant portion of the Company’s cost ofrevenue is attributable to component costs and payments to these contractmanufacturers.

Cost of revenue alsoincludes warranty costs. The Company records warranty liabilities at the timeof sale for the estimated costs that may be incurred under its warranty. Thespecific warranty terms and conditions generally included are technicalsupport, repair parts, and labor for a period that is generally three years. TheCompany re-evaluates its estimates to assess the adequacy of its recordedwarranty liabilities and adjusts the amounts as necessary and any change, basedon current information, is recorded as a change in estimate.

*j)   Incometaxes*

The Company accounts forincome taxes in accordance with the liability method. The determination offuture tax assets and liabilities is based on the difference between financialstatement and income tax bases of assets and liabilities, using enacted taxrates in effect for the period in which the differences are expected to reverse.Future tax assets are recorded to recognize tax benefits only to the extentthat, based on available evidence, it is more likely than not that they will berealized.

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*k)   Stock-basedcompensation*

The Company adopted SFAS No. 123(revised 2004), (“SFAS No.123 (R)”), *Share-Based CompensationCost* in respect of the fair value method of accounting for all ofits employee stock-based compensation on a prospective basis effective April 1,2003.

*l)   Loss pershare*

Loss per share has been computed based on theweighted-average number of common shares issued and outstanding during theperiod, and is calculated by dividing net loss by the weighted average numberof common shares outstanding during the period. The effects of the optionsgranted under the Company’s share option plan, the exercise of outstandingoptions, the exercise of outstanding warrants and the conversion of convertibleSeries A Preferred Shares, Series B Preferred Shares and convertibledebentures were excluded from the loss per share calculations for the yearspresented as their inclusion is anti-dilutive. Accordingly, diluted loss pershare has not been presented.

Thefollowing securities were not considered in the earnings per share calculation:

| ** **                                     | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Series A  Preferred Shares                |       |                         | 63,472,895 |                         |       |                         | —     |   |   |   | — |   |   |
| Series B  Preferred Shares                |       |                         | 9,988,513  |                         |       |                         | —     |   |   |   | — |   |   |
| Warrants                                       |       |                         | 15,619,025 |                         |       |                         | 15,789,919 |   |   |   | 17,736,426 |   |   |
| Options                                        |       |                         | 10,660,337 |                         |       |                         | 5,531,350  |   |   |   | 6,821,588 |   |   |
| December 17,  2004 convertible debentures |       |                         | —     |                         |       |                         | 11,363,636 |   |   |   | 11,363,636 |   |   |
|                                           |       |                         | 99,740,770 |                         |       |                         | 32,684,905 |   |   |   | 35,921,650 |   |   |

 

*m)   Othercomprehensive loss*

Other comprehensive lossconsists solely of cumulative translation adjustments arising from changes inexchange rates and is accounted for as a separate component of shareholders’deficiency.

*n)   RecentAccounting Pronouncements*

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS 154”). SFAS 154 replaces APB No. 20,“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements” and establishes retrospective application as therequired method for reporting a change in accounting principle. SFAS 154provides guidance for determining whether retrospective application of a changein accounting principle is impracticable and for reporting a change when retrospectiveapplication is impracticable. The reporting of a correction of an error byrestating previously issued financial statements is also addressed.SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005. The Company doesnot believe that the adoption of SFAS 154 in fiscal 2007 will have amaterial impact on the consolidated balance sheets and statements ofoperations, shareholders’ equity and cash flows.

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments.” which amends SFAS No. 133and SFAS No. 140. SFAS No. 155 permits hybrid financial instrumentsthat contain an embedded derivative that would otherwise require bifurcation toirrevocably be accounted for at fair value, with changes in fair valuerecognized in the statement of income. The fair value election may be appliedon an instrument-by-instrument basis. SFAS No. 155 alsoeliminates a restriction on the passive derivative instruments that aqualifying special purpose entity may hold. SFAS No. 155 is effective forthose financial instruments acquired or issued after December 1, 2006. Atadoption, any difference between the total carrying amount of the individualcomponents of the existing bifurcated hybrid financial instrument and the fairvalue of the combined hybrid financial instrument will be 

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recognized as a cumulative-effectadjustment to beginning retained earnings. The Company does not expect the newstandard to have any material impact on its financial position or results ofoperations.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”SFAS No. 156 requires all separately recognized servicing assets andservicing liabilities to be initially measured at fair value, if practicable.The standard permits an entity to subsequently measure each class of servicingassets or servicing liabilities at fair value and report changes in fair valuein the statement of income in the period in which the changes occur. SFAS No. 156is effective for the Company as of April 1, 2007. The Company does notexpect the new standard to have any material impact on its financial positionor results of operations.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities—Includingan amendment of FASB Statement No. 115.” This statement allows companiesto elect to measure certain eligible financial instruments and other items atfair value. Companies may choose to measure items at fair value at a specifiedelection date, and subsequent unrealized gains and losses are recorded inincome at each subsequent reporting date. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007, with earlier adoptionpermitted under certain circumstances. The Company is required to adopt SFAS No. 159no later than the first quarter of Fiscal 2009. The Company does not expect thenew standard to have a material impact on its financial position or results ofoperations.

In September 2006, the SEC issued SAB 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” This document provides interpretive guidanceon the consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. SAB 108requires registrants to quantify errors using both the iron curtain method, andthe rollover method, and requires adjustment if either method indicates amaterial error. The rollover method quantifies a misstatement’s effect on thecurrent year’s income statement, which does not consider the effects ofcorrecting the portion of the current year balance sheet misstatement thatoriginated in prior years. The iron curtain method quantifies errors as thecumulative amount by which the balance sheet for the current year is misstated,irrespective of the misstatement’s years of origination. SAB 108 is effectivefor fiscal years ending after November 15, 2006, and is effective for theCompany in Fiscal 2007. The adoption of SAB 108 did not have any other materialimpacts on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87, 88, 106 and 132 (R).” Thestatement requires companies to report the funded status of their definedbenefit pension plans on the balance sheet. Changes in the funded status in theyear in which the changes occur are recorded through other comprehensive income.The statement requires that companies measure plan assets and obligations as ofthe end of the company’s fiscal year. The statement also requires enhanceddisclosures related to defined benefit pension plans. SFAS No. 158 iseffective as of the end of the company’s first fiscal year ending after December 15,2006. The adoption of SFAS No. 158 did not have a material impact on theCompany’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” The statement clarifies the definition of fairvalue, establishes a framework for measuring fair value, and expands thedisclosure requirements regarding fair value measurements. SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007, with earlieradoption permitted. The Company is required to adopt SFAS No. 157 no laterthan the fist quarter of Fiscal 2008. The Company does not expect the adoptionof SFAS No. 157 to have a material impact on its financial position orresults of operations.

In July 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109 (FIN 48).” FIN 48prescribes a comprehensive model for 

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recognizing,measuring, presenting and disclosing in the financial statements tax positionstaken or expected to be taken on a tax return, including a decision on whetheror not to file in a particular jurisdiction. Under FIN 48, a tax benefit froman uncertain position may be recognized only if it is “more likely than not”that the position is sustainable based on its technical merits. FIN 48 iseffective for fiscal years beginning after December 15.2006, and we willadopt FIN 48 beginning in the first quarter of Fiscal 2008. The adoption of FIN48 will not have a material impact on its financial position or results ofoperations.

**3.**                 INVENTORY

| ** **           | ** ** | **March 31,** | ** ** |
|----------------------|------------|--------------------|------------|
| ** **           | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Computer  components |       | $                  | 465        |   | $ | 1,422 |   |
| Finished goods       |       | 3,174              |       | 2,291 |   |
| Total inventory      |       | $                  | 3,639      |   | $ | 3,713 |   |

 

Inventory sent toend-users for which revenue recognition attributes have not been completed isincluded in other current assets and was $464 at March 31, 2007, and therewas none at March 31, 2006.

Prepaid expenses and othercurrent assets at March 31, 2006 include $580 representing advances to asupplier to secure the supply of components delivered in fiscal 2007. Therewere no such advances at March 31, 2007.

**4.**                 FIXED ASSETS

| ** **                                  | ** ** | **March 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|
| ** **                                  | ** ** | **2007**           | ** ** | **2006** | ** ** |
| *Cost*                                      |       |               |       |   |   |
| Tooling and  fixtures                       |       | $                  | 1,421      |   | $ | 1,246 |   |
| Office equipment  and leasehold improvments |       | 686                |       | 570 |   |
| Computer  equipment and demonstration units |       | 1,204              |       | 1,014 |   |
| Computer software                           |       | 665                |       | 582 |   |
|                                        |       | 3,976              |       | 3,412 |   |
| *Accumulated depreciation*                  |       |               |       |   |   |
| Tooling and  fixtures                       |       | 1,258              |       | 1,056 |   |
| Office equipment  and leasehold improvments |       | 450                |       | 370 |   |
| Computer  equipment and demonstration units |       | 1,108              |       | 869 |   |
| Computer software                           |       | 575                |       | 520 |   |
|                                        |       | 3,391              |       | 2,815 |   |
| Total fixed assets, net                     |       | $                  | 585        |   | $ | 597 |   |

 

**5.**                 BANKINDEBTEDNESS

On April 22, 2005, the Company entered into aloan and security agreement with a commercial bank. Under the terms of thisagreement, as amended, the Company could finance certain eligible accountsreceivable up to a maximum $2,625. Borrowings yielded interest at prime rateplus 3% per annum. The Company was obligated to repay each loan advance on theearliest of the date on which the financed receivable payment was received orthe date to which the financed receivable became ineligible or 90 days pastdue. Borrowings were secured by all assets and intellectual property of theCompany.

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On September 15, 2005, the Company entered into aloan and security agreement with the same commercial bank which replaced the April 22,2005 agreement. Under the terms of this two year agreement, the Company mayfinance certain eligible accounts receivable up to a maximum of $5,000.Borrowings under the facility bear interest at prime rate plus 2.25%. TheCompany is obligated to repay each loan advance on the earliest of the date onwhich the financed receivable payment is received or the date to which thefinanced receivable becomes ineligible or 90 days past due. The Company iscommitted to pay a fee equal to .25% of the unused portion of the creditfacility.

On February 28, 2007,the Company’s revolving credit facility was increased by up to $8 million.Under the terms of the amended facility, the borrowings formula was increasedup to the lesser of $8 million or 80% of the Company’s U.S. and Canadianaccounts receivable outstanding for 90 days or less, plus 80% of theCompany’s foreign accounts receivable (up to $2,500) plus 25% of eligibleinventory (up to $1,750). The interest rate on the borrowings remained at primeplus 2.25% (or prime plus 2.5% in the case of borrowings related to itsinventory). Under the terms of the amended facility, the maturity date forborrowings under this facility was extended to March 31, 2008. Borrowingsare secured by all assets and intellectual property of the Company. Pursuant tothe terms of various subordination agreements between the commercial bank, theCompany’s debenture holder and one of its suppliers, the commercial bank has afirst priority security interest in all of the assets of the Company, undercertain circumstances the supplier has a priority security interest in certaintrade debts of the Company, and the Company’s debenture holder has a securityinterest in all of the assets of the Company. The loan agreement contains anumber of financial and operational covenants, including that the Company havea minimum tangible net worth of at least $3,750 at all times and a minimumexcess availability of $750. As of June 20, 2007, the Company was in fullcompliance with these covenants. As of June 20, 2007, there were noborrowings outstanding.

**6.**                 ACCOUNTS PAYABLEAND ACCRUED LIABILITIES

| ** **                 | ** ** | **March 31,** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Accounts payable           |       | $                  | 2,778      |   | $ | 4,309 |   |
| Engineering  accrual       |       | 645                |       | 350 |   |
| Warranty accrual           |       | 507                |       | 525 |   |
| Accrued interest  payable  |       | 6                  |       | 981 |   |
| Other accrued  liabilities |       | 1,383              |       | 877 |   |
| Total                      |       | $                  | 5,319      |   | $ | 7,042 |   |

 

Thedetails of the Company’s warranty accrual liability are as follows:

| ** **                 | ** ** | **Fiscal Year** | ** ** |
|----------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **2007**             | ** ** | **2006** | ** ** |
| Balance beginning  of year |       | $                    | 525        |   | $ | 675 |   |
| Accruals                   |       | 44                   |       | 26 |   |
| Payments                   |       | (62                  | )          | (176 | ) |
| Balance at end of year     |       | $                    | 507        |   | $ | 525 |   |

 

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**7.**                 DEBENTURES

TheCompany had issued and outstanding debentures at March 31, 2007 and 2006,as detailed in the tables below.

***Short-termDebentures:***

| **Debenture Issuance Date** | ** ** | ** **               | ** ** | **Balance** | ** ** | **New  Issuances** | ** ** | **Value  Assigned to  Warrants** | ** ** | **Payments** | ** ** | **Accretion of  Non-cash  Interest** | ** ** | **Converted to  Series A  Preferred  Shares** | ** ** | **Balance** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-------------|------------|--------------------|------------|---------------------------------------|------------|--------------|------------|-------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                            | ** ** | **March 31,  2006** | ** ** | ** **  | ** ** | ** **         | ** ** | ** **                            | ** ** | ** **   | ** ** | ** **                                | ** ** | **March 31,  2007**                                | ** ** |
| September 15, 2005               |       |                     | $          | 3,000       |       |               |       | —                                |       |         |       | —                                    |       |                                                    |       | —      |       |   |   | — |   |   |   | (3,000 | ) |   |   | $ | — |   |   |
| September 29,2005                |       |                     | 750        |        |       |               | —     |                                  |       |         | —     |                                      |       |                                                    | —     |        |       |   | — |   |   |   | (750 | ) |   |   | $ | — |   |   |
| November 7,  2005                |       |                     | 1,250      |        |       |               | —     |                                  |       |         | —     |                                      |       |                                                    | —     |        |       |   | — |   |   |   | (1,250 | ) |   |   | $ | — |   |   |
| April 21,  2006                  |       |                     | —     |        |       |               | 1,000      |                                  |       |         | —     |                                      |       |                                                    | —     |        |       |   | — |   |   |   | (1,000 | ) |   |   | $ | — |   |   |
|                                  |       |                     | $          | 5,000       |       |               |       | $                                     | 1,000      |         |       |                                      | $          | —                                                  |       |        |       | $ | — |   |   |   | $ | — |   |   |   | $ | (6,000 | ) |   |   | $ | — |   |   |
|                                       |            |                          |            |             |            |                    |            |                                       |            |              |            |                                           |            |                                                         |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Long-termDebentures:***

| **Debenture Issuance Date** | ** ** | ** **               | ** ** | **Balance** | ** ** | **New  Issuances** | ** ** | **Value  Assigned to  Warrants** | ** ** | **Payments** | ** ** | **Accretion of  Non-cash  Interest** | ** ** | **Converted to  Shares** | ** ** | **Balance** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-------------|------------|--------------------|------------|---------------------------------------|------------|--------------|------------|-------------------------------------------|------------|-------------------------------|------------|-------------|------------|
| ** **                            | ** ** | **March 31,  2005** | ** ** | ** **  | ** ** | ** **         | ** ** | ** **                            | ** ** | ** **   | ** ** | ** **                                | ** ** | **March 31,  2006**      | ** ** |
| ** **                            | ** ** | **(Restated)**           | ** ** | ** **  | ** ** | ** **         | ** ** | ** **                            | ** ** | ** **   | ** ** | ** **                                | ** ** | **(Restated)**                | ** ** |
| November 5, 2002                 |       |                     | $          | 4,635       |       |               |       | $                                     | —     |         |       |                                      | $          | —                        |       |        |       | $ | — |   |   |   | $ | 30 |   |   |   | $ | (75 | ) |   |   | $ | 4,590 |   |   |
| December 6,  2002                |       |                     | 939        |        |       |               | —     |                                  |       |         | —     |                                      |       |                          | —     |        |       |   | 31 |   |   |   | — |   |   |   | $ | 970 |   |   |
| April 9,  2003                   |       |                     | 673        |        |       |               | —     |                                  |       |         | —     |                                      |       |                          | —     |        |       |   | 52 |   |   |   | — |   |   |   | $ | 725 |   |   |
| April 29,  2003                  |       |                     | 672        |        |       |               | —     |                                  |       |         | —     |                                      |       |                          | —     |        |       |   | 53 |   |   |   | (5 | ) |   |   | $ | 720 |   |   |
| December 17,  2004               |       |                     | 1,636      |        |       |               | —     |                                  |       |         | —     |                                      |       |                          | —     |        |       |   | 2,882 |   |   |   | — |   |   |   | $ | 4,518 |   |   |
|                                  |       |                     | $          | 8,555       |       |               |       | $                                     | —     |         |       |                                      | $          | —                        |       |        |       | $ | — |   |   |   | $ | 3,048 |   |   |   | $ | (80 | ) |   |   | $ | 11,523 |   |   |

 

| ** **              | ** ** | **March 31,  2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **March 31,  2007** | ** ** |
|-------------------------|------------|--------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|--------------------------|------------|
| ** **              | ** ** | **(Restated)**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **               | ** ** |
| November 5, 2002   |       |                     | $          | 4,590      |       |       |       | $          | —     |       |       |       | $          | —                   |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | (4,590 | ) |   |   | $ | — |   |   |
| December 6,  2002  |       |                     | 970        |       |       |       | —     |       |       |       | —     |       |       |                     | —     |   |   |   | — |   |   |   | (720 | ) |   |   | $ | 250 |   |   |
| April 9,  2003     |       |                     | 725        |       |       |       | —     |       |       |       | —     |       |       |                     | —     |   |   |   | — |   |   |   | (725 | ) |   |   | $ | — |   |   |
| April 29,  2003    |       |                     | 720        |       |       |       | —     |       |       |       | —     |       |       |                     | —     |   |   |   | — |   |   |   | (720 | ) |   |   | $ | — |   |   |
| December 17,  2004 |       |                     | 4,518      |       |       |       | —     |       |       |       | —     |       |       |                     | —     |   |   |   | 482 |   |   |   | (5,000 | ) |   |   | $ | — |   |   |
|                    |       |                     | $          | 11,523     |       |       |       | $          | —     |       |       |       | $          | —                   |       |   |   | $ | — |   |   |   | $ | 482 |   |   |   | $ | (11,755 | ) |   |   | $ | 250 |   |   |

 

***Fiscal 2007 Debenture Issuances and Exchange ofDebentures for Equity***

On April 21, 2006, the Company entered into afinancing agreement with Phoenix Venture Fund LLC (“Phoenix”). The Chairman andChief Executive Officer, and one Director of the Company are co-managers of themanaging member of Phoenix. Under this agreement, Phoenix agreed, in its solediscretion, to provide up to $5,000 in financing to the Company through theissuance of debentures or Series A Preferred Shares. In connection withthe financing on April 21, 2006, the Company initially issued a 10%secured debenture in the aggregate principal amount of $1,000 to Phoenix, whichhad a maturity date of June 30, 2006. The debenture and related accruedand unpaid interest were exchanged for 

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2,970,185 Series APreferred Shares in connection with the recapitalization discussed below. Ofthe remaining $4,000 of available financing, the Company received grossproceeds of approximately $800 in June 2006 and approximately $1,904 in July 2006in exchange for a total of 7,952,353 Series A Preferred Shares issued tocertain investors, as designated by Phoenix.

On May 30, 2006, the Company completed arecapitalization pursuant to which approximately $18,877 of indebtedness,represented by 10% secured debentures in the original principal amount of$17,755 and accrued interest of $1,122 was exchanged for 55,520,542 shares of Series APreferred Shares. The Series A Preferred Shares are convertible initiallyon a one-for-one basis into common shares of the Company at any time at theoption of the holder and will convert upon the occurrence of specified events.The conversion rate is subject to adjustment for stock dividends, splits,combinations and similar events. In the event that the Company issuesadditional securities at a purchase price less than the then current Series APreferred Share conversion price, such conversion price will be adjusted inaccordance with the formula specified in the share conditions set out in theCompany’s Articles of Incorporation. The Series A Preferred Shares areentitled to one vote per share at meetings of the Company’s shareholders, havea cumulative 5% dividend that is paid quarterly in common shares, have certainprotective provisions, and contain a liquidation preference over the commonshares. Series A Preferred Shares issuance costs incurred were $453 andprincipally consisted of charges associated with the special shareholders’meeting and legal fees.

One debenture in the amount of $250 and related accruedinterest was not exchanged and remains outstanding. This debenture bearsinterest at 10% per annum and the interest is payable semi-annually on June 30and December 31. In connection with the recapitalization, the maturity ofthe debenture was extended to April 30, 2009. The debenture purchaseagreement contains a number of financial and operational covenants which theCompany is in full compliance with through June 20, 2007.

As of March 31, 2006,the Company had unpaid interest of approximately $400 owed to Phoenix that wasdue on December 31, 2005. On May 30, 2006, this unpaid interest andinterest accrued since December 31, 2005 was exchanged for Series APreferred Shares.

**Short-termDebentures:**

***Fiscal 2006 Debenture Issuances—All Classified in Short-termDebentures***

On September 15, 2005, the Company entered into adebenture purchase agreement with Phoenix and other lenders, including anaffiliate of Phoenix (collectively, the “Lenders”), whereby the Lendersprovided an aggregate of $5,000 of financing to the Company through theissuance of short-term debentures. All of the short-term debentures issuedunder this purchase agreement had an original maturity date of March 31,2006 and borrowings under the short-term debentures bore interest at 10% per annum.Borrowings were secured by all of the Company’s assets and were subordinated tothe Company’s commercial bank credit facility and certain trade debts. On September 15,2005, the Company issued short-term debentures to the Lenders under thepurchase agreement in the aggregate amount of $3,000. The Company used thegross proceeds to re-pay promissory notes in the aggregate principal amount of$3,000 previously issued by its U.S. subsidiary and due on September 15,2005. On September 29, 2005, the Company made another draw on the facilityand issued short-term debentures to the Lenders in the aggregate principalamount of $750 to be used for working capital and general corporate purposes.On November 7, 2005 a final draw in the principal amount of $1,250 wasmade that increased aggregate principal borrowings to $5,000.

In the event that any ofthe short-term debentures issued under the September 15, 2005 purchaseagreement were not paid in full on or prior to March 31, 2006, the Companyagreed to issue common share purchase warrants to the holders of suchshort-term debentures. The short-term debentures were not repaid and on April 10,2006 the Company issued to the Lenders 5,235,343 warrants with an exerciseprice 

F-16

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of CAD$0.45. The warrants were exercisable through April 10, 2008. The exerciseprice of the warrants was based on the average current market price of theCompany’s common shares for the five days before the date of issuance. Thewarrants have been valued separately at fair value using the Black-Scholesmethodology. The fair value calculations assumed a discount rate ofapproximately 4.8%, volatility of approximately 127% and no dividends. Thevalue of $1,329 assigned to these warrants is reflected as a separate componentof shareholders’ deficiency and as a deferred charge to be amortized asnon-cash interest expense during the remaining term of the debentures. Inconnection with the Company’s recapitalization, the maturity date of theshort-term debentures was extended to June 30, 2006. These short-termdebentures and accrued interest were exchanged for Series A PreferredShares on May 30, 2006. From the date of the modification of theshort-term debentures’ maturity date through May 30, 2006, non-cashinterest expense of $905 was recorded to reflect the amortization of thedeferred financing costs. The remaining unamortized deferred financing cost of$424 was recorded as a loss on extinguishment of debt in connection with theCompany’s recapitalization on May 30, 2006.

**Long-termDebentures:**

***Fiscal 2005 Debenture Issuances—December 17, 2004Debentures Classified in Long-term Debentures***

On December 17, 2004, the Company raised grossproceeds of $5,000 through the completion of a private placement of 10% secureddebentures and 9,100,000 common share purchase warrants of the Company. Eachwarrant entitled the holder to acquire one common share at an exercise price of$0.55 until December 17, 2007. The interest was calculated on theoutstanding debentures face value and was payable semi-annually in arrears on June 30and December 31. At the option of the holder, the interest was convertibleat a price per share equal to the volume weighted average trading price of theCompany’s common shares on the Toronto Stock Exchange for the 10 trading dayspreceding the date of the interest payment, less the maximum discount permittedby the Toronto Stock Exchange. The original maturity date was October 31,2005; however, in September 2005 the maturity date was extended to April 30,2007.

The December 17, 2004 debentures had a conversionfeature which permitted the holders to convert the principal amount of eachdebenture into common shares of the Company at a conversion price of $0.44 pershare. The conversion price was subject to adjustment as provided by the debentureagreement for dividends, distributions, subdivisions, combinations andreorganizations of the Company. The debentures had a beneficial conversionfeature as a result of an in-the-money conversion option at the commitmentdate. The value of the beneficial conversion feature of $2,766 was determinedas the difference between the effective conversion price and the Toronto StockExchange closing market price of the Company’s common shares as of thecommitment date multiplied by 11,363,636, the number of common shares intowhich the debentures were convertible.

The December 17, 2004 debentures and the relatedcommon share purchase warrants have been valued separately at fair value usingthe Black-Scholes methodology. The fair value calculations assumed adiscount rate of approximately 3.4%, volatility of approximately 100% and nodividends.

The debentures have beenreflected in the consolidated financial statements at a discounted value ofzero, net of the beneficial conversion feature value of $2,766 and the valueassigned to the warrants of $2,234.

***Other Information Pertaining to the Debentures***

The values assigned to warrants or the beneficialconversion features issued in connection with the debentures have beenreflected as additional paid-in capital. Upon exercise of the warrants, therelated value assigned to such warrants is reclassified into share capital.

F-17

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The discounts related to the values assigned to thewarrants and the beneficial conversion features discussed in this note areamortized as non-cash interest expense over the term of the debentures. Inconnection with each modification to extend the maturity date of an outstandingdebenture, the remaining unamortized discounts as of the date of themodification were prospectively amortized over the new term of the debenture.On May 30, 2006, all of the debentures and accrued interest, except forone debenture with outstanding principal of $250, were exchanged forSeries A Preferred Shares and the remaining unamortized discounts of $408were recorded as a loss on extinguishment of debt in connection with theCompany’s recapitalization.

For the years ended March 31, 2007, 2006 and2005, the amounts of non-cash interest expense of $979, $3,048 and $1,920,respectively, were recorded relating to the amortization of debenturesdiscounts.

During the years ended March 31, 2006 and 2005,certain of the debenture holders surrendered their debentures to the Company asconsideration for the exercise price of warrants they held. As a result, theface value of the outstanding debentures was reduced by $80 in 2006 and $465 in2005.

The Company’s outstanding debentures were secured byall assets and intellectual property of the Company. The December 17, 2004debenture holders had a priority security interest over the security interestgranted to the remaining debenture holders.

The debenture purchaseagreement, under which the remaining debenture of $250 was issued, contained anumber of financial and operational covenants which the Company was in fullcompliance with through June 20, 2007.

**8.**                 SHARECAPITAL

The Company is authorizedto issue an unlimited number of common shares.

**Year-ended March 31,2007**

On August 10, 2006, the Company issued 9,988,513 Series BPreferred Shares on a private placement basis for gross proceeds to the Companyof approximately $3,396. The Series B Preferred Shares issued in thisprivate placement generally have the rights and preferences similar to thoseattached to the Series A Preferred Shares. The Series B PreferredShares are convertible initially on a one-for-one basis into common shares ofthe Company at any time at the option of the holder, subject to adjustment forstock dividends, splits, combinations and similar events. The Series BPreferred Shares are entitled to one vote per share at meetings of the Company’sshareholders, are entitled to a cumulative 5% dividend paid quarterly in commonshares, have certain protective provisions, and contain a liquidationpreference over the common shares.

For the year ended March 31, 2007, there wereaccrued dividends of $2,767 for the Series A Preferred Shares and $316 forthe Series B Preferred Shares. The liquidation preference values of the Series Aand Series B Preferred Shares was $21,581 and $3,396, respectively. The Series BPreferred Shares rank on parity with the Series A Preferred Shares withrespect to a liquidation.

The convertible Series A and Series BPreferred Shares have beneficial conversion features as a result of an in-the-moneyconversion option at the respective dates of commitment. For each issuance ofthese Preferred Shares, the value of the beneficial conversion feature wasdetermined as the difference between the conversion price and the Toronto StockExchange closing market price of the Company’s common shares as of the relatedfinancing’s commitment date multiplied by the number of shares into which thePreferred Shares are convertible. The value of the beneficial conversionfeatures are presented as deemed dividends to the Preferred Shareholders withan offsetting amount to additional paid-in capital. Since the Preferred Sharesare immediately convertible into common stock by the holders at any time, theCompany 

F-18

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recognized non-cashcharges (deemed dividends) in connection with the Preferred Share financingsaggregating approximately $3,381 during the year ended March 31, 2007.

On September 25, 2006, the Company issued2,848,253 common shares on a private placement basis for gross proceeds to theCompany of approximately $997.

In connection with the Series B Preferred Sharesand common shares private placements, the Company issued to a sales agentwarrants to purchase 499,425 common shares at an exercise price of $0.58 pershare and an expiration date of August 9, 2009 and warrants to purchase142,412 common shares at an exercise price of $0.35 per share and an expirationdate of September 23, 2009. The non-cash charge of $239 for the value ofthese warrants was recorded as issuance costs. The Company also entered into asix-month agreement with the sales agent to provide consulting services relatedto the Company’s corporate migration to the U.S. and future financings. As partof the agreement terms, the Company issued to the sales agent warrants topurchase 499,429 common shares at an exercise price of $0.58 per share and anexpiration date of August 9, 2009 and warrants to purchase 142,416 commonshares at an exercise price of $0.35 per share and an expiration date of September 23,2009. The non-cash charge of $239 for the value of these warrants and othercash compensation of $220 are recorded as general administrative expenses overthe term of the agreement.

The warrants issued to thesales agent have been valued separately at fair value using the Black-Scholesmethodology. The fair value calculations relating to the warrants assumed avolatility of approximately 113%, a life of three years and no dividends.

**Year-ended March 31,2006**

During the year ended March 31,2006, a number of warrant holders elected to exercise their warrants. TheCompany issued 2,067,330 common shares upon the exercise by warrant holders of2,067,330 warrants. The Company received cash proceeds of $572 and receivedsurrendered debentures in the face amount of $80 as payment for the warrantexercise price.

**Year-ended March 31,2005**

During the year ended March 31, 2005, a number ofwarrant holders elected to exercise their warrants. The Company issued 1,853,408common shares upon the exercise by warrant holders of 1,853,408 warrants. TheCompany received cash proceeds of $59 and received surrendered debentures inthe face amount of $465 as payment for the warrant exercise price. Further, infiscal 2005 the Company issued 9,952,723 common shares upon the exercise, on acashless basis in accordance with their terms, of 12,500,744 warrants.

During the year ended March 31, 2005, the Companyraised gross proceeds of $800 through the completion of a private placement of1,000,030 units at $0.80 per unit, each unit comprised of one common share ofthe Company and one common share purchase warrant.

In December 2004, the Company agreed with a keysupplier to sell 2,975,011 common shares of the Company for approximately $1.3million. In addition, the supplier entered into an intercreditor agreement withthe debenture holders whereby the supplier was granted a priority securityinterest in certain trade debts of the Company in excess of $2 million.

In connection with the issuanceof the December 17, 2004 debentures in a private placement, the Companyissued 9,100,000 warrants. The warrants are exercisable for common shares ofthe Company at an exercise price per share of $0.55 until the later of 36months after December 17, 2004 and 24 months after the debentures arefully repaid or converted; provided, however, that in no event will any warrantbe exercisable on or after December 17, 2009.

F-19

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***Warrants outstanding***

Therewere 15,619,025 warrants outstanding at March 31, 2007 as detailed in thetable below:

| **Number**      | ** ** | **Exercise** | ** ** | **Expiry**               | ** ** |
|-----------------|------------|--------------|------------|--------------------------|------------|
| **Outstanding** | ** ** | **Price**    | ** ** | **Date**                 | ** ** |
| 9,100,000       |       | US$0.55      |       | December 17, 2007   |       |
| 5,235,343       |       | C$0.45       |       | April 10, 2008      |       |
| 998,854         |       | US$0.58      |       | August 9, 2009      |       |
| 284,828         |       | US$0.35      |       | September 22,  2009 |       |

 

**9.**                 STOCK-BASEDCOMPENSATION PLAN

In 1995, the Board of Directors approved a ShareOption Plan, as amended and restated in December 2004, as amended. TheShare Option Plan is administered by the Board of Directors and provides thatoptions may be granted to employees, officers, Directors and consultants to theCompany. The exercise price of an option is determined at the time of grant andis to be based on the closing price of the common shares on The Toronto StockExchange, or other applicable stock exchange, on the day preceding the grant. Unlessotherwise provided for, the options are exercisable only during the term ofengagement of the employee, officer or consultant or during the period ofservice as a Director of the Company. The maximum aggregate number of commonshares reserved for issuance upon the exercise of all options granted under theShare Option Plan, as amended, is not to exceed 26,800,000 common shares of theCompany. The options under the plan generally vest over a 3-year periodin equal annual amounts.

The options have been valued separately using theBlack-Scholes methodology and the calculations for issuances in fiscal 2007,2006 and 2005 assumed discount rates of approximately 4.8%, 4.2% and 3.8%,respectively, and volatility of approximately 113%, 127% and 83%, respectively,and no dividends for both years. The Company recorded compensation cost of $819in fiscal 2007, $522 in fiscal 2006 and $305 in fiscal 2005 for option grantsissued since April 1, 2003.

Asummary of the activity in the Company’s Share Option Plan during the yearsended March 31, 2007, 2006 and 2005 is as follows: 

| ** **                        | ** ** | **Year ended March 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **Options**                             | ** ** | **Weighted  Average  Exercise Price  (Cdn$)** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price  (Cdn$)** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price  (Cdn$)** | ** ** |
| Outstanding at  beginning of year |       | 5,531,350                               |       |   | $ | 0.91 |   |   | 6,821,588 |   |   | $ | 1.05 |   |   | 3,886,679 |   |   | $ | 1.63 |   |   |
| Granted                           |       | 7,935,168                               |       |   | $ | 0.88 |   |   | 1,579,500 |   |   | $ | 0.88 |   |   | 4,409,748 |   |   | $ | 0.76 |   |   |
| Exercised                         |       | —                                  |       |   | $ | 0.47 |   |   | 100,000 |   |   | $ | 0.46 |   |   | 150,835 |   |   | $ | 0.46 |   |   |
| Forfeited                         |       | 2,806,181                               |       |   | $ | 1.25 |   |   | 2,769,738 |   |   | $ | 1.25 |   |   | 1,324,004 |   |   | $ | 1.83 |   |   |
| Outstanding at end of  year       |       | 10,660,337                              |       |   | $ | 0.91 |   |   | 5,531,350 |   |   | $ | 0.91 |   |   | 6,821,588 |   |   | $ | 1.05 |   |   |

 

At March 31, 2007, the total number of commonshares issued in connection with the exercise of options is 521,385 since theinception of the Share Option Plan.

F-20

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Asummary of the options outstanding and exercisable as at March 31, 2007 isas follows:

| ** **                                            | ** ** | **Options outstanding** | ** ** | **Options  exercisable** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **Range of Exercise Prices Cdn$** | ** ** | ** **                   | ** ** | **Number  Outstanding**  | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Number  Exercisable** | ** ** |
| $0.31—0.38                                       |       | 2,026,000                    |       |                     | 4.3        |   |   | — |   |
| $0.40—0.47                                       |       | 6,013,335                    |       |                     | 1.4        |   |   | 603,334 |   |
| $0.50—$0.56                                      |       | 1,467,501                    |       |                     | 3.4        |   |   | 942,097 |   |
| $0.65—1.18                                       |       | 882,834                      |       |                     | 3.8        |   |   | 437,008 |   |
| $1.24—1.85                                       |       | 270,667                      |       |                     | 2.2        |   |   | 226,835 |   |
|                                                  |       | 10,660,337                   |       |                     |       |   |   | 2,209,274 |   |
|                                                       |            |                              |            |                          |            |  |  |  |  |  |  |

 

During the year ended March 31,2007, grants covering 600,000 common shares were issue to non-executiveDirectors of the Company at an exercise price of C$0.44. During the year ended March 31,2006, grants covering 300,000 common shares were issued to non-executiveDirectors of the Company at an exercise price of C$0.93. There were no grantsof common shares issued to non-executive Directors of the Company during theyear ended March 31, 2005.

**10.**          INCOMETAXES

Thetax effect of temporary differences that give rise to future income tax assetsare as follows:

| ** **                 | ** ** | **Year ended March 31,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| ** **                 | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                 | ** ** | ** **                              | ** ** | **(Restated)** | ** ** |
| Future income tax  assets: |       |                                    |       |   |   |
| Net operating losses       |       | 23,144                                  |       | 22,004 |   |
| Inventory allowance        |       | 403                                     |       | 502 |   |
| Warranty accrual           |       | 177                                     |       | 184 |   |
| Valuation  allowance       |       | (23,724                                 | )          | (22,690 | ) |
| Deferred tax asset         |       | $                                       | —     |   | $ | — |   |
|                            |            |                                         |            |  |  |  |  |

 

Theprovision for income taxes varies from the expected provision at statutoryrates for the following reasons:

| ** **                                              | ** ** | **Year ended March 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | ** **                              | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Combined basic  Canadian statutory rates                |       | 37                                      | %          |   | 37 | % |   |   | 37 | % |   |
| Recovery of  income taxes based on the above rates      |       | $                                       | (2,448     | ) |   | $ | (3,325 | ) |   |   | $ | (3,885 | ) |   |
| Increase  (decrease) in income taxes resulting from:    |       |                                    |       |   |   |   |   |   |   |   |   |
| Permanent difference—financing fees                |       | 671                                     |       |   | 1,128 |   |   |   | 711 |   |   |
| Permanent difference—stock compensation            |       | 303                                     |       |   | 193 |   |   |   | 113 |   |   |
| Effect of differences between US and foreign tax  rates |       | 30                                      |       |   | 73 |   |   |   | 179 |   |   |
| Permanent difference—issuance costs                |       | —                                  |       |   | — |   |   |   | (17 | ) |   |
| Non-recognition of loss carry forwards                  |       | 1,444                                   |       |   | 1,931 |   |   |   | 2,899 |   |   |
| Provision for income  taxes                             |       | $                                       | —     |   |   | $ | — |   |   |   | $ | — |   |   |

 

TheCompany has non-capital losses for income tax purposes totaling approximately$66,127, which under certain conditions, may be carried forward and applied toreduce future year’s taxable income. The 

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potential benefit associated with these losses is notreflected in these statements as management does not believe that recovery ismore likely than not. The right to claim these losses expires as follows:

| **Expiry Year** | ** ** | ** ** | ** ** | **Canada** | ** ** | **United States** | ** ** | **Total** | ** ** |
|----------------------|------------|------------|------------|------------|------------|------------------------|------------|-----------|------------|
| 2008                 |       | 1,857      |       |       | —     |                   |       | 1,857     |       |
| 2010                 |       | 3,195      |       |       | —     |                   |       | 3,195     |       |
| 2011                 |       | 4,823      |       |       | —     |                   |       | 4,823     |       |
| 2015                 |       | 2,889      |       |       | —     |                   |       | 2,889     |       |
| 2016                 |       | —     |       |       | 1,282      |                   |       | 1,282     |       |
| 2017                 |       | —     |       |       | 737        |                   |       | 737       |       |
| 2018                 |       | —     |       |       | 5,293      |                   |       | 5,293     |       |
| 2019                 |       | —     |       |       | 2,978      |                   |       | 2,978     |       |
| 2020                 |       | —     |       |       | 1,486      |                   |       | 1,486     |       |
| 2021                 |       | —     |       |       | 3,116      |                   |       | 3,116     |       |
| 2022                 |       | —     |       |       | 6,412      |                   |       | 6,412     |       |
| 2023                 |       | —     |       |       | 10,746     |                   |       | 10,746    |       |
| 2024                 |       | —     |       |       | 4,433      |                   |       | 4,433     |       |
| 2025                 |       | —     |       |       | 7,764      |                   |       | 7,764     |       |
| 2026                 |       | 1,707      |       |       | 3,660      |                   |       | 5,367     |       |
| 2027                 |       | 936        |       |       | 2,813      |                   |       | 3,749     |       |
|                 |       | $          | 15,407     |       |       | $                      | 50,720     |      |       | $ | 66,127 |   |
|                      |            |            |            |            |            |                        |            |           |            |  |  |  |  |  |

 

**11.**          FINANCIALINSTRUMENTS

*Fair value offinancial instruments*

The estimated fair valueof accounts receivable, accounts payable, accrued liabilities and debentures isequal to the book value given their short-term nature and terms.

*Interest rate risk*

At March 31, 2007,all of the Company’s debentures bear interest at a fixed rate of 10% and theCompany is not exposed to future fluctuations in interest rates. At February 28,2007, the Company entered into a loan and security agreement with a commercialbank and the interest rate has a variable component based on the bank’s primerate. If the Company borrowed 100% of the facility’s available line for a fullyear and the bank’s prime rate increased by 1%, the Company’s borrowing costswould increase by $80,000.

*Foreign exchangerisk*

The United States dollaris the Company’s reporting currency. As the majority of the Company’s revenuesand expenses are in United States dollars, foreign exchange is limited to non -U.S. dollar denominated revenues and net expenditures in Canadian dollars,which represents 2%, 2%, and 1% of revenues and 3%, 9% and 8% of netexpenditures in each of the years ended March 31, 2007, 2006 and2005, respectively.

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*Credit risk*

TheCompany’s exposure to accounts receivable credit risk is as follows:

| **As of March 31,** | ** ** | ** ** | ** ** | **Accounts  Receivable  (in millions)** | ** ** | **Number of Customers  with Receivable Balance  > 10% of Total  Receivables** | ** ** | **Customer Share as a  Percent of Total  Receivables** | ** ** | **Percentage Share of  Total Receivables** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| 2007                               |       |       | $          | 4.4                                          |       |                                                                                                                |       | 2                                                                               |       |                                                      |       | 23% and 18% |   |   |   | 41% |   |   |
| 2006                               |       |       | $          | 4.6                                          |       |                                                                                                                |       | 1                                                                               |       |                                                      |       | 42% |   |   |   | 42% |   |   |

 

The receivablesrepresenting 23% and 18% of the accounts receivable balance at March 31,2007 were subsequently collected.

*Supplier Risk*

The Company relies on asingle supplier for the majority of its finished goods. At March 31, 2007and 2006, the Company owed $2,095 and $3,497, respectively, recorded asaccounts payable and accrued liabilities. The inventory purchases and engineeringservices from this supplier for the years ended March 31, 2007, 2006 and2005 were $16,275, $17,255 and $9,088, respectively.

**12.**          SEGMENTEDINFORMATION

The Company operates in one segment, the sale ofrugged mobile wireless Tablet PC computing systems. The majority of theCompany’s revenue is derived from sales in the United States of America. Otherthan Canada with 10.3% of the total revenue, no other country outside of theUnited States of America accounted for more than 10% of the Company’s revenue forthe year ended March 31, 2007. For the year ended March 31, 2006, theNetherlands accounted for 12.6% of the Company’s revenue and there was nocountry other than the United States that accounted for more than 10% of theCompany’s total revenue in the year ended March 31, 2005.

Thedistribution of revenue by country is segmented as follows:

| ** **               | ** ** | **Year ended March 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Revenue by country:*    |       |                                    |       |   |   |   |   |
| United States of America |       | $                                       | 20,069     |   | $ | 14,839 |   | $ | 13,089 |   |
| Canada                   |       | $                                       | 3,682      |   | $ | 2,725 |   | $ | 469 |   |
| Netherlands              |       | $                                       | 3,427      |   | $ | 3,467 |   | $ | 24 |   |
| All other countries      |       | 7,356                                   |       | 6,449 |   | 3,948 |   |
|                     |       | $                                       | 34,534     |   | $ | 27,480 |   | $ | 17,530 |   |

 

F-23

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TheCompany has a variety of customers, however, in a given year a single customercan account for a significant portion of sales. For the year endedMarch 31, 2007, the Company had no customers who accounted for more than10% of total revenue. For the year ended March 31, 2006, the Company hadone customer that had sales that were greater than 10% of total revenue and thecustomer was located in the Netherlands. In fiscal 2005, there were nocustomers who accounted for more than 10% of total revenue. The percentages oftotal revenue from these customers are as follows:

| **Fiscal Year** | ** ** | ** ** | ** ** | **Total  Revenue (in millions)** | ** ** | **Number of Customers  with Revenue > 10%  of Total Revenue** | ** ** | **Customer  Share as a  Percent of  Total Revenue** | ** ** | **Percentage Share of  Total Revenue** | ** ** |
|----------------------|------------|------------|------------|---------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| 2007                 |       |       | $          | 34.5                                  |       |                                                                                                |       | None                                                                    |       |                                                  |       | — |   |   |   | — |   |   |
| 2006                 |       |       | $          | 27.5                                  |       |                                                                                                |       | 1                                                                       |       |                                                  |       | 10.23 | % |   |   | 10.23 | % |   |
| 2005                 |       |       | $          | 17.5                                  |       |                                                                                                |       | None                                                                    |       |                                                  |       | — |   |   |   | — |   |   |

 

Substantially all of theCompany’s capital assets are owned by its wholly-owned subsidiary, XploreTechnologies Corporation of America, a corporation organized under the laws ofthe State of Delaware. No country, other than the United States of America, hadmore than 10% of the Company’s assets for the two years ended March 31,2007.

**13.**          COMMITMENTSAND CONTINGENT LIABILITIES

a)               Premises

The Company leases facilities in Austin, Texas. Theannual lease commitment is $232 and the lease maturity date was extended from May 31,2007 to August 31, 2009.  The Company also leases a satellite office inHelsinki, Finland, on a 3-month renewable basis.

Minimumannual payments by fiscal year required under all of the Company’s operatingleases are:

| 2008   |   | $   | 261    |   |
|--------|--------|-----|--------|--------|
| 2009   |   | 256 |   |
| 2010   |   | 125 |   |
|   |   | $   | 642    |   |

 

b)              Purchase commitment

At March 31, 2007, the Company had purchaseobligations extending into fiscal 2008 of approximately $2,402 related toinventory and product development items.

c)               Litigation

The Company and itssubsidiaries are engaged in legal actions, arising in the ordinary course ofbusiness. None of these actions, individually or in the aggregate, are expectedto have a material adverse effect on the Company’s consolidated financialposition or results of operations.

**14.**          RELATEDPARTY TRANSACTIONS

On April 21, 2006, the Company entered into afinancing agreement with Phoenix pursuant to which Phoenix agreed, at its solediscretion, to provide up to $5,000 in financing to the Company. In connectionwith the financing, the Company issued a 10% secured debenture in the aggregateamount of $1,000 to Phoenix, which had a maturity date of June 30, 2006. Thedebenture and related accrued and unpaid interest were exchanged for 2,970,185 Series APreferred Shares as part of the recapitalization discussed below. Of theremaining $4,000 of available financing, the Company received gross proceeds of

F-24

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approximately $800 in June 2006and approximately $1,904 in July 2006 in exchange for a total of 7,952,353Series A Preferred Shares issued to certain investors, as designated byPhoenix.

On May 20, 2005, the Company raised $1,500through the issuance of a 10% secured promissory note due August 31, 2005(subsequently extended to September 15, 2005) in the original principalamount of $1,500 to Phoenix. The note was repaid on September 15, 2005.

On July 19, 2005, the Company raised $1,500through the issuance of 10% secured promissory notes due August 31, 2005(subsequently extended to September 15, 2005) to Phoenix and otherlenders, including an affiliate of Phoenix in the aggregate original principalamount of $1,500. The notes were repaid on September 15, 2005.

During the fiscal year ended March 31, 2005, theCompany had short-term borrowings of $2,650 from Phoenix and affiliates. The10% interest bearing notes were secured by assets of the Company and repaidwith proceeds from the $5,000 December 17, 2004 private placement.

Interest expense for thefiscal years ended 2007, 2006 and 2005 included $230, $1,167 and $520respectively, related to borrowings from Phoenix and its affiliates. At March 31,2007, 2006, and 2005 outstanding debentures issued to such affiliates were$2,095, $13,208 and $8,708, respectively.

**15.**          SALEOF TECHNOLOGY

On August 3, 2005,the Company sold previously developed rugged handheld technology to a foreignvalue added reseller. The sale agreement provided for an initial payment ofapproximately $900, which the Company received on August 5, 2005, and afuture payment of approximately $700, net of the Company’s share of futuredevelopment costs, upon the completion of certain agreed upon productionactivities by a third party manufacturer. At March 31, 2007, the agreedupon production activities were not completed and it is uncertain as to whetherthe purchaser will complete its obligations under the sale agreement. Theproceeds received in August 2005, net of related selling expenses, havebeen reflected in other income for the year ended March 31, 2006. TheCompany’s investment in the rugged handheld technology was previously expensedwhen incurred since the expenditures were research and development related. Thetechnology was in a development stage and did not account for any of theCompany’s revenue.

**16.**          QUARTERLYOPERATING RESULTS

Thefollowing tables provide a summary of the Company’s unaudited operating resultsfor each of the quarters ended on the date indicated: 

| **Quarter ended**             | ** ** | ** ** | ** ** | **June 30,  2006  (Restated)** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Revenue                            |       |       | $          | 9,179                               |       |                         |       | $                           | 8,660      |                     |       |   | $ | 8,114 |   |   |   | $ | 8,581 |   |   |
| Gross profit                       |       |       | 2,508      |                                |       |                         | 2,414      |                        |       |                     | 2,243      |   |   |   | 2,646 |   |   |
| Operating  expenses                |       |       | 2,974      |                                |       |                         | 3,132      |                        |       |                     | 3,749      |   |   |   | 4,232 |   |   |
| Loss from  operations              |       |       | (466       | )                                   |       |                         | (718       | )                           |       |                     | (1,506     | ) |   |   | (1,586 | ) |   |
| Other expenses                     |       |       | (2,175     | )                                   |       |                         | (36        | )                           |       |                     | (19        | ) |   |   | (109 | ) |   |
| Net loss                           |       |       | $          | (2,641                              | )          |                         |       | $                           | (754       | )                        |       |   | $ | (1,525 | ) |   |   | $ | (1,695 | ) |   |
| Loss per common  share             |       |       | $          | (0.04                               | )          |                         |       | $                           | (0.01      | )                        |       |   | $ | (0.03 | ) |   |   | $ | (0.03 | ) |   |
| Average shares  outstanding (000s) |       |       | 57,855     |                                |       |                         | 58,155     |                        |       |                     | 60,897     |   |   |   | 61,586 |   |   |

 

F-25

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| **Quarter ended**             | ** ** | ** ** | ** ** | **June 30,  2005  (Restated)** | ** ** | **September 30,  2005  (Restated)** | ** ** | **December 31,  2005  (Restated)** | ** ** | **March 31,  2006  (Restated)** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| Revenue                            |       |       | $          | 6,125                               |       |                                     |       | $                                       | 6,583      |                                 |       |   | 7,218 |   |   |   | 7,554 |   |   |
| Gross profit                       |       |       | 1,429      |                                |       |                                     | 1,692      |                                    |       |                                 | 1,768      |   |   |   | 1,920 |   |   |
| Operating  expenses                |       |       | 2,666      |                                |       |                                     | 3,297      |                                    |       |                                 | 3,171      |   |   |   | 2,695 |   |   |
| Loss from  operations              |       |       | (1,237     | )                                   |       |                                     | (1,605     | )                                       |       |                                 | (1,403     | ) |   |   | (775 | ) |   |
| Other expenses                     |       |       | (1,839     | )                                   |       |                                     | (816       | )                                       |       |                                 | (685       | ) |   |   | (626 | ) |   |
| Net loss                           |       |       | $          | (3,076                              | )          |                                     |       | $                                       | (2,421     | )                                    |       |   | $ | (2,088 | ) |   |   | $ | (1,401 | ) |   |
| Loss per common  share             |       |       | $          | (0.06                               | )          |                                     |       | $                                       | (0.04      | )                                    |       |   | $ | (0.03 | ) |   |   | $ | (0.03 | ) |   |
| Average shares  outstanding (000s) |       |       | 54,986     |                                |       |                                     | 55,008     |                                    |       |                                 | 56,455     |   |   |   | 57,326 |   |   |

 

**17.**          SUMMARYOF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES INTHE UNITED STATES AND CANADA

The consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples in the United States (“U.S. GAAP”), which differ in certain respectsfrom generally accepted accounting principles in Canada (“Canadian GAAP”). UnderCanadian securities regulations, the Company is required to provide areconciliation setting out the differences between U.S. GAAP and Canadian GAAPas applied to the Company’s financial statements. The significant differencesfor the years ended March 31, 2007, 2006 and 2005 are summarized below:

**a) Valuation ofCommon Share Purchase Warrants**

The common share purchasewarrants issued with the December 17, 2004 debentures were assigned avalue of $2,234 under U.S. GAAP as compared to $945 under Canadian GAAP. Thedifference is attributable to different valuation methodologies.

**b) Recognition ofBeneficial Conversion Feature**

The conversion featurerelated to the December 17, 2004 debentures was deemed a beneficialconversion feature with a value of $2,766 under U.S. GAAP. Under Canadian GAAP,the conversion feature was not deemed a beneficial conversion feature andaccordingly was not assigned a value.

**c) Recognition ofUnamortized Discounts Upon Extension of Debenture Maturity Date**

Under U.S. GAAP, the extensions of the maturity datesof debentures were accounted for as modifications and the remaining unamortizeddiscounts at the time of the restructurings were recognized ratably over thenew term of the debentures. Under Canadian GAAP, these transactions wereaccounted for as settlements of the original debts and related unamortizeddiscounts were immediately expensed. The sum of the differences noted above arereflected in other income (expense) as either interest expense or loss onextinguishment of debt.

F-26

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**RECONCILIATION TO CANADIAN GAAP**

**Consolidated Balance Sheet**

The following is areconciliation of the balance sheet reflecting the differences between U.S.GAAP and Canadian GAAP:

**Consolidated Balance Sheet as of March 31, 2007**

| **Line Item**                                  | ** ** | ** ** | ** ** | **U.S. GAAP** | ** ** | **Difference** | ** ** | **Canadian GAAP** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------|------------|----------------|------------|------------------------|------------|
| Additional paid-in capital (Contributed surplus)    |       |       | $          | 8,959              |       |           |       | $                      | (6,374     | ) |   |   | $ | 2,585 |   |   |
| Warrants                                            |       |       | —     |               |       |           | 2,319      |                   |       |   | 2,319 |   |   |
| Accumulated other comprehensive loss                |       |       | (1,104     | )                  |       |           | 1,104      |                   |       |   | — |   |   |
| Accumulated deficit                                 |       |       | (91,957    | )                  |       |           | 2,951      |                   |       |   | (89,006 | ) |   |
| Total shareholders’ equity                     |       |       | 5,545      |               |       |           | —     |                   |       |   | 5,545 |   |   |
| Total liabilities and shareholders’ deficiency |       |       | 11,114     |               |       |           | —     |                   |       |   | 11,114 |   |   |

 

**Consolidated Balance Sheet as of March 31, 2006**

| **Line Item**                                  | ** ** | ** ** | ** ** | **U.S. GAAP** | ** ** | **Difference** | ** ** | **Canadian GAAP** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------|------------|----------------|------------|------------------------|------------|
| Debentures                                          |       |       | $          | 16,523             |       |           |       | $                      | 482        |   |   |   | $ | 17,005 |   |   |
| Total liabilities                                   |       |       | 25,237     |               |       |           | 482        |                   |       |   | 25,719 |   |   |
| Additional paid-in capital  (Contributed surplus)   |       |       | 7,714      |               |       |           | (6,374     | )                      |       |   | 1,340 |   |   |
| Warrants                                            |       |       | —     |               |       |           | 2,319      |                   |       |   | 2,319 |   |   |
| Accumulated other  comprehensive loss               |       |       | (1,104     | )                  |       |           | 1,104      |                   |       |   | — |   |   |
| Accumulated deficit                                 |       |       | (84,457    | )                  |       |           | 2469       |                   |       |   | (81,988 | ) |   |
| Total shareholders’  deficiency                |       |       | (14,013    | )                  |       |           | (482       | )                      |       |   | (14,495 | ) |   |
| Total liabilities and shareholders’ deficiency |       |       | 11,224     |               |       |           | —     |                   |       |   | 11,224 |   |   |

 

**Consolidated Statements of Loss as of March 31,2007**

| **Line Item**              | ** ** | ** ** | ** ** | **U.S. GAAP** | ** ** | **Difference** | ** ** | **Canadian GAAP** | ** ** |
|---------------------------------|------------|------------|------------|--------------------|------------|----------------|------------|------------------------|------------|
| Interest expense                |       |       | $          | (1,467             | )          |           |       | $                      | 74         |   |   |   | $ | (1,393 | ) |   |
| Loss on extinguishment  of debt |       |       | (832       | )                  |       |           | 408        |                   |       |   | (424 | ) |   |
| Total other expenses            |       |       | (2,339     | )                  |       |           | 482        |                   |       |   | (1,857 | ) |   |
| Net loss                        |       |       | (6,615     | )                  |       |           | 482        |                   |       |   | (6,133 | ) |   |
| Loss per share                  |       |       | (0.11      | )                  |       |           | 0.01       |                   |       |   | (0.10 | ) |   |

 

**Consolidated Statements of Loss as of March 31,2006**

| **Line Item**   | ** ** | ** ** | ** ** | **U.S. GAAP** | ** ** | **Difference** | ** ** | **Canadian GAAP** | ** ** |
|----------------------|------------|------------|------------|--------------------|------------|----------------|------------|------------------------|------------|
| Interest expense     |       |       | $          | (4,867             | )          |           |       | $                      | 2,413      |   |   |   | $ | (2,454 | ) |   |
| Total other expenses |       |       | (3,966     | )                  |       |           | 2,413      |                   |       |   | (1,553 | ) |   |
| Net loss             |       |       | (8,986     | )                  |       |           | 2,413      |                   |       |   | (6,573 | ) |   |
| Loss per share       |       |       | (0.16      | )                  |       |           | 0.04       |                   |       |   | (0.12 | ) |   |

 

**Consolidated Statements of Loss as of March 31,2005**

| **Line Item**   | ** ** | ** ** | ** ** | **U.S. GAAP** | ** ** | **Difference** | ** ** | **Canadian GAAP** | ** ** |
|----------------------|------------|------------|------------|--------------------|------------|----------------|------------|------------------------|------------|
| Interest expense     |       |       | $          | (2,818             | )          |           |       | $                      | 1,610      |   |   |   | $ | (1,208 | ) |   |
| Total other expenses |       |       | (2,826     | )                  |       |           | 1,610      |                   |       |   | (1,216 | ) |   |
| Net loss             |       |       | (10,501    | )                  |       |           | 1,610      |                   |       |   | (8,891 | ) |   |
| Loss per share       |       |       | (0.21      | )                  |       |           | 0.03       |                   |       |   | (0.18 | ) |   |

 

**ConsolidatedStatements of Cash Flows**

There were no differencesbetween U.S. GAAP and Canadian GAAP for the years ended March 31, 2007,2006 and 2005 as it relates to the Company’s Consolidated Statements of CashFlows.

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**Quarterly Results**

Thecompany has prepared its financial statements in accordance with U.S. GAAP forthe interim periods as described in Note 16. The following is a reconciliationexplaining the material differences between U.S. GAAP and Canadian GAAP:

| **Quarter ended**              | ** ** | ** ** | ** ** | **June 30,  2006  (Restated)** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Net loss—US                    |       |       | $          | (2,641                              | )          |                         |       | $                           | (754       | )                        |       |   | $ | (1,525 | ) |   |   | $ | (1,695 | ) |   |
| Difference                          |       |       | 906        |                                |       |                         | —     |                        |       |                     | —     |   |   |   | — |   |   |
| Net loss—CAN                   |       |       | (1,735     | )                                   |       |                         | (754       | )                           |       |                     | (1,525     | ) |   |   | (1,695 | ) |   |
| Total assets—US                |       |       | 11,300     |                                |       |                         | 15,430     |                        |       |                     | 12,667     |   |   |   | 11,114 |   |   |
| Difference                          |       |       | —     |                                |       |                         | —     |                        |       |                     | —     |   |   |   | — |   |   |
| Total assets—CAN               |       |       | 11,300     |                                |       |                         | 15,430     |                        |       |                     | 12,667     |   |   |   | 11,114 |   |   |
| Liabilities —US                |       |       | 8,434      |                                |       |                         | 7,395      |                        |       |                     | 5,649      |   |   |   | 5,569 |   |   |
| Difference                          |       |       | —     |                                |       |                         | —     |                        |       |                     | —     |   |   |   | — |   |   |
| Liabilities—CAN                |       |       | 8,434      |                                |       |                         | 7,395      |                        |       |                     | 5,649      |   |   |   | 5,569 |   |   |
| Shareholders’ equity—US   |       |       | 2,866      |                                |       |                         | 8,035      |                        |       |                     | 7,018      |   |   |   | 5,545 |   |   |
| Difference                          |       |       | —     |                                |       |                         | —     |                        |       |                     | —     |   |   |   | — |   |   |
| Shareholders’  equity—CAN |       |       | 2,866      |                                |       |                         | 8,035      |                        |       |                     | 7,018      |   |   |   | 5,545 |   |   |
| Loss per common share—US       |       |       | $          | (0.04                               | )          |                         |       | $                           | (0.01      | )                        |       |   | $ | (0.03 | ) |   |   | (0.03 | ) |   |
| Difference                          |       |       | 0.01       |                                |       |                         | —     |                        |       |                     | —     |   |   |   | — |   |   |
| Loss per common  share—CAN     |       |       | (0.03      | )                                   |       |                         | (0.01      | )                           |       |                     | (0.03      | ) |   |   | (0.03 | ) |   |
| Average shares  outstanding (000s)  |       |       | 57,855     |                                |       |                         | 58,155     |                        |       |                     | 60,897     |   |   |   | 61,586 |   |   |

 

**18.**          SUBSEQUENTEVENTS

On June 20, 2007, following shareholder approval,the Company completed its domestication under Section 388 of the DelawareGeneral Corporation Law pursuant to which the Company’s jurisdiction ofincorporation became the State of Delaware.

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