---

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|x  | Quarterly   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934   for the Quarterly Period Ended September 30, 2005.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                               
|or
|  
|o  | Transition   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of   1934.                                                 

Commission File Number:  000-31146

724 SOLUTIONS INC.
(Exact Name of Registrant as Specified in its Charter)

|Canada                                                           |  | Inapplicable                          
|---------------------------------------------------------------- |  | --------------------------------------
|                                                                 |  |                                       
|(State or   Other Jurisdiction of Incorporation or Organization) |  | (I.R.S.   Employer Identification No.)
|                                                                 |  |                                       
|1221 State Street, Suite 200                                     |  |                                       
|Santa Barbara, CA                                                |  | 93101                                 
|                                                                 |  |                                       
|(Address   of Principal Executive Office)                        |  | (Zip Code)                            
|                                                                 |  |                                       
|(805) 884-8308                                                  
|                                                                
|(Registrants   Telephone Number, Including Area Code).         

Indicate by
check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  YesxNoo

Indicate by
check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).  YesoNox

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

Common Shares, no par value 
6,039,444 shares outstanding as of November 10, 2005 (together with
associated rights to purchase additional Common Shares)

---



724 SOLUTIONS INC.

Table of Contents

|PART I.    |    | FINANCIAL INFORMATION                                                                   | 2 
|---------- | -- | --------------------------------------------------------------------------------------- | --
|           |    |                                                                                         |   
|Item 1.    |    | Financial Statements                                                                    | 2 
|           |    |                                                                                         |   
|Item 2.    |    | Managements Discussion and Analysis of Financial Condition and   Results of Operations | 29
|           |    |                                                                                         |   
|Item 3.    |    | Quantitative and Qualitative Disclosures About Market Risk                              | 46
|           |    |                                                                                         |   
|Item 4.    |    | Controls and Procedures                                                                 | 46
|           |    |                                                                                         |   
|PART II.   |    | OTHER INFORMATION                                                                       | 47
|           |    |                                                                                         |   
|Item 1.    |    | Legal Proceedings                                                                       | 47
|           |    |                                                                                         |   
|Item 2.    |    | Unregistered Sales of Equity Securities and Use of Proceeds                             | 48
|           |    |                                                                                         |   
|Item 3.    |    | Defaults upon Senior Securities                                                         | 48
|           |    |                                                                                         |   
|Item 4.    |    | Submission of Matters to a Vote of Security Holders                                     | 48
|           |    |                                                                                         |   
|Item 5.    |    | Other Information                                                                       | 48
|           |    |                                                                                         |   
|Item 6.    |    | Exhibits                                                                                | 48
|           |    |                                                                                         |   
|SIGNATURES | 49

-i-



|PART I. | FINANCIAL INFORMATION
|------- | ---------------------

|Item 1. | Financial Statements.
|------- | ---------------------

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

September 30, 2005 and December 31, 2004

|                                                                                         |  | 2005        |          | 2004 |  
|---------------------------------------------------------------------------------------- |  | ----------- | -------- | ---- | -
|                                                                                         |  |             |          |      |  
|                                                                                         |  | (Unaudited) |          |      |  
|Assets                                                                                   |  |             |          |      |  
|Current   assets:                                                                        |  |             |          |      |  
|Cash and cash equivalents (note 2)                                                       |  | $           | 3,375    |      | $
|Short-term investments (note   2)                                                        |  |             | 6,501    |      |  
|Restricted cash (note 2)                                                                 |  |             | 220      |      |  
|Accounts   receivable - trade, net of allowance of $19 (December 31, 2004 - $18)         |  |             | 4,420    |      |  
|Prepaid expenses and other receivables                                                   |  |             | 619      |      |  
|                                                                                         |  |             |          |      |  
|Total current   assets                                                                   |  |             | 15,135   |      |  
|Deferred   charges                                                                       |  |             | 197      |      |  
|Fixed assets, net of accumulated   amortization of $13,801 (December 31, 2004 - $13,732) |  |             | 948      |      |  
|                                                                                         |  |             |          |      |  
|                                                                                         |  | $           | 16,280   |      | $
|                                                                                         |  |             |          |      |  
|Liabilities and Shareholders Equity                                                     |  |             |          |      |  
|Current   liabilities:                                                                   |  |             |          |      |  
|Accounts payable                                                                         |  | $           | 752      |      | $
|Accrued liabilities                                                                      |  |             | 1,999    |      |  
|Interest payable to related parties (note 3)                                             |  |             | 107      |      |  
|Deferred revenue                                                                         |  |             | 215      |      |  
|                                                                                         |  |             |          |      |  
|Total current   liabilities                                                              |  |             | 3,073    |      |  
|Long-term liabilities                                                                    |  |             |         |      |  
|Convertible notes   payable to  related parties (note 3)                                 |  |             | 7,964    |      |  
|Long-term   interest payable to related parties (note 3)                                 |  |             | 660      |      |  
|                                                                                         |  |             |          |      |  
|Total liabilities                                                                        |  |             | 11,697   |      |  
|Shareholders   equity:                                                                  |  |             |          |      |  
|Share capital (note 5):                                                                  |  |             |          |      |  
|Authorized:                                                                              |  |             |          |      |  
|Unlimited common shares                                                                  |  |             |          |      |  
|Unlimited preferred shares                                                               |  |             |          |      |  
|Issued and outstanding:                                                                  |  |             |          |      |  
|6,039,444 common   shares (December 31, 2004    5,989,300)                              |  |             | 764,859  |      |  
|Additional   paid-in capital                                                             |  |             | 980      |      |  
|Accumulated deficit                                                                      |  |             | (761,350 | )    |  
|Accumulated   other comprehensive income                                                 |  |             | 94       |      |  
|                                                                                         |  |             |          |      |  
|Total   shareholders equity                                                             |  |             | 4,583    |      |  
|Contingent liabilities (note 9)                                                          |  |             |          |      |  
|                                                                                         |  |             |          |      |  
|                                                                                         |  | $           | 16,280   |      | $
|                                                                                         |  |             |          |      |  

See accompanying notes to consolidated financial statements.

2



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

|                                                                                                            |  | Three months ended   September 30, |        | Nine months ended   September 30, |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | -
|                                                                                                            |  |                                    |        |                                   |  
|                                                                                                            |  | 2005                               |        | 2004                              |  
|                                                                                                            |  |                                    |        |                                   |  
|                                                                                                            |  | (Unaudited)                        |        | (Unaudited)                       |  
|Revenue:                                                                                                    |  |                                    |        |                                   |  
|Product                                                                                                     |  | $                                  | 1,295  |                                   | $
|Services                                                                                                    |  |                                    | 3,166  |                                   |  
|                                                                                                            |  |                                    |        |                                   |  
|                                                                                                            |  |                                    | 4,461  |                                   |  
|Operating   expenses:                                                                                       |  |                                    |        |                                   |  
|Cost of product revenue                                                                                     |  |                                    | 10     |                                   |  
|Cost of services revenue                                                                                    |  |                                    | 1,804  |                                   |  
|Research and development                                                                                    |  |                                    | 1,768  |                                   |  
|Sales and marketing                                                                                         |  |                                    | 930    |                                   |  
|General and administrative                                                                                  |  |                                    | 748    |                                   |  
|Depreciation                                                                                                |  |                                    | 150    |                                   |  
|Stock-based compensation:                                                                                   |  |                                    |        |                                   |  
|Cost of revenue                                                                                             |  |                                    | 19     |                                   |  
|Research and development                                                                                    |  |                                    | 43     |                                   |  
|Sales and marketing                                                                                         |  |                                    | 53     |                                   |  
|General and administrative                                                                                  |  |                                    | 233    |                                   |  
|Restructuring costs (note 6)                                                                                |  |                                    |       |                                   |  
|                                                                                                            |  |                                    |        |                                   |  
|                                                                                                            |  |                                    | 5,758  |                                   |  
|                                                                                                            |  |                                    |        |                                   |  
|Loss from   operations                                                                                      |  |                                    | (1,297 | )                                 |  
|Interest   expense, net                                                                                     |  |                                    | (172   | )                                 |  
|Loss on settlement of liability to related   party                                                          |  |                                    |       |                                   |  
|                                                                                                            |  |                                    |        |                                   |  
|Loss for the   period                                                                                       |  | $                                  | (1,469 | )                                 | $
|                                                                                                            |  |                                    |        |                                   |  
|Basic and   diluted loss per share                                                                          |  | $                                  | (0.24  | )                                 | $
|                                                                                                            |  |                                    |        |                                   |  
|Weighted   average number of shares  used in   computing basic and diluted  loss per   share (in thousands) |  |                                    | 6,036  |                                   |  
|                                                                                                            |  |                                    |        |                                   |  

See accompanying notes to consolidated financial statements.

3



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

Nine months ended September 30, 2005 and 2004 (unaudited)

|                                    |  |                 |           |        |   |         |  | Additional   paid in capital |     | Accumulated   deficit |   | Accumulated   other   comprehensive   income (loss) |   | Total   shareholders   equity |     
|----------------------------------- |  | --------------- | --------- | ------ | - | ------- |  | ---------------------------- | --- | --------------------- | - | --------------------------------------------------- | - | ------------------------------ | ----
|                                    |  | Common   shares |           |        |   |         | 
|                                    |  |                 |           |        |   |         | 
|                                    |  | Number          |           | Amount |   |         |  |                              |    
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Balances   December 31, 2003        |  |                 | 5,983,349 |        | $ | 764,508 |  | $                            | 62  |                       | $ | (749,887                                            | ) | $                              | 33  
|Loss for the   period               |  |                 |          |        |   |        |  |                              |    |                       |   | (7,726                                              | ) |                                |    
|Cumulative   translation adjustment |  |                 |          |        |   |        |  |                              |    |                       |   |                                                    |   |                                | 86  
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Total   comprehensive loss          |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Stock-based   compensation expense  |  |                 |          |        |   |        |  |                              | 89  |                       |   |                                                    |   |                                |    
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Balances,   September 30, 2004      |  |                 | 5,983,349 |        | $ | 764,508 |  | $                            | 151 |                       | $ | (757,613                                            | ) | $                              | 119 
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Balances   December 31, 2004        |  |                 | 5,989,300 |        | $ | 764,530 |  | $                            | 279 |                       | $ | (757,921                                            | ) | $                              | 207 
|Loss for the   period               |  |                 |          |        |   |        |  |                              |    |                       |   | (3,429                                              | ) |                                |    
|Cumulative   translation adjustment |  |                 |          |        |   |        |  |                              |    |                       |   |                                                    |   |                                | (113
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Total   comprehensive loss          |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Issuance on   exercise of options   |  |                 | 16,595    |        |   | 61      |  |                              |    |                       |   |                                                    |   |                                |    
|Issuance of   common shares         |  |                 | 33,549    |        |   | 268     |  |                              |    |                       |   |                                                    |   |                                |    
|Stock-based   compensation expense  |  |                 |          |        |   |        |  |                              | 701 |                       |   |                                                    |   |                                |    
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     
|Balances,   September 30, 2005      |  |                 | 6,039,444 |        | $ | 764,859 |  | $                            | 980 |                       | $ | (761,350                                            | ) | $                              | 94  
|                                    |  |                 |           |        |   |         |  |                              |     |                       |   |                                                     |   |                                |     

See accompanying notes to consolidated financial statements.

4



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

|                                                      |  | Three months ended   September 30, |        | Nine months ended   September 30, |  
|----------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | -
|                                                      |  |                                    |        |                                   |  
|                                                      |  | 2005                               |        | 2004                              |  
|                                                      |  |                                    |        |                                   |  
|                                                      |  | (Unaudited)                        |        | (Unaudited)                       |  
|Cash flows   from/ (used in) operating activities:    |  |                                    |        |                                   |  
|Loss for the period                                   |  | $                                  | (1,469 | )                                 | $
|Items not affecting cash:                             |  |                                    |        |                                   |  
|Depreciation and amortization                         |  |                                    | 150    |                                   |  
|Amortization of deferred charges                      |  |                                    | 29     |                                   |  
|Stock-based compensation                              |  |                                    | 348    |                                   |  
|Loss on settlement of liability                       |  |                                    |       |                                   |  
|Other non-cash expenses                               |  |                                    | 111    |                                   |  
|Change in operating assets and liabilities:           |  |                                    |        |                                   |  
|Accounts receivable                                   |  |                                    | (641   | )                                 |  
|Prepaid expenses   and other receivables              |  |                                    | (111   | )                                 |  
|Accounts payable                                      |  |                                    | 33     |                                   |  
|Interest payable to related parties                   |  |                                    | 107    |                                   |  
|Long-term liabilities                                 |  |                                    | (18    | )                                 |  
|Long-term   interest payable to related parties       |  |                                    | 107    |                                   |  
|Accrued liabilities                                   |  |                                    | 78     |                                   |  
|Deferred revenue                                      |  |                                    | (18    | )                                 |  
|                                                      |  |                                    |        |                                   |  
|Net cash   flows from/ (used in) operating activities |  |                                    | (1,294 | )                                 |  
|Cash flows   from/ (used in) financing activities:    |  |                                    |        |                                   |  
|Issuance of notes payable                             |  |                                    |       |                                   |  
|Deferred charges                                      |  |                                    |       |                                   |  
|Issuance of common shares on exercise of options      |  |                                    | 17     |                                   |  
|                                                      |  |                                    |        |                                   |  
|Net cash   flows from/ (used in) financing activities |  |                                    | 17     |                                   |  
|Cash flows   from/ (used in) investing activities:    |  |                                    |        |                                   |  
|Purchase of fixed assets                              |  |                                    | (57    | )                                 |  
|Maturity of short-term investments                    |  |                                    | 3,996  |                                   |  
|Purchases of short-term investments                   |  |                                    | (2,520 | )                                 |  
|                                                      |  |                                    |        |                                   |  
|Net cash   flows/ (used in) investing activities      |  |                                    | 1,419  |                                   |  
|Effect of   exchange rate changes on cash             |  |                                    | (15    | )                                 |  
|                                                      |  |                                    |        |                                   |  
|Increase (decrease) in cash and cash equivalents      |  |                                    | 127    |                                   |  
|Cash and cash equivalents, beginning  of period       |  |                                    | 3,248  |                                   |  
|                                                      |  |                                    |        |                                   |  
|Cash and   cash equivalents, end of period            |  | $                                  | 3,375  |                                   | $
|                                                      |  |                                    |        |                                   |  

See accompanying notes to consolidated financial statements.

5



|1. | Basis of presentation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The   accompanying consolidated financial statements include the accounts of 724   Solutions Inc. and its wholly owned subsidiaries (collectively referred to as   the Company). Inter-company transactions and balances are eliminated on   consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The   Companys consolidated financial statements are expressed in U.S. dollars and   have been prepared in accordance with accounting principles generally   accepted in the United States. The interim financial statements follow the   same accounting policies and methods of application as the most recent annual   financial statements.  For further   information, reference should be made to the audited annual consolidated   financial statements for the year ended December 31, 2004 that are included   in the Companys Annual Report filed with the Canadian Securities   Administrators on March 17, 2005 and with the Securities and Exchange   Commission on Form 10-K filed on March 18, 2005.                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The   preparation of the financial statements requires use of management estimates.   The information furnished for the three and nine months ended September 30,   2005 and September 30, 2004 reflects, in the opinion of management, all   adjustments, consisting only of normal recurring adjustments, necessary for a   fair presentation of the results of the interim periods presented.  Interim results are not necessarily   indicative of results for a full year.                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|2. | Cash and cash equivalents and short-term   investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | All   short-term investments are classified as held-to-maturity because the Company   has the positive intent and ability to hold the securities to maturity.  Held-to-maturity securities are stated at   amortized cost, adjusted for amortization of premiums and accretion discounts   to maturity.  The Company owns no   short-term investments that are considered to be trading securities or   available-for-sale securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company   has entered into letters of credit in the amount of $220,000 (December 31,   2004  $210,000) to guarantee future payments. Letters of credit are secured   by segregated instruments and disclosed as restricted cash on the   consolidated balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|3. | Convertible notes payable to related   parties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On May 14,   2004, the Company entered into a series of agreements, including a Secured   Convertible Note Purchase Agreement (the Purchase Agreement) between 724   Solutions Inc. and its wholly owned subsidiary, 724 Solutions Software Inc.,   and a group of partnerships affiliated with Austin Ventures in connection   with the private placement of $8,000,000 of Secured Convertible Promissory   Notes (the Notes) for cash.  The   non-brokered private placement of secured convertible promissory notes was   completed in two tranches.  The first   tranche of the financing involved the issuance of $3,044,000 of convertible   notes and was completed on May 14, 2004.    The second tranche of the financing involved the issuance of   $4,956,000 of convertible notes and was completed on June 29, 2004, after the   Company obtained shareholder approval of the transactions.

6



| | The Notes   have a three-year term and accrue interest at a rate of 2.5% per quarter, of   which 1.25% is payable in arrears at the beginning of each quarter starting   in the first quarter of 2005 and the remainder of which is due at   maturity.  The principal amounts of   the Notes and all interest owing at maturity are convertible at the option of   the Lenders into common shares at a conversion price of $3.07 per share,   subject to an anti-dilution adjustment as set out below. The conversion price   was based on the volume weighted average trading price of the Companys   common shares on the TSX for the five trading days prior to May 14, 2004. If   the Company issues any common shares or securities convertible into common   shares at a price that is less than the conversion price of the Notes then in   effect, then such conversion price shall be subject to a weighted average   anti-dilution adjustment, whereby the conversion price will be reduced
based   on the weighted average price of the additional securities issued. The   conversion price will not be lowered by more than 15% of the initial   conversion price of $3.07. The interest payable quarterly is convertible at   the option of the Company into common shares at a conversion price of $3.07   per share, subject to the anti-dilution adjustment and provided the market   price on the payment date is higher than the conversion price then in effect.   In accordance with FASB EITF No. 00-27, Application of EITF No. 98-5,   Accounting for Convertible Securities with Beneficial Conversion Features or   Contingently Adjustable Conversion Ratios, the Company has determined that a   beneficial conversion feature existed for the second tranche of its convertible   notes.  On the date the required   shareholder approval was obtained, the Companys common shares closed at a   premium of $0.04 per share to the conversion price of $3.07, resulting in a   beneficial conversion feature on that
date of approximately $65,000.  Under issue 6 of EITF 00-27, this   conversion feature is to be amortized over the period to the stated   redemption date of May 14, 2007.    Total amortization of the beneficial conversion feature was $6,000 and   $16,000 in the three and nine months ended September 30, 2005, compared to   nil in each of the three and nine months ended September 30, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company   also analyzed the arrangement to determine whether any accounting was   required for the contingent beneficial conversion feature that may arise if   the Company were to issue additional shares in the future at a price less   than $3.07.  The Company considered   EITF 00-27, Issue 7, and concluded that since the terms of the contingent   conversion option do not permit the Company to compute the additional number   of shares that it would need to issue upon conversion of the Notes if the   contingent event occurs and the conversion price is adjusted, the Company   should compute any additional beneficial conversion feature only if the   contingent event occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Austin   Ventures is the Companys largest beneficial shareholder. Assuming that all   of the Notes are converted into common shares at the lowest possible   conversion price on the maturity date, all accrued interest on the Notes is   paid with common shares, and that no additional common shares are issued,   Austin Ventures could be deemed to beneficially own up to 44.49% of the   Companys issued and outstanding common shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Joseph C.   Aragona is currently a member of the Companys Board of Directors.  He is also a general partner of Austin   Ventures.  As a general partner of   Austin Ventures, Mr. Aragona may have a limited pecuniary interest in the   Private Placement Transactions.  Mr.   Aragona did not participate in the deliberations or voting of the Companys   Board with respect to the approval of the Private Placement Transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company   and its material subsidiaries granted the Lenders a blanket security interest   in all of their assets to secure the timely payment and performance in full   of all of the obligations under the Notes.    The security interest ranks senior to all indebtedness of the Company,   other than fully-funded indebtedness of up to $1,500,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

7



|   | The Notes   are subject to customary events of default, including the failure to pay   interest or principal, and specified types of bankruptcy events. Additional   events of default include the issuance of certain capital securities that, if   not for the limitation noted above, would cause the conversion price of the   notes to be lowered by more than 15% of the initial conversion price and the   Company engaging in specified types of merger or acquisition   transactions.  An event of default   would require the Company to repay all amounts owing under the Notes.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Total   interest expense related to the amount payable to Austin Ventures was   $214,000 and $634,000 in the three and nine months ended September 30, 2005,   compared to $201,000 and $240,000 in the three and nine months ended   September 30, 2004. At September 30, 2005, total interest payable to Austin   Ventures is $767,000 (December 2004  $446,000).                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On January   3, 2005, the Company issued 33,549 shares with a market value of $268,000 in   settlement of interest owing of $103,000 and recorded a loss on settlement of   liability of $165,000 in the three month period ended March 31, 2005 related   to the extinguishment of the liability. Interest payments made subsequent to   the quarter ended March 31, 2005 have been made in cash.                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|4. | Segment information:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company   operates in a single reportable operating segment, that is, the design and   delivery of software products for use by mobile network operators and other   customers.  The single reportable   operating segment derives its revenue from the sale of software and related   services.  Information about the   Companys geographical net revenue and assets is set forth below.                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Geographic   distribution of net revenue:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                  |  | Three months ended   September 30, |       | Nine months ended   September 30, |  
| | -------------------------------- |  | ---------------------------------- | ----- | --------------------------------- | -
| |                                  |  |                                    |       |                                   |  
| | (In thousands of   U.S. dollars) |  | 2005                               |       | 2004                              |  
| |                                  |  |                                    |       |                                   |  
| | United States                    |  | $                                  | 2,614 |                                   | $
| | Europe                           |  |                                    | 1,739 |                                   |  
| | Asia Pacific                     |  |                                    | 108   |                                   |  
| | Canada                           |  |                                    |      |                                   |  
| |                                  |  |                                    |       |                                   |  
| |                                  |  | $                                  | 4,461 |                                   | $
| |                                  |  |                                    |       |                                   |  

| | In the three   months ended September 30, 2005, three customers accounted for 38%, 18% and   13% of revenue. In same period ended September 30, 2004, three customers   accounted for 47%, 22% and 11% of revenue. In the nine months ended September   30, 2005, three customers accounted for 36%, 20% and 13% of revenue. In the   same period ended September 30, 2004, two customers accounted for 59% and 15%   of revenue.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | At September   30, 2005, three customers accounted for 34%, 25% and 13% of accounts   receivable and at September 30, 2004, two customers accounted for 46% and 10%   of accounts receivable.                                                                                                                                                                                                                                    

8



| | Geographic   distribution of fixed assets:
| | ------------------------------------------

| | (In thousands of   U.S. dollars) |  | September   30,   2005 |     | December   31,   2004 |  
| | -------------------------------- |  | ---------------------- | --- | --------------------- | -
| |                                  |  |                        |     |                       |  
| | Canada                           |  | $                      | 717 |                       | $
| | United   States                  |  |                        | 75  |                       |  
| | Europe                           |  |                        | 146 |                       |  
| | Asia Pacific                     |  |                        | 10  |                       |  
| |                                  |  |                        |     |                       |  
| |                                  |  | $                      | 948 |                       | $
| |                                  |  |                        |     |                       |  

|5. | Share capital:
|-- | --------------
|   |               
|   | (a)           
|   |               
|   |               
|   |               
|   |               

| | Exercise   price ranges |  | Number of   options |        | Weighted   average   exercise price |  | Weighted   average   remaining   contractual life   (years) |  | Number of   options   exerciseable |        | Weighted   average   exercise price | 
| | ----------------------- |  | ------------------- | ------ | ----------------------------------- |  | ----------------------------------------------------------- |  | ---------------------------------- | ------ | ----------------------------------- | 
| |                         |  |                     |        |                                     |  |                                                             |  |                                    |        |                                     | 
| | $                      |  | $                   | 3.50   |                                     |  | 282,965                                                     |  | $                                  | 3.14   |                                     | 
| | 3.51                    |  |                     | 5.00   |                                     |  | 450,179                                                     |  |                                    | 4.04   |                                     | 
| | 5.01                    |  |                     | 6.50   |                                     |  | 496,486                                                     |  |                                    | 5.75   |                                     | 
| | 6.51                    |  |                     | 10.00  |                                     |  | 104,771                                                     |  |                                    | 7.44   |                                     | 
| | 10.01                   |  |                     | 50.00  |                                     |  | 23,242                                                      |  |                                    | 17.20  |                                     | 
| | 50.01                   |  |                     | 550.00 |                                     |  | 24,557                                                      |  |                                    | 189.18 |                                     | 
| |                         |  |                     |        |                                     |  |                                                             |  |                                    |        |                                     | 
| |                         |  |                     |        |                                     |  | 1,382,200                                                   |  | $                                  | 8.24   |                                     | 
| |                         |  |                     |        |                                     |  |                                                             |  |                                    |        |                                     | 

| | (b) | Loss per   share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The Company   has excluded from the calculation of diluted earnings per share all common   shares potentially issuable upon the exercise of stock options and other   potentially convertible instruments that could dilute basic earnings per   share in the future, because to do so would have been anti-dilutive.                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (c) | Stock-based   compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | Effective   January 1, 2003, the Company adopted, on a prospective basis, the fair value   measurement for stock-based compensation.    Under the fair value based method, compensation cost for option grants   is measured at fair value at the date of grant and is expensed over the   awards vesting period. The fair value of options issued in the three months   ended September 30, 2005 was $189,000, while the fair value of options issued   in the three months ended September 30, 2004 was $285,000. These amounts are   being amortized as expenses over the vesting period of 4 years.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The fair   value of each option granted in the three months ended September 30, 2005 was   estimated at the date of grant using the Black-Scholes option pricing model   under the following assumptions: dividend yield of 0% (2004  0%), expected   volatility of 65% (2004 - 60%), risk-free rate of interest of 3.43% (2004    3.97%) and an expected life of the option of five years.                                                                                                                                                                                                           

9



| |     | The Company   has assumed no forfeiture rate, as adjustments for actual forfeitures are   made in the period in which they occur. The weighted average grant date fair   value of options issued in the three months ended September 30, 2005 was   $2.91 (2004 - $1.82).                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                           
| | (d) | Pro forma   disclosure for stock-based compensation and other stock-based payments:                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                           
| |     | For options   issued prior to January 1, 2003, the Company is required to disclose the pro   forma information as if it had accounted for stock options issued from   inception on July 28, 1997 to December 31, 2002 under the fair value   method.  The following table presents   the required disclosure of pro forma earnings and earnings per share.

| |                                                                   |  | Three months ended
September   30, |        | Nine months ended
September   30, |  
| | ----------------------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | -
| |                                                                   |  |                                    |        |                                   |  
| | (In thousands of U.S. dollars, except per share amounts)          |  | 2005                               |        | 2004                              |  
| |                                                                   |  |                                    |        |                                   |  
| | Loss for the   period                                             |  | $                                  | (1,469 | )                                 | $
| | Compensation   expense related to the fair value of stock options |  |                                    |        |                                   |  
| | In excess of amounts recognized                                   |  |                                    | (51    | )                                 |  
| |                                                                   |  |                                    |        |                                   |  
| | Pro forma   loss for the period                                   |  | $                                  | (1,520 | )                                 | $
| | Pro forma   loss per share:                                       |  |                                    |        |                                   |  
| | Basic and diluted                                                 |  | $                                  | (0.25  | )                                 | $
| |                                                                   |  |                                    |        |                                   |  

| | The fair   value of each option granted prior to January 1, 2003, was estimated at the   date of grant using the Black-Scholes option pricing model with the   assumptions disclosed in the notes to the Companys annual consolidated   financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



|6. | Restructuring charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | For the   years ended December 31, 2004, 2003 and 2002, the Company recorded charges   for restructuring activities. Portions of these restructuring charges were   scheduled to be paid out in subsequent periods. At September 30, 2005,   included in accrued liabilities is the remaining restructuring provision of   $93,000, which relates to a restructuring activity undertaken in 2002,   specifically to costs associated with an office in Europe that the Company   has vacated. Although the space is sublet, the Company is obligated to   refurbish the space at the end of the lease. The Company expects to pay out   the remaining balance by the end of the first quarter of 2006.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Changes to   the Companys restructuring accruals in the nine months ended September 30,   2005 and 2004, are set out below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | (a) | Restructuring   provision at September 30, 2005:      
| | --- | ------------------------------------------------------
| |     |                                                       
| |     | 2002   Restructuring, provision at September 30, 2005:

| | (In thousands of U.S. dollars)                              |  | Severance |        | Lease exit   costs |   | Hosting   exit   costs |   | Total |       
| | ----------------------------------------------------------- |  | --------- | ------ | ------------------ | - | ---------------------- | - | ----- | ------
| |                                                             |  |           |        |                    |   |                        |   |       |       
| | Restructuring   charges in 2002                             |  | $         | 7,991  |                    | $ | 2,472                  |   | $     | 7,438 
| | Cash payments                                               |  |           | (7,024 | )                  |   | (364                   | ) |       | (4,951
| | Non-cash charges                                            |  |           |       |                    |   | (580                   | ) |       |      
| | Provision,   December 31, 2002                              |  | $         | 967    |                    | $ | 1,528                  |   | $     | 2,487 
| | Activity   during 2003:                                     |  |           |        |                    |   |                        |   |       |       
| | Reversal of provision                                       |  |           |       |                    |   |                       |   |       | (900  
| | Cash payments                                               |  |           | (967   | )                  |   | (1,388                 | ) |       | (996  
| |                                                             |  |           |        |                    |   |                        |   |       |       
| | Provision,   December 31, 2003                              |  | $         |       |                    | $ | 140                    |   | $     | 591   
| | Activity   during 2004:                                     |  |           |        |                    |   |                        |   |       |       
| | Reversal of provision                                       |  |           |       |                    |   |                       |   |       | (181  
| | Cash payments                                               |  |           |       |                    |   | (47                    | ) |       | (410  
| |                                                             |  |           |        |                    |   |                        |   |       |       
| | Provision,   December 31, 2004                              |  | $         |       |                    | $ | 93                     |   | $     |      
| | Activity   during the nine months ended September 30, 2005: |  |           |        |                    |   |                        |   |       |       
| | Cash payments                                               |  |           |       |                    |   |                       |   |       |      
| |                                                             |  |           |        |                    |   |                        |   |       |       
| | Provision,   September 30, 2005                             |  | $         |       |                    | $ | 93                     |   | $     |      

| | During 2002, the Company reduced its worldwide workforce by   approximately 198 people, closed redundant facilities, wrote down inventory   assets that were no longer part of its future strategy and wrote down unused   fixed assets.  The Company realigned   its workforce following this reduction to allow it to focus on delivering   software applications and infrastructure software to MNOs while servicing   its global installed base of financial services clients.  In addition, as part of the restructuring,   the Company formalized a three-year arrangement with Computer Sciences   Corporation (CSC), an unrelated party, whereby CSC will provide application   hosting services to support the Companys current hosting agreements until   such time as the agreements expire or are assigned to CSC.  The Company does not intend to enter into any   further hosting agreements and will promote CSC as its preferred supplier of   such
services.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



| |     | The restructuring activities undertaken in 2002 were completed within   the year, shortly after the reductions in the workforce occurred in the first   and fourth quarters of the year. All amounts provided for were settled in the   year except for: (i) severance in the amount of $967,000, which was settled   in the first half of 2003; (ii) lease exit costs related to abandoned   premises in the amount of $1,528,000, $1,388,000 of which was settled in 2003   and $47,000 of which was settled in 2004, leaving $93,000 at September 30,   2005 that the Company expects will be settled by the end of the first quarter   of 2006; and (iii) hosting exit costs in the amount of $2,487,000, $996,000   of which was paid out in 2003, $900,000 of which was reversed in 2003 upon   the re-negotiation of certain agreements, $410,000 of which was paid out in   2004 and $181,000 of which was reversed in 2004 because certain costs were   lower than the Company had estimated.    The
Company has now fully exited all hosting arrangements related to   legacy customers.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (b) | Restructuring   provisions at September 30, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | (i) 2004   Restructuring, provision at September 30, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | (In thousands of U.S. dollars)                                 |  | Severance |       | Lease exit   costs |   | Total |  
| | -------------------------------------------------------------- |  | --------- | ----- | ------------------ | - | ----- | -
| |                                                                |  |           |       |                    |   |       |  
| | Activity   during the three months ended March 31,   2004:     |  |           |       |                    |   |       |  
| | Restructuring charges                                          |  | $         | 1,600 |                    | $ | 500   |  
| | Cash payments                                                  |  |           | (15   | )                  |   | (77   | )
| | Provision,   March 31, 2004                                    |  | $         | 1,585 |                    | $ | 423   |  
| | Activity   during the three months ended June 30,   2004:      |  |           |       |                    |   |       |  
| | Reversal of provision                                          |  |           | (900  | )                  |   |      |  
| | Cash payments                                                  |  |           | (606  | )                  |   | (364  | )
| | Provision,   June 30, 2004                                     |  | $         | 79    |                    | $ | 59    |  
| | Activity   during the three months ended September   30, 2004: |  |           |       |                    |   |       |  
| | Cash payments                                                  |  |           | (53   | )                  |   | (38   | )
| | Provision,   September 30, 2004                                |  | $         | 26    |                    | $ | 21    |  
| |                                                                |  |           |       |                    |   |       |  

| | In the three months ended March 31, 2004, the Company completed a   plan to reduce its overall operating costs and to realign its operating   expenses and investments by reducing its worldwide workforce by approximately   40 people and consolidating facilities.    As a result of these decisions, the Company recorded $2,100,000 in   restructuring charges related to severance and lease exit costs.                                                                                                                             
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Due to the asset purchase completed in the three months ended June   30, 2004, the Company determined that it would not carry out some employee   terminations planned as of the end of the prior quarter. Therefore, in the   three months ended June 30, 2004, the Company reversed $900,000 in severance   costs included in restructuring charges. This amount had been part of the   restructuring charge of $2,100,0000 in the first quarter of 2004. Employee   terminations not related to the asset purchase proceeded as planned.

12



| | (ii) 2003   Restructuring, provision at September 30, 2004:
| | -----------------------------------------------------------

| | (In thousands of U.S. dollars)                               |  | Severance |      | Lease exit   costs |   | Total |  
| | ------------------------------------------------------------ |  | --------- | ---- | ------------------ | - | ----- | -
| |                                                              |  |           |      |                    |   |       |  
| | Restructuring   charges in 2003                              |  | $         | 775  |                    | $ | 175   |  
| | Cash payments                                                |  |           | (483 | )                  |   | (175  | )
| | Provision,   December 31, 2003                               |  | $         | 292  |                    | $ |      |  
| | Activity   during the three months ended March 31, 2004:     |  |           |      |                    |   |       |  
| | Cash payments                                                |  |           |     |                    |   |      |  
| | Provision,   March 31, 2004                                  |  | $         | 292  |                    | $ |      |  
| | Activity   during the three months ended June 30, 2004:      |  |           |      |                    |   |       |  
| | Cash payments                                                |  |           | (292 | )                  |   |      |  
| | Provision,   June 30, 2004                                   |  | $         |     |                    | $ |      |  
| | Activity   during the three months ended September 30, 2004: |  |           |      |                    |   |       |  
| | Cash payments                                                |  |           |     |                    |   |      |  
| | Provision,   September 30, 2004                              |  | $         |     |                    | $ |      |  
| |                                                              |  |           |      |                    |   |       |  

| | During 2003, the Company reduced its worldwide workforce by   approximately 40 people and closed redundant facilities in an effort to   reduce its overall operating costs and to realign operating expenses and   investments with a view to achieving operational profitability. The   restructuring activities were completed within the year shortly after the   reduction in the workforce occurred in the second and fourth quarters of the   year.  All amounts provided for were   settled in the year except for severance amounts that were provided for at   December 2003. These severance amounts remained outstanding at March 31, 2004   and were paid out in the second quarter of 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



| | (iii) 2002   Restructuring, provision at September 30, 2004:
| | ------------------------------------------------------------

| | (In thousands of U.S. dollars)                               |  | Severance |        | Lease exit   costs |   | Hosting   exit   costs |   | Total |       
| | ------------------------------------------------------------ |  | --------- | ------ | ------------------ | - | ---------------------- | - | ----- | ------
| |                                                              |  |           |        |                    |   |                        |   |       |       
| | Restructuring   charges in 2002                              |  | $         | 7,991  |                    | $ | 2,472                  |   | $     | 7,438 
| | Cash payments                                                |  |           | (7,024 | )                  |   | (364                   | ) |       | (4,951
| | Non-cash charges                                             |  |           |       |                    |   | (580                   | ) |       |      
| | Provision,   December 31, 2002                               |  | $         | 967    |                    | $ | 1,528                  |   | $     | 2,487 
| | Activity   during 2003:                                      |  |           |        |                    |   |                        |   |       |       
| | Reversal of provision                                        |  |           |       |                    |   |                       |   |       | (900  
| | Cash payments                                                |  |           | (967   | )                  |   | (1,388                 | ) |       | (996  
| |                                                              |  |           |        |                    |   |                        |   |       |       
| | Provision,   December 31, 2003                               |  | $         |       |                    | $ | 140                    |   | $     | 591   
| | Activity   during the three months ended March 31, 2004:     |  |           |        |                    |   |                        |   |       |       
| | Cash payments                                                |  |           |       |                    |   | (25                    | ) |       | (165  
| |                                                              |  |           |        |                    |   |                        |   |       |       
| | Provision,   March 31, 2004                                  |  | $         |       |                    | $ | 115                    |   | $     | 426   
| | Activity   during the three months ended June 30, 2004:      |  |           |        |                    |   |                        |   |       |       
| | Cash payments                                                |  |           |       |                    |   | (22                    | ) |       | (229  
| |                                                              |  |           |        |                    |   |                        |   |       |       
| | Provision,   June 30, 2004                                   |  | $         |       |                    | $ | 93                     |   | $     | 197   
| | Activity   during the three months ended September 30, 2004: |  |           |        |                    |   |                        |   |       |       
| | Reversal of provision                                        |  |           |       |                    |   |                       |   |       | (181  
| | Cash payments                                                |  |           |       |                    |   |                       |   |       | (16   
| |                                                              |  |           |        |                    |   |                        |   |       |       
| | Provision,   September 30, 2004                              |  | $         |       |                    | $ | 93                     |   | $     |      
| |                                                              |  |           |        |                    |   |                        |   |       |       

| | In the three months ended September 30, 2004, the Company reversed   $181,000 in hosting exit costs that were included as Restructuring charges   in the financial statements for the period ended June 30, 2004 because   certain hosting exit charges were lower than the Company initially   expected.  As of September 30, 2004,   the Company had fully exited all hosting arrangements related to legacy customers.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



|7. | Supplemental disclosure:
|-- | ------------------------

| |                                                                                                        |  | Three months ended   September 30, |    | Nine   months ended   September 30, |  
| | ------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | -- | ----------------------------------- | -
| |                                                                                                        |  |                                    |    |                                     |  
| | (In thousands of   U.S. dollars)                                                                       |  | 2005                               |    | 2004                                |  
| |                                                                                                        |  |                                    |    |                                     |  
| | Supplemental cash flow (use) information:                                                              |  |                                    |    |                                     |  
| | Interest received                                                                                      |  | $                                  | 97 |                                     | $
| | Interest paid                                                                                          |  |                                    |   |                                     |  
| | Supplemental   disclosure of non-cash financing and investing activities:                              |  |                                    |    |                                     |  
| | Common shares issued upon settlement of interest due on convertible   notes payable to related parties |  |                                    |   |                                     |  
| |                                                                                                        |  |                                    |    |                                     |  

|8. | Guarantees:
|-- | -----------
|   |            
|   | (a)        
|   |            
|   |            
|   |            
|   | (b)        
|   |            
|   |            
|   |            
|   |            

15



| | (c) | Letters of   credit:                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | At September   30, 2005, the Company had one outstanding letter of credit in the amount of   $220,000 to secure Company credit cards. At December 31, 2004, the Company   had one outstanding letter of credit in the amount of $210,000 to secure   Company credit cards. Letters of credit are secured by segregated short-term   investments and are disclosed as restricted cash on the consolidated balance   sheets.

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

16



| | In June   2004, an agreement of settlement was submitted to the court for preliminary   approval.  The court requested that   any objections to preliminary approval of the settlement be submitted by July   14, 2004, and the underwriter defendants formally objected to the   settlement.  The plaintiffs and issuer   defendants separately filed replies to the underwriter defendants objections   to the settlement on August 4, 2004.    The court granted the preliminary approval motion on February 15,   2005, subject to certain modifications.                                                                                                                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On August   31, 2005, the court issued a preliminary order further approving the   modifications to the settlement and certifying the settlement classes.  The court also appointed the Notice   Administrator for the settlement and ordered that notice of the settlement be   distributed to all settlement class members beginning on November 15, 2005   and completed by January 15, 2006.    The settlement fairness hearing has been set for April 26, 2006.  Following the hearing, if the court   determines that the settlement is fair to the class members, the settlement   will be approved. There can be no assurance that this proposed settlement   would be approved and implemented in its current form, or at all.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Due to the   inherent uncertainties of litigation, and because the settlement approval   process is at a preliminary stage, the Company cannot accurately predict the   ultimate outcome of the matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

17



|10. | Reconciliation to Canadian GAAP:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The   consolidated financial statements of the Company have been prepared in   accordance with U.S. GAAP. The consolidated financial statements conform in   all material respects with Canadian generally accepted accounting principles   (Canadian GAAP), except for the treatment of the secured convertible notes   to related parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Under   Canadian securities requirements, the Company is required to provide a   reconciliation setting out differences between U.S. and Canadian GAAP as   applied to the Companys financial statements.  This note sets out the differences between U.S. and Canadian   GAAP for the three and nine months ended September 30, 2005 and 2004 and as   at September 30, 2005 and December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Under U.S.   GAAP, the secured convertible notes payable to related parties are classified   entirely as debt except for the beneficial conversion feature, which was   recorded as additional paid-in capital. The difference between the amounts   allocated to the liability and the principal amount of the notes of   $8,000,000 is being amortized as non-cash imputed interest expense over the   period to maturity and the liability is being accreted up to its maturity   value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Under   Canadian GAAP, the secured convertible notes to related parties are   considered compound instruments that are required to be separated into liability   and equity components. The Company has calculated the liability component of   the secured convertible notes as the present value of the future obligation   using a discount rate of 15%, representing the estimated rate that it would   be required to pay for similar borrowings with no conversion feature. The   liability component amounted to $7,067,000. The residual amount of $933,000   represents the estimated equity component for the conversion option and is   recorded under Canadian GAAP as the equity portion of convertible notes   payable to related parties.  The   difference between the amounts allocated to the liability and the principal   amount of the notes of $8,000,000 is being amortized as non-cash imputed   interest expense over the period to maturity and the liability is being
 accreted up to its maturity value.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | For U.S.   GAAP purposes, the costs related to the issuance of the secured convertible   notes payable was recorded as a long-term asset and are being amortized over   the term of the Notes.  For Canadian   GAAP purposes, these costs have been allocated on a pro rata basis between   the debt and equity components of the compound instruments.  The amount allocated to the debt component   has been recorded as a long-term asset and amortized over the term of the   notes and the amount allocated to the equity component has been recorded as a   reduction to shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The   following tables present the adjustments required to reconcile the September   30, 2005 consolidated financial statements presented under U.S. GAAP to   Canadian GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

18



Reconciliation to Canadian GAAP - Balance sheet at September 30, 2005:

|(In thousands of U.S. dollars)                                   |  | U.S. GAAP |          | Adjustments |   | Canadian   GAAP |  
|---------------------------------------------------------------- |  | --------- | -------- | ----------- | - | --------------- | -
|                                                                 |  |           |          |             |   |                 |  
|Assets                                                           |  |           |          |             |   |                 |  
|Current assets:                                                  |  |           |          |             |   |                 |  
|Cash   and cash equivalents                                      |  | $         | 3,375    |             | $ |                |  
|Short-term   investments                                         |  |           | 6,501    |             |   |                |  
|Restricted   cash                                                |  |           | 220      |             |   |                |  
|Accounts   receivable, net of allowance of $19                   |  |           | 4,420    |             |   |                |  
|Prepaid   expenses and other receivables                         |  |           | 619      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current assets                                             |  |           | 15,135   |             |   |                |  
|Deferred charges                                                 |  |           | 197      |             |   | (22             | )
|Fixed assets                                                     |  |           | 948      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total assets                                                     |  | $         | 16,280   |             | $ | (22             | )
|                                                                 |  |           |          |             |   |                 |  
|Liabilities and shareholders   equity                           |  |           |          |             |   |                 |  
|Current liabilities:                                             |  |           |          |             |   |                 |  
|Accounts   payable                                               |  | $         | 752      |             | $ |                |  
|Accrued   liabilities                                            |  |           | 1,999    |             |   |                |  
|Interest   payable to related parties                            |  |           | 107      |             |   |                |  
|Deferred   revenue                                               |  |           | 215      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current liabilities                                        |  |           | 3,073    |             |   |                |  
|Convertible notes payable   to related parties                   |  |           | 7,964    |             |   | (493            | )
|Long-term interest payable   to related parties                  |  |           | 660      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities                                                |  |           | 11,697   |             |   | (493            | )
|Shareholders equity:                                            |  |           |          |             |   |                 |  
|Common   shares                                                  |  |           | 764,859  |             |   |                |  
|Additional   paid-in capital                                     |  |           | 980      |             |   | (65             | )
|Equity   portion of convertible notes payable to related parties |  |           |         |             |   | 892             |  
|Accumulated   deficit                                            |  |           | (761,350 | )           |   | (356            | )
|Accumulated   other comprehensive income                         |  |           | 94       |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total shareholders equity                                       |  |           | 4,583    |             |   | 471             |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities and   shareholders equity                     |  | $         | 16,280   |             | $ | (22             | )
|                                                                 |  |           |          |             |   |                 |  

19



Reconciliation to Canadian GAAP - Balance sheet at December 31, 2004

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

20



Reconciliation to Canadian GAAP - Statement of operations for the three months ended September 30, 2005:

|(In thousands of U.S. dollars, except per share amounts)                                         |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | --------------- | -
|                                                                                                 |  |           |        |             |   |                 |  
|Revenue:                                                                                         |  |           |        |             |   |                 |  
|Product                                                                                          |  | $         | 1,295  |             | $ |                |  
|Services                                                                                         |  |           | 3,166  |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|                                                                                                 |  |           | 4,461  |             |   |                |  
|Operating expenses:                                                                              |  |           |        |             |   |                 |  
|Cost   of product revenue, other                                                                 |  |           | 10     |             |   |                |  
|Cost   of service revenue                                                                        |  |           | 1,804  |             |   |                |  
|Research   and development                                                                       |  |           | 1,768  |             |   |                |  
|Sales   and marketing                                                                            |  |           | 930    |             |   |                |  
|General   and administrative                                                                     |  |           | 748    |             |   |                |  
|Depreciation                                                                                     |  |           | 150    |             |   |                |  
|Stock-based   compensation:                                                                      |  |           |        |             |   |                 |  
|Cost   of revenue                                                                                |  |           | 19     |             |   |                |  
|Research   and development                                                                       |  |           | 43     |             |   |                |  
|Sales   and marketing                                                                            |  |           | 53     |             |   |                |  
|General   and administrative                                                                     |  |           | 233    |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Total operating expenses                                                                         |  |           | 5,758  |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Loss from operations                                                                             |  |           | (1,297 | )           |   |                |  
|Interest expense, net                                                                            |  |           | (172   | )           |   | (69             | )
|                                                                                                 |  |           |        |             |   |                 |  
|Loss for the period                                                                              |  | $         | (1,469 | )           | $ | (69             | )
|                                                                                                 |  |           |        |             |   |                 |  
|Basic and   diluted loss per share                                                               |  | $         | (0.24  | )           | $ | (0.01           | )
|                                                                                                 |  |           |        |             |   |                 |  
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 6,036  |             |   | 6,036           |  
|                                                                                                 |  |           |        |             |   |                 |  

21



Reconciliation to Canadian GAAP  Statement of operations for the three months ended September 30, 2004

|(In thousands of U.S. dollars, except per share amounts)                                         |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | --------------- | -
|                                                                                                 |  |           |        |             |   |                 |  
|Revenue:                                                                                         |  |           |        |             |   |                 |  
|Product                                                                                          |  | $         | 2,013  |             | $ |                |  
|Services                                                                                         |  |           | 1,489  |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|                                                                                                 |  |           | 3,502  |             |   |                |  
|Operating   expenses:                                                                            |  |           |        |             |   |                 |  
|Cost of revenue                                                                                  |  |           | 1,505  |             |   |                |  
|Research and development                                                                         |  |           | 1,410  |             |   |                |  
|Sales and marketing                                                                              |  |           | 1,093  |             |   |                |  
|General and administrative                                                                       |  |           | 796    |             |   |                |  
|Depreciation                                                                                     |  |           | 124    |             |   |                |  
|Stock-based compensation:                                                                        |  |           |        |             |   |                 |  
|Cost of revenue                                                                                  |  |           | 4      |             |   |                |  
|Research and development                                                                         |  |           | 10     |             |   |                |  
|Sales and marketing                                                                              |  |           | 9      |             |   |                |  
|General and administrative                                                                       |  |           | 16     |             |   |                |  
|Restructuring charges                                                                            |  |           | (181   | )           |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Total   operating expenses                                                                       |  |           | 4,786  |             |   |                |  
|Loss from   operations                                                                           |  |           | (1,284 | )           |   |                |  
|Interest expense, net                                                                            |  |           | (183   | )           |   | (78             | )
|                                                                                                 |  |           |        |             |   |                 |  
|Loss for the   period                                                                            |  | $         | (1,467 | )           | $ | (78             | )
|                                                                                                 |  |           |        |             |   |                 |  
|Basic and   diluted loss per share                                                               |  | $         | (0.25  | )           | $ | (0.01           | )
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 5,983  |             |   | 5,983           |  
|                                                                                                 |  |           |        |             |   |                 |  

22



Reconciliation to Canadian GAAP - Statement of operations for the nine months ended September 30, 2005:

|(In thousands of U.S. dollars, except per share amounts)                                         |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | --------------- | -
|                                                                                                 |  |           |        |             |   |                 |  
|Revenue:                                                                                         |  |           |        |             |   |                 |  
|Product                                                                                          |  | $         | 5,984  |             | $ |                |  
|Services                                                                                         |  |           | 8,898  |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|                                                                                                 |  |           | 14,882 |             |   |                |  
|Operating expenses:                                                                              |  |           |        |             |   |                 |  
|Cost   of product revenue                                                                        |  |           | 25     |             |   |                |  
|Cost   of service revenue                                                                        |  |           | 5,737  |             |   |                |  
|Research   and development                                                                       |  |           | 5,148  |             |   |                |  
|Sales   and marketing                                                                            |  |           | 3,121  |             |   |                |  
|General   and administrative                                                                     |  |           | 2,405  |             |   |                |  
|Depreciation                                                                                     |  |           | 472    |             |   |                |  
|Stock-based   compensation:                                                                      |  |           |        |             |   |                 |  
|Cost   of revenue                                                                                |  |           | 41     |             |   |                |  
|Research   and development                                                                       |  |           | 97     |             |   |                |  
|Sales   and marketing                                                                            |  |           | 112    |             |   |                |  
|General   and administrative                                                                     |  |           | 450    |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Total operating expenses                                                                         |  |           | 17,608 |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Loss from operations                                                                             |  |           | (2,726 | )           |   |                |  
|Interest expense, net                                                                            |  |           | (538   | )           |   | (207            | )
|Loss on   settlement of liability                                                                |  |           | (165   | )           |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Loss for the period                                                                              |  | $         | (3,429 | )           | $ | (207            | )
|                                                                                                 |  |           |        |             |   |                 |  
|Basic and   diluted loss per share                                                               |  | $         | (0.57  | )           | $ | (0.03           | )
|                                                                                                 |  |           |        |             |   |                 |  
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 6,032  |             |   | 6,032           |  
|                                                                                                 |  |           |        |             |   |                 |  

23



Reconciliation to Canadian GAAP - Statement of operations for the nine months ended September 30, 2004:

|(In thousands of U.S. dollars, except per share amounts)                                         |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | --------------- | -
|                                                                                                 |  |           |        |             |   |                 |  
|Revenue:                                                                                         |  |           |        |             |   |                 |  
|Product                                                                                          |  | $         | 5,704  |             | $ |                |  
|Services                                                                                         |  |           | 3,848  |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|                                                                                                 |  |           | 9,552  |             |   |                |  
|Operating expenses:                                                                              |  |           |        |             |   |                 |  
|Cost   of service revenue                                                                        |  |           | 4,570  |             |   |                |  
|Research   and development                                                                       |  |           | 4,932  |             |   |                |  
|Sales   and marketing                                                                            |  |           | 3,669  |             |   |                |  
|General   and administrative                                                                     |  |           | 2,384  |             |   |                |  
|Depreciation                                                                                     |  |           | 429    |             |   |                |  
|Stock-based   compensation:                                                                      |  |           |        |             |   |                 |  
|Cost   of revenue                                                                                |  |           | 9      |             |   |                |  
|Research   and development                                                                       |  |           | 23     |             |   |                |  
|Sales   and marketing                                                                            |  |           | 20     |             |   |                |  
|General   and administrative                                                                     |  |           | 37     |             |   |                |  
|Restructuring   charges                                                                          |  |           | 1,019  |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Total operating expenses                                                                         |  |           | 17,092 |             |   |                |  
|                                                                                                 |  |           |        |             |   |                 |  
|Loss from operations                                                                             |  |           | (7,540 | )           |   |                |  
|Interest expense, net                                                                            |  |           | (186   | )           |   | (92             | )
|                                                                                                 |  |           |        |             |   |                 |  
|Loss for the period                                                                              |  | $         | (7,726 | )           | $ | (92             | )
|                                                                                                 |  |           |        |             |   |                 |  
|Basic and   diluted loss per share                                                               |  | $         | (1.29  | )           | $ | (0.02           | )
|                                                                                                 |  |           |        |             |   |                 |  
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 5,983  |             |   | 5,983           |  
|                                                                                                 |  |           |        |             |   |                 |  

24



Reconciliation to Canadian GAAP  Cash flows from operations for the three months ended September 30, 2005:

|(In thousands of U.S. dollars)                              |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------------- |  | --------- | ------ | ----------- | - | --------------- | -
|                                                            |  |           |        |             |   |                 |  
|Cash flows from/ (used in)   operating activities:          |  |           |        |             |   |                 |  
|Loss   for the period                                       |  | $         | (1,469 | )           | $ | (69             | )
|Items   not involving cash:                                 |  |           |        |             |   |                 |  
|Accretion   on convertible notes payable to related parties |  |           |       |             |   | 72              |  
|Depreciation   and amortization                             |  |           | 150    |             |   |                |  
|Amortization   of deferred charges                          |  |           | 29     |             |   | (3              | )
|Stock-based   compensation                                  |  |           | 348    |             |   |                |  
|Other   non-cash expenses                                   |  |           | 111    |             |   |                |  
|Changes   in operating assets and liabilities:              |  |           |        |             |   |                 |  
|Accounts   receivable                                       |  |           | (641   | )           |   |                |  
|Prepaid   expenses and other receivables                    |  |           | (111   | )           |   |                |  
|Accounts   payable                                          |  |           | 33     |             |   |                |  
|Interest   payable to related parties                       |  |           | 107    |             |   |                |  
|Long-term   liabilities                                     |  |           | (18    | )           |   |                |  
|Long-term   interest payable to related parties             |  |           | 107    |             |   |                |  
|Accrued   liabilities                                       |  |           | 78     |             |   |                |  
|Deferred   revenue                                          |  |           | (18    | )           |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net cash flows from/ (used   in) operating activities       |  |           | (1,294 | )           |   |                |  
|Cash flows from/ (used in)   financing activities:          |  |           |        |             |   |                 |  
|Issuance   of common shares on exercise of options          |  |           | 17     |             |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net cash flows from/ (used   in) financing activities       |  |           | 17     |             |   |                |  
|Cash flows from/ (used in)   investing activities:          |  |           |        |             |   |                 |  
|Purchase   of fixed assets, net                             |  |           | (57    | )           |   |                |  
|Maturity   of short-term investments                        |  |           | 3,996  |             |   |                |  
|Purchases   of short-term investments                       |  |           | (2,520 | )           |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net cash flows from/ (used   in) investing activities       |  |           | 1,419  |             |   |                |  
|Effect of exchange rate   changes on cash                   |  |           | (15    | )           |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net increase/ (decrease) in   cash and cash equivalents     |  |           | 127    |             |   |                |  
|Cash and cash equivalents,   beginning of period            |  |           | 3,248  |             |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Cash and cash equivalents,   end of period                  |  | $         | 3,375  |             | $ |                |  
|                                                            |  |           |        |             |   |                 |  

25



Reconciliation to Canadian GAAP  Cash flows from operations for the three months ended September 30, 2004

|(In thousands of U.S. dollars)                          |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|------------------------------------------------------- |  | --------- | ------ | ----------- | - | --------------- | -
|                                                        |  |           |        |             |   |                 |  
|Cash flows   from/ (used in) operating activities:      |  |           |        |             |   |                 |  
|Loss for the period                                     |  | $         | (1,467 | )           | $ | (14             | )
|Items   not affecting cash:                             |  |           |        |             |   |                 |  
|Accretion on convertible notes to related parties       |  |           |       |             |   | 14              |  
|Depreciation and amortization                           |  |           | 124    |             |   |                |  
|Amortization of deferred charges                        |  |           | 29     |             |   |                |  
|Stock-based compensation                                |  |           | 39     |             |   |                |  
|Other non-cash expenses                                 |  |           | (20    | )           |   |                |  
|Changes in operating assets and liabilities:            |  |           |        |             |   |                 |  
|Accounts receivable                                     |  |           | (146   | )           |   |                |  
|Prepaid expenses and other receivables                  |  |           | 89     |             |   |                |  
|Accounts payable                                        |  |           | 254    |             |   |                |  
|Long-term accounts payable                              |  |           | (63    | )           |   |                |  
|Long-term interest payable to   related parties         |  |           | 242    |             |   |                |  
|Accrued liabilities                                     |  |           | (595   | )           |   |                |  
|Deferred revenue                                        |  |           | (18    | )           |   |                |  
|                                                        |  |           |        |             |   |                 |  
|Net cash   flows from/ (used in) operating activities   |  |           | (1,532 | )           |   |                |  
|Cash flows   from/ (used in) investing activities:      |  |           |        |             |   |                 |  
|Purchase of fixed assets                                |  |           | (133   | )           |   |                |  
|Purchases short-term investments                        |  |           | (6,463 | )           |   |                |  
|                                                        |  |           |        |             |   |                 |  
|Net cash   flows from/ (used in) investing activities   |  |           | (6,596 | )           |   |                |  
|Effect of   exchange rate changes on cash               |  |           | (3     | )           |   |                |  
|Net   increase/ (decrease) in cash and cash equivalents |  |           | (8,131 | )           |   |                |  
|Cash and   cash equivalents, beginning of period        |  |           | 14,174 |             |   |                |  
|                                                        |  |           |        |             |   |                 |  
|Cash and cash equivalents,   end of period              |  | $         | 6,043  |             | $ |                |  
|                                                        |  |           |        |             |   |                 |  

26



Reconciliation to Canadian GAAP  Cash flows from operations for the nine months ended September 30, 2005:

|(In thousands of U.S. dollars)                              |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------------- |  | --------- | ------ | ----------- | - | --------------- | -
|                                                            |  |           |        |             |   |                 |  
|Cash flows from/ (used in)   operating activities:          |  |           |        |             |   |                 |  
|Loss   for the period                                       |  | $         | (3,429 | )           | $ | (207            | )
|Items   not involving cash:                                 |  |           |        |             |   |                 |  
|Accretion   on convertible notes payable to related parties |  |           |       |             |   | 217             |  
|Depreciation   and amortization                             |  |           | 472    |             |   |                |  
|Amortization   of deferred charges                          |  |           | 89     |             |   | (10             | )
|Stock-based   compensation                                  |  |           | 700    |             |   |                |  
|Loss   on settlement of liability                           |  |           | 165    |             |   |                |  
|Other   non-cash expenses                                   |  |           | 63     |             |   |                |  
|Changes   in operating assets and liabilities:              |  |           |        |             |   |                 |  
|Accounts   receivable                                       |  |           | (1,589 | )           |   |                |  
|Prepaid   expenses and other receivables                    |  |           | (36    | )           |   |                |  
|Accounts   payable                                          |  |           | 139    |             |   |                |  
|Interest   payable to related parties                       |  |           | 4      |             |   |                |  
|Long-term   liabilities                                     |  |           | (92    | )           |   |                |  
|Long-term   interest payable to related parties             |  |           | 317    |             |   |                |  
|Accrued   liabilities                                       |  |           | (102   | )           |   |                |  
|Deferred   revenue                                          |  |           | 42     |             |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net cash flows from/ (used   in) operating activities       |  |           | (3,257 | )           |   |                |  
|Cash flows from/ (used in)   financing activities:          |  |           |        |             |   |                 |  
|Issuance   of common shares on exercise of options          |  |           | 61     |             |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net cash flows from/ (used   in) financing activities       |  |           | 61     |             |   |                |  
|Cash flows from/ (used in)   investing activities:          |  |           |        |             |   |                 |  
|Purchase   of fixed assets, net                             |  |           | (332   | )           |   |                |  
|Maturity   of short-term investments                        |  |           | 10,457 |             |   |                |  
|Purchases   of short-term investments                       |  |           | (8,971 | )           |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net cash flows from/ (used   in) investing activities       |  |           | 1,154  |             |   |                |  
|Effect of exchange rate   changes on cash                   |  |           |       |             |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Net increase/ (decrease) in   cash and cash equivalents     |  |           | (2,042 | )           |   |                |  
|Cash and cash equivalents,   beginning of period            |  |           | 5,417  |             |   |                |  
|                                                            |  |           |        |             |   |                 |  
|Cash and cash equivalents,   end of period                  |  | $         | 3,375  |             | $ |                |  
|                                                            |  |           |        |             |   |                 |  

27



Reconciliation to Canadian GAAP  Cash flows from operations for the nine months ended September 30, 2004

|(In thousands of U.S. dollars)                        |  | U.S. GAAP |        | Adjustments |   | Canadian   GAAP |  
|----------------------------------------------------- |  | --------- | ------ | ----------- | - | --------------- | -
|                                                      |  |           |        |             |   |                 |  
|Cash flows   from/ (used in) operating activities:    |  |           |        |             |   |                 |  
|Loss for the period                                   |  | $         | (7,726 | )           | $ | (92             | )
|Items not affecting cash:                             |  |           |        |             |   |                 |  
|Accretion on convertible notes   payable              |  |           |       |             |   | 92              |  
|Depreciation and amortization                         |  |           | 429    |             |   |                |  
|Amortization of deferred   charges                    |  |           | 36     |             |   |                |  
|Stock-based compensation                              |  |           | 89     |             |   |                |  
|Other non-cash expenses                               |  |           | 10     |             |   |                |  
|Changes in operating assets   and liabilities:        |  |           |        |             |   |                 |  
|Accounts receivable                                   |  |           | (354   | )           |   |                |  
|Prepaid expenses and other   receivables              |  |           | 3      |             |   |                |  
|Accounts payable                                      |  |           | 384    |             |   |                |  
|Long-term liabilities                                 |  |           | 125    |             |   |                |  
|Long-term interest payable to   related parties       |  |           | 242    |             |   |                |  
|Accrued liabilities                                   |  |           | (1,306 | )           |   |                |  
|Deferred revenue                                      |  |           | (84    | )           |   |                |  
|                                                      |  |           |        |             |   |                 |  
|Net cash flows from (used in) operating activities    |  |           | (8,152 | )           |   |                |  
|Cash flows   from/ (used in) financing activities:    |  |           |        |             |   |                 |  
|Issuance of notes payable to related parties          |  |           | 8,000  |             |   |                |  
|Notes payable to related parties issuance cost        |  |           | (352   | )           |   |                |  
|                                                      |  |           |        |             |   |                 |  
|Net cash   flows from/ (used in) financing activities |  |           | 7,648  |             |   |                |  
|Cash flows from/ (used in) investing activities:      |  |           |        |             |   |                 |  
|Purchase of fixed assets                              |  |           | (681   | )           |   |                |  
|Maturity of short-term   investments                  |  |           | 1,748  |             |   |                |  
|Purchases of short-term   investments                 |  |           | (7,963 | )           |   |                |  
|                                                      |  |           |        |             |   |                 |  
|Net cash flows from/ (used in) investing activities   |  |           | (6,896 | )           |   |                |  
|Effect of exchange rate changes on cash               |  |           | 7      |             |   |                |  
|                                                      |  |           |        |             |   |                 |  
|Net increase/ (decrease) in cash and cash equivalents |  |           | (7,393 | )           |   |                |  
|Cash and cash equivalents, beginning of period        |  |           | 13,436 |             |   |                |  
|                                                      |  |           |        |             |   |                 |  
|Cash and cash equivalents,   end of period            |  | $         | 6,043  |             | $ |                |  
|                                                      |  |           |        |             |   |                 |  

28



|Item 2. | Managements Discussion and Analysis of Financial Condition and   Results of Operations.
|------- | ----------------------------------------------------------------------------------------

| | OVERVIEW                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 724 Solutions designs, develops, markets   and supports software products for use by mobile network operators worldwide.   Mobile network operators are telecommunications companies that provide a   range of mobile voice and data communications services to their consumer and   business customers.  Examples of large   mobile network operators include Verizon Wireless, Cingular Wireless, Sprint   PCS, Vodafone Group and China Mobile, some of which currently license our   products.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | We offer software products that enable   Internet connectivity to mobile devices such as mobile phones and handheld   computing devices.  We also offer   software that helps to deliver text messaging, multimedia messaging, voice   services and transactions to mobile network operators end user customers   using mobile phones and handheld computing devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | We were incorporated in 1997 and in 1999 we   introduced our initial products. At that time, we focused on creating   software products that assisted financial services companies in making their   traditional services available to their customers through mobile phones and   handheld computing devices.  In   January 2001, we acquired Tantau Software with a view to expanding our   customer base, utilizing Tantaus software products to strengthen our   products offered to financial services customers, and to expand our sales to   mobile network operators.  In 2001, we   began offering our mobile alerting software products and our mobile Internet   gateway product (software that enables Internet connectivity to mobile   devices) to mobile network operators. In October 2002, our products and   solutions for mobile network operators and other customers were re-branded as   the X-treme Mobility Suite of products (XMS).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In 2002, we concluded that the adoption of   wireless technologies by the financial services industry had slowed   considerably.  At the same time, we   judged that the market for mobile data services in the mobile network   operator sector was potentially larger and likely to develop sooner. As a   consequence, we began to restructure our business to focus on opportunities   in the mobile network operator marketplace.    During 2004, we completed this process and are now focused on selling   our software products to mobile network operators. We no longer offer   products developed specifically for financial institutions, although we   continue to provide services to a small number of financial services   customers and continue to support earlier sales to them.                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | We continue to develop and expand our   X-treme Mobility Suite of products for mobile network operators to assist   them in growing their next-generation data services.  In addition, we may in the future acquire   products and/or companies that have developed software that aligns with our   X-treme Mobility Suite of products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | With our corporate office in Santa Barbara,   California, we have development and sales offices around the world, including   Hong Kong, Switzerland, Canada, the United Kingdom and the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | CRITICAL ACCOUNTING POLICIES AND ESTIMATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | We periodically review our financial   reporting and disclosure practices and accounting policies to ensure they   provide accurate and transparent information relative to the current economic   and business environment. As part of this process, we have reviewed the   selection, application and communication of our critical accounting policies   and financial disclosures. We have determined that the critical accounting   policies relating to our core ongoing business activities are primarily those   that relate to revenue recognition, allowance for doubtful accounts, income   taxes, litigation, valuation of intangible assets, valuation of fixed assets,   and restructuring provisions. Other important accounting policies are   described in note 2 to our audited annual consolidated financial statements   for the year ended December 31, 2004, which are included in our annual report   on form 10-K.                     

29



| | REVENUE RECOGNITION
| | -------------------
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30



| |  |                                            |  | Reseller/OEM Arrangement  the reseller or   OEM typically pays a non-refundable licensing fee for our software and/or a   royalty fee based on the related number of users or based on a given   capacity. We recognize revenue associated with non-refundable license fees   when we have met our revenue recognition criteria for license agreements as   outlined above. We recognize royalty fee revenue when the amount is determinable   and all of our other revenue recognition criteria for license revenue are   met.                                                                                                                                                                                                                    
| |  | ------------------------------------------ | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                            |  | Fixed License Fee Arrangement  a license   fee for a fixed number of copies or unlimited use of the software for a   period of time ranging from three months to perpetuity.  If the license is not a perpetual license,   we recognize the revenue ratably over the term of the license.  If the license is a perpetual license, we   recognize the revenue when the general conditions outlined above under   Sources of Revenue are met.                                                                                                                                                                                                                                                                                                      
| |  |                                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | SERVICE REVENUE                           
| |  | Service revenue consists of the following:
| |  |                                           
| |  |                                            |  | Implementation and Customer Service Fees    includes fees for implementation of our product offerings (which may include   hardware and third party software operating on the hardware), consulting and   training services. Customers are charged a fee based on time and expenses and   a fee for the hardware and third party software they choose to buy from us.   Revenue is recognized as the implementation is performed or as the hardware   is delivered and accepted or deferred until we achieve contractually defined   milestones or until customer acceptance has occurred, as the case may be, for   those contracts.                                                                                                              
| |  |                                           
| |  |                                            |  | Maintenance Fees  revenue for maintaining   and servicing our products for customers. The maintenance fee is typically   equal to a specified percentage of the customers cumulative license fees,   and may include a minimum quarterly amount. In the case of our agreement with   Hewlett-Packard (as a reseller to Sprint PCS) that terminated October 31,   2005, we received fixed monthly maintenance fees. If associated with the   fixed fee license model, the maintenance revenues received will be recorded   as deferred revenue and recognized on a straight-line basis over the contract   period. When associated with the variable fee license model, any maintenance   payments will be recognized on a monthly basis as earned.
| |  |                                           
| |  |                                            |  | Managed Alerts Service Fees  revenue from   providing services to our customers using our managed X-treme Alerts   Platform. These fees can include revenue from voice alerts, Short Message   Service (SMS) alerts, Multimedia Message Service (MMS) alerts, fraud   alerts, and collection alerts. Our XAP software is hosted in New Jersey with   Computer Sciences Corporation and the voice hardware is hosted in Florida   with InterVoice. Customers typically pay a per alert fee, subject to monthly   minimums. The fees are recognized on a monthly basis as earned.                                                                                                                                                                

| | ALLOWANCE FOR DOUBTFUL ACCOUNTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | We maintain an allowance for doubtful   accounts for estimated losses resulting from the inability of our customers   to make required payments. Our general credit terms are 30 to 60 days from   the invoice date.  We perform an   ongoing credit evaluation of each customers financial condition and if the   financial condition of a customer deteriorates, resulting in an impairment of   its ability to make payment, an additional allowance would be required. At   September 30, 2005, our allowance for doubtful accounts totaled $19,000.  Our maximum exposure to loss on receivables   at any point in time is the total accounts receivable, which was $4.4 million   at September 30, 2005.

31



| | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | We record a valuation allowance against deferred income tax assets   when we believe it is not more likely than not that some portion or all of   the deferred income tax assets will be realized. We consider factors such as   the reversal of deferred income tax liabilities, projected taxable income,   the character of the income tax asset and the potential for realization due   to tax planning strategies. At December 31, 2004, while we had $92.2 million   in available net tax benefit of loss carry forwards and other deferred tax   assets, we have experienced losses in recent years and the extent of future   income for tax purposes before utilization of these benefits is   uncertain.  Accordingly, the entire   balance of deferred tax assets was offset by a valuation allowance.  Due to the significant number of estimates   and projections utilized in determining an appropriate valuation for our   deferred income tax assets, the actual valuation allowance
against the tax   assets could be materially different from these estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | LITIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | We are a party, from time to time, in legal proceedings such as the   securities litigation relating to our initial public offering (see note 9 to   our consolidated financial statements). In these cases, we assess the   likelihood that a loss will result, as well as the amount of the potential   loss, and the financial statements provide for the best estimate of the   losses. In making our assessment of the existence of losses, we consider   advice from legal counsel, the nature of the claim and other settlements, if   any, that are occurring from similar claims.    To the extent that any of these legal proceedings are resolved and   require us to pay an amount in excess of what has been provided for in the   financial statements, we would be required to record, against earnings, the   excess at that time. If the resolution resulted in a gain, or a loss less   than that provided for, the gain is recognized when received or receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | VALUATION OF INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | We have acquired several businesses. As part of the completion of any   business combination, we are required to value any intangible assets acquired   at the date of acquisition. We utilize the most current internally-generated   and publicly available information to develop an estimate of future   undiscounted cash flows including, among other things, estimated lives,   residual values and terminal values, and believe the estimates to be   reasonable at the date prepared.  This   valuation is inherently subjective, and necessarily involves judgments and   estimates regarding future cash flows and other operational variables of the   intangible assets acquired. There can be no assurance that the judgments and   estimates made at the date of acquisition will reflect future performance of   the acquired intangible assets. To assist us with the valuation process, we   have adopted the practice of using independent valuation experts in the   valuation process
for intangible assets acquired through material   acquisitions. However, it is entirely possible that either we or the   independent valuation experts will make judgments or estimates that differ   from actual circumstances.  In these   cases, we may be required to record a provision or write-off certain of our   intangible assets. Similarly, in accordance with the Financial Accounting   Standards Board (FASB) Statement of Financial Accounting Standard (SFAS)   No. 142, Goodwill and Other Intangible Assets, we are required to annually   test the value of our goodwill. Changes in estimates could result in   different conclusions for the underlying value of goodwill. We perform our   annual impairment testing on goodwill at December 31 of each fiscal year,   provided that circumstances do not arise during the year that would   necessitate an earlier evaluation. At times over the past three years, our   book value has exceeded our fair value and we have recorded impairment
charges to reflect these assessments.    As at September 30, 2005, the carrying value of our goodwill and   intangible assets is nil.
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| | VALUATION OF FIXED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | We monitor the appropriateness of the carrying values of our fixed   assets, primarily office furniture and computer software and equipment, on an   ongoing basis, in accordance with accounting requirements. As required, if an   indicator of potential impairment is evident, we will review the projected   undiscounted future cash flows associated with the relevant fixed asset, to determine   if the undiscounted cash flows exceed the carrying amount of the fixed asset.   If it is determined that the net carrying amount of the fixed asset is not   recoverable, then an adjustment would be made to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| | reduce the net carrying amount to the fair value amount of the asset.   We utilize the most current internally-generated and publicly available   information to develop our estimates of future undiscounted cash flows   including, among other things, estimated lives, residual values and terminal   values, and believe the estimates to be reasonable. Additionally,   determination of fair values of fixed assets may also involve various methods   of estimation, if comparable independent fair values are not readily   available. Accordingly, different assumptions related to cash flows or fair   values of fixed assets could materially affect our estimates.  We have recorded charges to write-down   fixed assets, primarily arising due to the restructuring activities we have   undertaken.  As at September 30, 2005,   the net book value of our fixed assets was $948,000.                                                                                                                                        
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | RESTRUCTURING PROVISIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | We record restructuring provisions when specified criteria under   accounting principles are met.  While   these provisions are substantially based on contractual terms, it is   necessary to make estimates of the fair values of liabilities in some   circumstances, primarily when the charge includes future costs to be incurred   on leased space which is no longer being used but for which the lease   agreement has not been terminated.  In   these cases, we estimate the fair value of future sub-lease rentals that will   be realized over the term of the agreement.    These estimates take into account expected demands and prices   available for the specific space in the areas the lease is located.  Unless we have a fixed sub-lease for the   remaining term of the lease arrangement, the actual amount of sub-lease   rental income may differ from the estimates used in developing the provision   and those changes may be material.    Changes in
estimated sub-lease income are recognized as determinable.
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| | RESULTS OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THREE AND   NINE MONTHS ENDED SEPTEMBER 30, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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| | Our consolidated financial statements have been prepared in accordance   with U.S. generally accepted accounting principles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | REVENUE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | PRODUCT REVENUE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Product revenue was $1.3 million and $6.0   million in the three and nine months ended September 30, 2005, compared to   $2.0 million and $5.7 million in the three and nine months ended September   30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Product revenue from our X-treme Mobility   Suite (XMS) of products decreased to $1.2 million in the three months ended   September 30, 2005 from $2.0 million in the same period in 2004. The   principal revenue producing deployments for our XMS products in the three   months ended September 30, 2005 were with Hewlett-Packard (as a reseller to   Sprint PCS) and Nokia. Product sales to Hewlett-Packard (as a reseller to   Sprint PCS) totaled $909,000 and product sales to Nokia totaled $243,000 in   the three months ended September 30, 2005, compared to $983,000 and $616,000   from these two customers, respectively, in the same period of 2004.                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On October 31, 2005, the subcontract   agreement between us and Hewlett-Packard terminated. We   expect this change will reduce our product revenue from Hewlett-Packard (as a   reseller to Sprint) by approximately $283,000 per month beginning in November   2005 from the monthly revenue achieved from January 2005 through October   2005. Our contract with Sprint for our X-treme Service Activity Manager   product is unaffected by this notice and we continue an active dialog with   Sprint regarding opportunities for alternate uses for our X-treme Mobility   Gateway (XMG) technology within the Sprint PCS network.                                                                                                                                                                                                                                                                                                                                                                                                     

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| | In the three months ended September 30,   2005, the X-treme Mobility Gateway product accounted for approximately 77% of   our revenue from the X-treme Mobility Suite of products and our Multimedia   Application Gateway (AGW) product contributed approximately 20%.  In the three months ended September 30,   2004, our XMG product contributed approximately 61% of XMS revenue while our   Multimedia Application Gateway product contributed approximately 31% of XMS   revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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| | In the nine months ended September 30,   2005, product revenue from our X-treme Mobility Suite (XMS) of products   increased to $5.8 million from $5.5 million in the same period in 2004.  The principal revenue producing deployments   for our XMS products in the nine months ended September 30, 2005 were with   Hewlett-Packard (as a reseller to Sprint PCS), Nokia and Vodafone.  Product revenue from Nokia and Vodafone   increased by $69,000 and $525,000, respectively, in the nine months ended   September 30, 2005, compared to the same period of 2004. Product revenue from   Hewlett-Packard (as a reseller to Sprint PCS) decreased by $839,000 in the   nine months ended September 30, 2005, compared to the same period in 2004.   New installations in 2005 have contributed $725,000 of product revenue in the   nine months ended September 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In the nine months ended September 30,   2005, our X-treme Mobility Gateway (XMG) product accounted for   approximately 66% of revenue from the X-treme Mobility Suite of products and   our AGW product accounted for approximately 17% of XMS revenue.  In the nine months ended September 30,   2004, our XMG and AGW products contributed approximately 73% and 23% of XMS   revenue, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Product revenue from our non-XMS products,   including those sold primarily to the financial services industry, was   $51,000 and $172,000 in the three and nine months ended September 30, 2005,   compared to $48,000 and $223,000 in the same periods in 2004. We will   continue to perform under the contracts we currently have with these   customers and anticipate that revenue from these customers will be   approximately $50,000 in the fourth quarter of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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| | We provide our customers with fixed or   variable pricing alternatives. In the three and nine months ended September   30, 2005, Hewlett-Packard (as a reseller to Sprint PCS) was the only   significant customer purchasing licenses on a fixed price basis, while in the   same period in 2004, essentially all of our key revenue producing contracts   for the XMS suite were on a variable pricing model.  We anticipate that the XMG and AGW products will generate most   of our XMS product revenue in the fourth quarter of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | SERVICE REVENUE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Service revenue increased to $3.2 million   and $8.9 million in the three and nine months ended September 30, 2005,   compared to $1.5 million and $3.8 million in the three and nine months ended   September 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In the three months ended September 30,   2005, service revenue from XMS increased to $3.0 million from $1.3 million in   the same period in 2004. Implementation and customer service fee revenue   related to XMS was approximately $1.6 million in the three months ended   September 30, 2005, compared to approximately $260,000 in the same period of   2004. Service revenue in the three months ended September 30, 2005 includes   approximately $214,000 in hardware. Maintenance revenue related to XMS   products increased to $1.3 million in the three months ended September 30,   2005 from $797,000 in the same period of 2004. Approximately 59% of this   increase was related to our XMG product, mostly due to increased maintenance   revenue from Hewlett-Packard (as a reseller to Sprint PCS), and approximately   32% of this increase was related to our AGW product. As discussed above, on   October 31, 2005, the subcontract agreement with respect to the deployment of   724
Solutions access gateway solution at Sprint between us and   Hewlett-Packard terminated. We expect this change will reduce our maintenance   revenue from Hewlett-Packard (as a reseller to Sprint) by approximately $262,000   per month beginning in November 2005 from the monthly revenue achieved from   January 2005 through October 2005.

34



| | In the nine months ended September 30,   2005, service revenue from XMS increased to $8.2 million from $3.0 million in   the same period in 2004. Implementation and customer service fee revenue   related to XMS was approximately $4.1 million in the nine months ended   September 30, 2005, compared to $773,000 in the same period of 2004.   Approximately 57% of this increase related to additional integration services   and the delivery of hardware at Vodafone and the remainder related mostly to   new implementations in Asia Pacific, Europe and North America. Maintenance   revenue related to XMS increased to $3.8 million in the nine months ended   September 30, 2005 from $2.0 million in the prior year period. Of the $1.8   million increase, approximately 54% was related to our XMG product, mostly   due to increased maintenance revenue from Hewlett-Packard (as a reseller to   Sprint PCS), and approximately 43% was related to our AGW product.
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Managed alerts services revenue from our   X-treme Alerts Platform included in XMS was $116,000 and $367,000 in the   three and nine months ended September 30, 2005, compared to $197,000 and   $273,000 in the same periods of 2004. Most of the revenue in 2004 and 2005   was derived from one customer that adopted this platform as part of its   customer retention and loyalty program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Service revenue from our non-XMS products,   including those sold primarily to the financial services industry, was   $181,000 and $672,000 in the three and nine months ended September 30, 2005,   compared to $236,000 and $813,000 in the corresponding periods in 2004. We   will continue to perform under the contracts we currently have with these customers   and anticipate that service revenue from these customers will be   approximately $180,000 in the fourth quarter of 2005. Our ability to achieve   this revenue, however, is dependent on our customers for these products   renewing their contracts.                                                                                                                                                                                                                                                                                                                                                         

| | OPERATING EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                         
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| | COST OF PRODUCT REVENUE                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Our product revenue consists of the sale of software licenses,   typically on a per user or capacity basis. There are no significant   out-of-pocket costs associated with the manufacture of our software. Costs   associated with our software are as follows:                                                                                                                                                           
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| | COST OF SERVICES REVENUE                                                                                                                                                                                                                                                                                                                                                                                                   
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| | Cost of services revenue consists primarily   of personnel costs associated with customer support, training and   implementations, as well as amounts paid to third-party consulting firms for   those services, together with an allocation of expenses for our facilities   and administration. It also includes the cost of hardware and third party   software our customers require us to purchase and resell to them.

35



| | Cost of services revenue increased to $1.8   million and $5.7 million for the three and nine months ended September 30,   2005, compared to $1.5 and $4.6 million for the same periods in 2004.   Hardware costs related to a customer deployment of approximately $155,000 and   $625,000 in the three and nine months ended September 30, 2005, respectively,   are included in these totals. Our integration, product support and managed   services related revenue were all significantly higher in the three and nine   months ended September 30, 2005, compared to the same periods in 2004, leading   to increased costs in these areas. Due to improved resource utilization, cost   of services revenue increased by a lower percentage than revenue. Cost of   services revenue, as a percentage of revenue, was 40% and 39% for the three   and nine months ended September 30, 2005, compared to 43% and 48% in the same   periods in 2004. Our average professional services headcount increased to
27   in the third quarter of 2005, compared to 14 in the same period of 2004, as   we added personnel to meet commitments to our customers. At the end of the   third quarter of 2005, we had 28 professional services personnel, compared to   16 at the end of the second quarter of 2004. Costs related to these personnel   increased by 64% and 35% in the three and nine months ended September 30, 2005,   compared to the same periods of 2004 while average headcount increased by 91%   and 70%, compared to the same periods of 2004. The geographic mix of our   professional services personnel changed from the third quarter of 2004 to the   third quarter of 2005, resulting in a lower cost per employee.
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| | RESEARCH AND DEVELOPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Research and development (R&D)   expenses include compensation of software development personnel working on   the continuing enhancement of our products and our quality assurance and   testing activities. These expenses also include the cost of retaining   independent contractors and consultants, software licensing expenses and   allocated operating expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Research and development expenses were $1.8   and $5.1 million for the three and nine months ended September 30, 2005,   compared to $1.4 and $4.9 million for the same periods in 2004. As part of   our 2004 restructuring initiative, we reduced our R&D headcount in the   first quarter of 2004 from 48 in January 2004 to 34 at March 31, 2004. Due to   our acquisition of the AGW product in the second quarter of 2004 and to meet   customer commitments in other areas, we have added R&D personnel since   March 2004. Our average R&D headcount in the three and nine months ended   September 30, 2005 was 56 and 52, compared to 45 and 43 in the corresponding   periods in 2004. Our R&D headcount at September 30, 2005 was 55, compared   to 47 at September 30, 2004. Costs related to R&D personnel increased by   19% in the three months ended September 30, 2005 and increased by 5% in the   nine months ended September 30, 2005, compared to the corresponding
periods   of 2004, while average headcount increased by 24% and 21% in the three and   nine months ended September 30, 2005, compared to the corresponding periods   in 2004. Our R&D costs have increased by a lower percentage than our   R&D headcount because we have a higher proportion of our development team   in more cost-effective locations. The average cost per R&D employee was   lower by 4% and 14% in the three and nine months ended September 30, 2005,   respectively, compared to the same periods in 2004.                                                                                                                                                                                                                  
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| | We continue to evaluate our R&D   expenditure needs based on our anticipated product development schedule and   the current market environment. R&D expense, as a percentage of revenue,   was 40% and 35% for the three and nine months ended September 30, 2005,   compared to 40% and 52% for the same periods in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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| | SALES AND MARKETING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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| | Sales and marketing (S&M) expenses   include compensation of sales and marketing personnel, public relations and   advertising, trade shows, marketing materials and allocated operating   expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

36



| | Sales and marketing expenses were $930,000   and $3.1 million for the three and nine months ended September 30, 2005,   compared to $1.1 million and $3.7 million for the same periods in 2004. The   average number of S&M personnel was 17 and 18, respectively, in the three   and nine months ended September 30, 2005, compared to 18 and 19 in the   corresponding periods of 2004.  At   both September 30, 2005 and 2004, we had 17 sales and marketing personnel. We   continue to monitor our sales and marketing expenditures to ensure that they   remain aligned with our targeted opportunities as well as prevailing market   conditions. S&M expense, as a percentage of revenue, was 21% for each of   the three and nine months ended September 30, 2005, compared to 31% and 38%   for the same periods in 2004.                                                                                                                                                       
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| | GENERAL AND ADMINISTRATIVE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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| | General and administrative (G&A)   expenses include salaries and benefits for corporate personnel and other   general and administrative expenses such as facilities, travel, professional   consulting costs and foreign exchanges gains and losses. Our corporate staff   includes several of our executive officers and our business development, financial   planning and control, legal, human resources and corporate administration   staff.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | G&A expenses were $748,000 and $2.4   million for the three and nine months ended September 30, 2005, compared to   $796,000 and $2.4 million for the same periods in 2004. Our average G&A   headcount in both the three and nine months ended September 30, 2005 was 13,   compared to 13 and 14, respectively, in the corresponding periods of 2004. At   September 30, 2005, the number of G&A personnel was 13, unchanged from September   30, 2004.  G&A personnel costs   increased by $27,000 and $51,000 in the three and nine months ended September   30, 2005, compared to the same periods of 2004. G&A expense, as a   percentage of revenue, was 17% and 16% for the three and nine months ended   September 30, 2005, compared to 23% and 25% for the same periods in 2004.                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | DEPRECIATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Depreciation expense was $150,000 and   $472,000 in the three and nine months ended September 30, 2005, compared to   $124,000 and $429,000 for the same periods in 2004. Over the past six   quarters, we have increased our investments in fixed assets to allow us to   pursue business opportunities. We anticipate that we will make further   purchases of fixed assets in the fourth quarter of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Effective January 1, 2003, we prospectively   adopted the fair value accounting for stock-based awards, as prescribed by   SFAS 123, Accounting for Stock-based Compensation.  Prior to January 1, 2003, we elected not to apply fair value   accounting to stock-based awards to employees, other than for direct awards   of stock and awards that may be settled in cash, which required fair value   accounting.  Prior to January 1, 2003,   for awards not elected to be accounted for under the fair value method, we   accounted for stock-based compensation in accordance with Accounting   Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB   25).  APB 25 is based upon an   intrinsic value method of accounting for stock-based compensation. Under this   method, compensation cost is measured as the excess, if any, of the quoted   market price of the stock issuance at the measurement date over the amount to   be paid by the
employee.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | We adopted fair value accounting for   stock-based awards using the prospective application transitional alternative   available in SFAS 148, Accounting for Stock-based Compensation - Transition   and Disclosure.  Accordingly, the fair   value method is applied to all awards granted, modified or settled on or after   January 1, 2003.  Under the fair value   method, compensation cost is measured at fair value at the date of grant and   is expensed over the service period, that is, the awards vesting   period.  When awards are exercised,   share capital is credited by the sum of the consideration paid together with   the related portion previously credited to additional paid-in capital when   compensation costs were charged against income or acquisition consideration.                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Stock-based compensation increased to   $348,000 and $700,000 for the three and nine months ended September 30, 2005,   compared to $39,000 and $89,000 for the corresponding periods in 2004. All   stock compensation expenses in both periods related to the expensing of the   fair value of options granted since January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

37



| | RESTRUCTURING COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In the three and nine months ended   September 30, 2005, we recorded restructuring charges of nil and nil,   compared to a reversal of $181,000 and a net charge of $1.0 million in the   corresponding periods of 2004. In the three months ended September 30, 2004,   we reversed $181,000 in hosting exit costs that were included as   Restructuring charges in the financial statements for the period ended June   30, 2004 because certain hosting exit charges were lower than we initially   expected.  As of September 30, 2004,   we had fully exited all hosting arrangements related to legacy customers.                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In the three months ended March 31, 2004,   we planned to reduce our worldwide work force by approximately 40 people and   consolidate facilities and, accordingly, recorded charges of $1.6 million   related to severances and $500,000 related to lease exit costs. These efforts   were to be implemented in order to reduce our overall operating costs and to   realign our operating expenses and investments with a view to achieving   operating profitability. Our acquisition of the AGW product in the second   quarter of 2004 caused us to cancel 17 of the planned terminations and to   reverse $900,000 in severance charges.                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Included in our Accrued Liabilities as at   September 30, 2005 is approximately $93,000 in remaining obligations arising   from our restructuring activity undertaken in 2002. Specifically, it relates   to the remaining costs associated with an office in Europe that we have   vacated. Although the space is sublet, we are obligated to refurbish the   space at the end of the lease. We expect to pay out the remaining balance by   the end of the first quarter of 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | We continue to evaluate costs on an ongoing   basis to determine if costs of a particular product or function are warranted   given the anticipated revenue from or contribution to the business of that   product or function.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | INTEREST EXPENSE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | We had net interest expenses of $172,000   and $538,000 in the three and nine months ended September 30, 2005, compared   to net interest expenses of $183,000 and $186,000 in the same periods of   2004. We issued $8.0 million in convertible notes in the second quarter of   2004 and the interest expense associated with this debt was $249,000 and   $738,000 in the three and nine months ended September 30, 2005. Interest   earned in the three and nine months ended September 30, 2005 was $77,000 and   $200,000 and was derived from cash and cash equivalent balances and   short-term investments, representing primarily the unused portion of the proceeds   from the convertible debt financing completed in the second quarter of 2004.                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Net interest expense is expected to be   approximately $188,000 in the fourth quarter of 2005; being $251,000 in   interest charges related to the convertible notes payable to related parties   offset by interest income of approximately $63,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | LOSS ON SETTLEMENT OF LIABILITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On January 3, 2005, we issued 33,549 common   shares with a market value of $268,000 in settlement of interest owing of   $103,000 and recorded a loss on settlement of liability of $165,000. The   payment was related to the extinguishment of the liability related to   interest due on the convertible notes payable to related parties. We have the   option of paying the interest portion due quarterly on the notes payable in   cash or shares at a conversion price of $3.07 (see note 3 to the interim   financial statements for further details). In the event we settle future   interest obligations in shares, we will record additional charges, the amount   of which will depend on the price of our shares at the time of settlement. No   interest payments were made in the three months ended September 30, 2005. In   the nine months ended September 30, 2005, we made cash payments totaling   $210,000 in settlement of interest due to Austin Ventures.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | NET LOSS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Our net loss was $1.5 million in the three   months ended September 30, 2005, compared to $1.5 million in the three months   ended September 30, 2004. Our net loss for the nine months ended September   30, 2005 decreased to $3.4 million from $7.7 million in the same period of   2004. The net loss in the three months ended September 30, 2004 included a   reversal of $181,000 in restructuring charges while the net loss in the nine   months ended September 30, 2004 included a charge of $1.0 million related to   restructuring charges.                                                                                                                                                                                                                                                                                                                                                                                                                             

38



| | Our year to date net loss has decreased   significantly from the same period in 2004 because revenue increased by $5.3   million while total operating expenses increased by $516,000, interest expense   increased by $352,000 and loss on settlement of liability increased by   $165,000, in each case, compared to the same period in 2004. The year to date   2004 net loss included the net $1.0 million restructuring charge discussed   above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | LIQUIDITY AND CAPITAL RESOURCES                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The following table presents selected   balance sheet information as of September 30, 2005 and December 31, 2004 (in   thousands of U.S. dollars):                                                                                                                                                                                                                                                                                                    

|                                              |  | September 30, 2005 |        | December 31, 2004 |  
|--------------------------------------------- |  | ------------------ | ------ | ----------------- | -
|                                              |  |                    |        |                   |  
|Cash and cash equivalents                     |  | $                  | 3,375  |                   | $
|Short-term investments                        |  |                    | 6,501  |                   |  
|Restricted cash                               |  |                    | 220    |                   |  
|                                              |  |                    |        |                   |  
|                                              |  |                    | 10,096 |                   |  
|Other current assets less current liabilities |  |                    | 1,966  |                   |  
|                                              |  |                    |        |                   |  
|Working capital                               |  | $                  | 12,062 |                   | $
|                                              |  |                    |        |                   |  

| | At September 30, 2005, our cash and   short-term investments and restricted cash were $10.1 million, compared to   $13.6 million at December 31, 2004, a reduction of $3.5 million.  The reduction was primarily due to uses of   cash in operating activities, most notably our loss excluding non-cash items   of $2.0 million in the nine months ended September 30, 2005 and the increase   in accounts receivable of $1.6 million, offset by a net cash flow from other   operating activities of approximately $400,000, as well as the purchase of   $332,000 in fixed assets in the nine months ended September 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Our accounts receivables balance as at   September 30, 2005 was $4.4 million, with approximately 93% of the balance   being either current or less than 30 days past due.  We did not incur any bad debt expense in the three and nine   months ended September 30, 2005 and 2004 and we believe that the current   reserve of $19,000 is sufficient and that our accounts receivable will be   collected. Our accrued liabilities balance of $2.0 million includes   approximately $93,000 related to our 2002 restructuring that we anticipate   will be paid in 2006.                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The following table presents selected cash   flow information for the three and nine months ended September 30, 2005 and   2004 (in thousands of U.S. dollars):                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                     |  | Three   months ended |        | Nine   months ended  |  
|---------------------------------------------------- |  | -------------------- | ------ | -------------------- | -
|                                                     |  |                      |        |                      |  
|                                                     |  | September   30, 2005 |        | September   30, 2004 |  
|                                                     |  |                      |        |                      |  
|Net cash flows from operating activities             |  | $                    | (1,294 | )                    | $
|Net cash flows from financing activities             |  |                      | 17     |                      |  
|Net cash flows from investing activities             |  |                      | 1,419  |                      |  
|Effect of exchange rate changes on cash              |  |                      | (15    | )                    |  
|                                                     |  |                      |        |                      |  
|Net increase (decrease) in cash and cash equivalents |  | $                    | 127    |                      | $
|                                                     |  |                      |        |                      |  

39



| | We had a net cash use from operating activities of $1.3 million in   the three months ended September 30, 2005, compared to a net cash use in   operating activities of $1.5 million in the same period of 2004. For the nine   months ended September 30, 2005, net cash used in operating activities   decreased to $3.3 million, compared to $8.2 million for the same period in   2004. Net cash used in operating activities for the three months ended   September 30, 2005 consisted of our net loss of $1.5 million offset by   non-cash items; specifically depreciation of $150,000, amortization of   deferred charges of $29,000 and stock-based compensation of $348,000 plus an   increase in accounts receivable of $641,000 (other working capital items   resulted in a net cash source $289,000). Net cash used in operating   activities for the three months ended September 30, 2004 consisted of our net   loss of $1.5 million and a cash outflow of $257,000 related to working   capital
account changes, offset by non-cash items, specifically depreciation   of $124,000, amortization of deferred charges of $29,000 and stock-based   compensation expense of $39,000. The improved cash flows from operations in   the three and nine months ended September 30, 2005, compared to the   corresponding periods in 2004 has been achieved through increased revenue   year over year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Financing activities provided a cash source of $17,000 and $61,000 in   the three and nine months ended September 30, 2005. These amounts were   related to the issuance of common shares on the exercise of options. Cash   flows from financing activities were nil and $7.6 million in the three and   nine months ended September 30, 2004. The amount in the nine months ended   September 30, 2004 was represents the proceeds from the convertible debt   issuance completed in the second quarter of 2004 of $8.0 million offset by   expenses of $352,000 related to the financing, recorded as deferred charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Cash used in investing activities, before the sale (purchase) of   short-term investments, business acquisitions and restricted cash was $57,000   and $332,000 in the three and nine months ended September 30, 2005, compared   to cash use of $133,000 and $681,000 in the same periods in 2004. The amount   in each period is related to the purchase of fixed assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | We anticipate our cash expenditures in the next four quarters will be   in the range of $5.3 million to $6.0 million per quarter. We will maintain   our focus on cost management and believe that our existing cash and cash   equivalents, short term investments and our estimated cash from sales in the   next twelve months will be sufficient to cover our cash requirements,   including planned capital expenditures, for at least the next twelve months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | While we have no current plans to raise additional capital, we may   seek to do so in the future depending upon market conditions and conditions   in our business.  We may also require   additional financing if we expand our operations at a faster rate than   currently anticipated, if we decide to increase our R&D investments, if   our costs unexpectedly increase, if our revenues decrease, if we lose one or   more significant customers, or if we seek to effect one or more significant   acquisitions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS  CANADA AND UNITED STATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In December 2004, the Financial Accounting Standards Board issued   Statement of Financial Accounting Standards No. 123R, Share Based Payment,   or SFAS 123R, which requires companies to expense the fair value of employee   stock options and other forms of share based compensation. Accordingly, SFAS   123R eliminates the use of the intrinsic value method to account for share   based compensation transactions as provided under APB Opinion No. 25. Under   SFAS 123R, we are required to determine the appropriate fair value model to   be used for valuing share based payments, the amortization method for   compensation cost and the transition method to be used at date of adoption.   We currently use the Black Scholes option pricing model to value options. The   use of a different model to value options may result in a different fair   value than the use of the Black Scholes option pricing model. We are required   to adopt SFAS 123R in the first quarter of
fiscal 2006. We are evaluating the   requirements of SFAS 123R to assess what impact its adoption will have on our   financial position and results of operations.                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In December 2003, the FASB issued FASB Interpretation No. 46 (revised   December 2003), Consolidation of Variable Interest Entities, which addresses   how a business enterprise should evaluate whether it has a controlling   financial interest in an entity through means other than voting rights and,   accordingly, should consolidate the entity. FIN 46R replaces FASB   Interpretation No. 46, Consolidation of Variable Interest Entities, which was   issued in January 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

40



| | We were required to apply FIN 46R to such variable interest entities   (VIEs) commencing with quarter ended March 31, 2004. For any VIEs that must   be consolidated under FIN 46R that were created before January 1, 2004, the   assets, liabilities and non-controlling interests of the VIE initially would   be measured at their carrying amounts with any difference between the net   amount added to the balance sheet and any previously recognized interest   being recognized as the cumulative effect of an accounting change. If   determining the carrying amounts is not practicable, fair value at the date FIN   46R first applies may be used to measure the assets, liabilities and   non-controlling interest of the VIE.    There has been no impact on our accounting as a result of applying FIN   46R.                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | FASB Statement No. 150, Accounting for Certain Financial Instruments   with Characteristics of both Liabilities and Equity, was issued in May 2003.   This Statement establishes standards for the classification and measurement   of certain financial instruments with characteristics of both liabilities and   equity. The Statement also includes required disclosures for financial   instruments within its scope. For us, the statement was effective for   instruments entered into or modified after May 31, 2003 and otherwise   effective as of January 1, 2004, except for mandatorily redeemable financial   instruments. For certain mandatorily redeemable financial instruments, the   Statement will be effective for us on January 1, 2005.  The effective date has been deferred   indefinitely for certain other types of mandatorily redeemable financial instruments.  We currently do not have any financial   instruments that are within the scope of this
Statement.

41



| | RESULTS OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The following table sets forth certain   unaudited consolidated statements of operations data for each of the eight   most recent quarters that, in managements opinion, have been prepared on a   basis consistent with the unaudited consolidated financial statements   contained elsewhere in this interim report and include all adjustments,   consisting only of normal recurring adjustments, necessary for a fair   presentation of the information presented. These operating results are not   necessarily indicative of results for any future period. You should not rely   on them to predict our future performance.

|Quarter ended   (In thousands of U.S. dollars, except number of shares and per share amounts)         |  | Sept. 30,   2005 |        | Jun. 30,   2005 |   | Mar. 31,   2005 |   | Dec. 31   2004 |       | Sept. 30   2004 |   | Jun. 30   2004 |   | Mar. 31,   2004 |        | Dec. 31   2003 |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | --------------- | - | --------------- | - | -------------- | ----- | --------------- | - | -------------- | - | --------------- | ------ | -------------- | -
|                                                                                                      |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Revenue                                                                                               |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Product                                                                                               |  | $                | 1,295  |                 | $ | 1,704           |   | $              | 2,985 |                 | $ | 3,140          |   | $               | 2,013  |                | $
|Services                                                                                              |  |                  | 3,166  |                 |   | 2,912           |   |                | 2,820 |                 |   | 2,380          |   |                 | 1,489  |                |  
|                                                                                                      |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Total revenue                                                                                         |  |                  | 4,461  |                 |   | 4,616           |   |                | 5,805 |                 |   | 5,520          |   |                 | 3,502  |                |  
|Operating expenses:                                                                                   |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Cost   of product revenue                                                                             |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Other                                                                                                 |  |                  | 10     |                 |   | 10              |   |                | 5     |                 |   | 26             |   |                 |       |                |  
|Cost   of service revenue                                                                             |  |                  | 1,804  |                 |   | 1,907           |   |                | 2,026 |                 |   | 2,044          |   |                 | 1,505  |                |  
|Research   and development                                                                            |  |                  | 1,768  |                 |   | 1,693           |   |                | 1,687 |                 |   | 1,339          |   |                 | 1,410  |                |  
|Sales   and marketing                                                                                 |  |                  | 930    |                 |   | 1,023           |   |                | 1,168 |                 |   | 1,316          |   |                 | 1,093  |                |  
|General   and administrative                                                                          |  |                  | 748    |                 |   | 853             |   |                | 804   |                 |   | 690            |   |                 | 796    |                |  
|Depreciation                                                                                          |  |                  | 150    |                 |   | 165             |   |                | 157   |                 |   | 166            |   |                 | 124    |                |  
|Stock-based   compensation:                                                                           |  |                  |       |                 |   |                |   |                |      |                 |   |               |   |                 |       |                |  
|Cost   of revenue                                                                                     |  |                  | 19     |                 |   | 15              |   |                | 7     |                 |   | 6              |   |                 | 4      |                |  
|Research   and development                                                                            |  |                  | 43     |                 |   | 35              |   |                | 19    |                 |   | 17             |   |                 | 10     |                |  
|Sales   and marketing                                                                                 |  |                  | 53     |                 |   | 43              |   |                | 16    |                 |   | 14             |   |                 | 9      |                |  
|General   and administrative                                                                          |  |                  | 233    |                 |   | 186             |   |                | 31    |                 |   | 26             |   |                 | 16     |                |  
|Restructuring   costs                                                                                 |  |                  |       |                 |   |                |   |                |      |                 |   | (26            | ) |                 | (181   | )              |  
|Write-down   of goodwill, intangible and other assets                                                 |  |                  |       |                 |   |                |   |                |      |                 |   |               |   |                 |       |                |  
|                                                                                                      |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Total   operating expenses                                                                            |  |                  | 5,758  |                 |   | 5,930           |   |                | 5,920 |                 |   | 5,618          |   |                 | 4,786  |                |  
|                                                                                                      |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Loss from operations                                                                                  |  |                  | (1,297 | )               |   | (1,314          | ) |                | (115  | )               |   | (98            | ) |                 | (1,284 | )              |  
|Interest income (expense),   net                                                                      |  |                  | (172   | )               |   | (180            | ) |                | (186  | )               |   | (210           | ) |                 | (183   | )              |  
|Loss on settlement of   liability                                                                     |  |                  |       |                 |   |                |   |                | (165  | )               |   |               |   |                 |       |                |  
|Gain on sale of investments                                                                           |  |                  |       |                 |   |                |   |                |      |                 |   |               |   |                 |       |                |  
|                                                                                                      |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Loss for the period                                                                                   |  | $                | (1,469 | )               | $ | (1,494          | ) | $              | (466  | )               | $ | (308           | ) | $               | (1,467 | )              | $
|                                                                                                      |  |                  |        |                 |   |                 |   |                |       |                 |   |                |   |                 |        |                |  
|Basic and diluted loss per   share                                                                    |  | $                | (0.24  | )               | $ | (0.25           | ) | $              | (0.08 | )               | $ | (0.05          | ) | $               | (0.25  | )              | $
|Weighted-average number of   shares used in computing basic and diluted loss per share (in thousands) |  |                  | 6,036  |                 |   | 6,033           |   |                | 6,027 |                 |   | 5,985          |   |                 | 5,983  |                |  

| | INFORMATION REGARDING FORWARD-LOOKING STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Statements contained in this report which are not historical facts   are forward-looking statements within the meaning of Section 21E of the U.S.   Securities Exchange Act of 1934, as amended. A forward-looking statement may   contain words such as anticipate that, believes, continue to,   estimates, expects to, hopes, intends, plans, to be, will be,   will continue to be, or similar words. These forward-looking statements   include the statements herein regarding: future

42



| | developments in our markets and the markets in which we expect to   compete, including the wireless communications industry; our future ability   to fund our operations and become profitable; our development of new products   and relationships; the services that we or our customers will introduce and   the benefits that end users will receive from these services; our plans to   use or not to use certain types of technologies in the future; our future   revenue and cost of revenue, the composition of our future revenues, gross   margins and net losses; our future restructuring, research and development,   sales and marketing, general and administrative, stock-based compensation,   depreciation and amortization expenses; our future interest income and   expense; the value of our goodwill and other intangible assets; the   collectability of our accounts receivable; our future capital expenditures,   cash use and capital requirements; and the anticipated impact of
changes in   applicable accounting rules.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The accuracy of these statements may be impacted by a number of   business risks and uncertainties that could cause actual results to differ   materially from those projected or anticipated. These risks include the risks   described in our SEC filings, including our annual report on Form 10-K. These   risks are also described in our   filings with the Canadian Securities Administrators, including our   prospectuses, material change reports, Annual Information Form and Management   Information Circular. We encourage you to carefully review these risks in   order to evaluate an investment in our securities. Some of the key risks that   could cause actual results to differ materially from those projected or   anticipated also include the risks discussed below. We do not undertake any   obligation to update this forward-looking information, except as required   under applicable law.                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | GENERAL INDUSTRY, ECONOMIC AND MARKET   CONDITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Our future revenues and operating results   are dependent to a large extent upon general economic conditions, conditions   in the wireless market and within the wireless market, our primary target   market of mobile network operators. If general economic conditions are   adverse, if the economies in which our target customers are located enter   into a recession, or if demand for our solutions does not expand, our ability   to increase our customer base may be limited, our revenue may not increase   and our revenue could decrease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | MOBILE NETWORK OPERATOR FOCUS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | We have made mobile network operators the   main focus of our activities. Our future success depends on our ability to   increase revenues from sales of our software and services directly and   indirectly to mobile network operators. We may not be able to attract a large   number of these customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Currently, only a limited number of mobile   network operators and other customers have implemented and deployed services   based on our products. Mobile network operators may not widely deploy or   successfully sell services based on our software and services, and   subscribers to these services may not seek to use them. Any developments of   this kind could limit our ability to sell our solutions to companies in this   industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | In addition, our success is dependent upon   increased adoption by end users of the services that are based on our   software and services. Mobile network operators and their competitors (for   example, other communications providers) may successfully deploy and market   other services that compete with the services that are based on our   technology. If subscribers of our mobile network operator customers do not   increase their use of services that are based on our software and services,   our operating results will be harmed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

43



| | COMPETITIVE LANDSCAPE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Many of our competitors are significantly   larger than us in terms of revenue, marketing and research and development   expenditures and numbers of employees in their sales, services and support   organizations. The competitors we face on our X-treme Mobility Suite sales   opportunities include Nokia, Ericsson, Comverse, Alcatel and Openwave. Our   success is dependent on our ability to win our share of these opportunities   against these larger competitors and to retain our customers. Many of these   competitors are able to bundle other products (including handsets and/or   network equipment) into sales of competitive products, which they might argue   is more beneficial to their customers.    We do not believe that we can offer similar product bundles, which   could prevent us from competing with these competitors, offering similar   pricing, retaining key customers or acquiring new customers. These   competitors with greater resources may also be in a
better position than us   to make necessary or advantageous investments in the development or   acquisition of new products and services. Additionally, in some of our   messaging deals, we see price-driven competition from smaller private   companies, particularly European-based companies, including First Hop.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | CUSTOMER CONCENTRATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | To date, a significant portion of our   revenues in any particular period has been attributable to a limited number   of customers. In the three months ended September 30, 2005, 38% of our   revenue was derived from Hewlett-Packard (as reseller to Sprint PCS), 18% was   derived from Vodafone and 13% was derived from Nokia.  Most of our revenue from these customers   and our other customers depends on their or their customers continued use of   our products. If our customers or their customers discontinue or materially   reduce their use of our products, or obtain one or more additional suppliers   of competing software and services, our revenues will decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | As discussed under Product Revenue and   Service Revenue in Results of Operations above, on October 31, 2005, the   subcontract agreement with respect to the deployment of 724 Solutions access   gateway solution at Sprint between us and Hewlett-Packard terminated. We   expect this change will reduce our total product and service revenue from   Hewlett-Packard (as a reseller to Sprint) by approximately $545,000 per month   beginning in November 2005 from the monthly revenue achieved from January   2005 through October 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | We believe that we may continue to rely   upon a limited number of customers for a significant portion of our revenues   in the foreseeable future, and any failure by us to capture or retain a   significant share of these customers could materially harm our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Also, if our customer base consolidates, we   will have increased dependence on a few customers who may be able to exert increased pressure on our prices   and contractual terms in general.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | INTERNATIONAL MARKETS                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                              
| | We expect that sales in international markets   will be a major factor in our growth, particularly since the use of wireless   networks and wireless devices have generally proceeded more rapidly outside   North America.  Risks inherent in   conducting business internationally include:
| |                                                                                                                                                                                                                                                                                              
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| |                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                              
| | Any of these factors could harm our   international operations and, consequently, our operating results and growth.                                                                                                                                                                          

44



| | LIQUIDITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | In order to help ensure that we would have sufficient   capital to take advantage of our core business opportunities, we have taken   significant actions to reduce our operating expenses and in the first half of   2004, raised $8 million by issuing convertible debt. However, most of our   operating expenses, such as employee compensation and lease payments for   facilities and equipment, are relatively stable, and these expense levels are   based in part on our expectations regarding future revenues. As a result, any   sustained shortfall in our revenues relative to our expectations would   negatively impact our operating results. Accordingly, if the cost-cutting   actions that we have taken are insufficient, we may not have sufficient   capital to fund our operations, and additional capital may not be available   on acceptable terms, if at all. Any of these outcomes could adversely impact   our ability to respond to competitive pressures or could prevent us from
 conducting all or a portion of our planned operations. We may need to   undertake additional measures to reduce our operating expenses in the future.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | INVESTMENTS IN OTHER COMPANIES AND NEW   TECHNOLOGIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Because of our desire to manage our cash   expenditures, as well as other factors, we may limit equity investments in   other companies and the purchase of new technologies during the next few   fiscal quarters, and possibly longer. As a result, we may not take advantage   of investment opportunities that could provide us significant financial   benefits, or that could provide us with the opportunity to build relationships   with other companies in our industry and target markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | RECEIVABLES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | A significant portion of our receivables is   derived from customers in foreign countries. Due to varying economic   conditions and business practices in these countries, our collections cycle   from these customers may be longer than with our North American customers. In   the event of adverse economic conditions, there will be a greater risk that   our customers will have difficulties in paying us in accordance with the   terms of their contracts, and our risk of bad debt may increase   substantially.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | EMPLOYEES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Our ability to execute our business   successfully depends in large part upon our ability to have a sufficient   number of qualified employees to achieve our goals. There are only a limited   number of persons with the requisite skills to serve in many key management   and non-management positions, and it is difficult to retain and hire these   persons. If we are unable to do so, our business could be negatively   affected. The morale of our current employees may have been adversely   affected by previous workforce reductions, impacting performance. It may be   more difficult in the future for us to attract new employees if our   reputation is harmed as a result of these staffing reductions or otherwise.                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | GROSS MARGINS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | We believe that certain factors in the   current market may contribute to the risk that our gross margins will   decrease in future fiscal quarters. We may have to lower our prices in order   to accommodate our customers. In addition, many of our customers are   reluctant to make a commitment to pay large upfront license fees or to   guarantee purchases of a minimum number of licenses or licensed capacity,   which could also cause our revenues to decrease. Some mobile network operators   are also unwilling to pay for installations and customizations to our   products, which could negatively impact our operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | INTELLECTUAL PROPERTY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Although we are not currently aware of any   claims asserted by third parties that our products infringe their   intellectual property rights, in the future, third parties may assert claims   of this kind. We cannot predict whether third parties will assert these types   of claims against us or against the licensors of technology licensed to us,   or whether those claims will harm our business. If we are forced to defend   against these types of claims, whether they are with or without any merit or   whether they are resolved in favor of or against us or our licensors, we may   face costly litigation and diversion of managements attention and resources.   As a result of these disputes, we may have to develop costly non-infringing   technology, or enter into licensing agreements. These agreements, if   necessary, may not be available on acceptable terms, or at all, which could   prevent us from selling our products, increase our expenses or make our
products less attractive to customers.                                                                                                                              

45



| | LITIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Company and certain of its former   officers and directors were named as defendants in a series of purported   class actions relating to our initial public offering (see note 9 to our   consolidated financial statements). Litigation may be time consuming,   expensive, and distracting from the conduct of our business, and the outcome   of litigation may be difficult to predict. The adverse resolution of this   class action litigation or any other proceedings could have a material   adverse effect on our business, results of operations, and financial   condition.

|Item 3. | Quantitative and Qualitative Disclosures About   Market Risk.
|------- | -------------------------------------------------------------

IMPACT OF INTEREST RATE EXPOSURE

As of September 30, 2005, we had
approximately $10.1 million in cash, cash equivalents, short-term investments
and restricted cash, of which $6.7 million consisted of short-term investments
and restricted cash. A significant portion of the cash earns interest at
variable rates. In addition, although our short-term investments are fixed-rate
instruments, the average term is short. Accordingly, our interest income is
effectively sensitive to changes in the level of prevailing interest rates. Our
convertible notes payable to related parties bear interest at a fixed rate.

IMPACT OF FOREIGN EXCHANGE RATE
EXPOSURE

Our functional currency is the U.S.
dollar, as we recognize the majority of our revenues in U.S. dollars.  In
the foreseeable future, the majority of our non-US dollar denominated expenses
will be incurred in Canadian dollars, Euros, Swiss francs and United Kingdom
pounds sterling. Changes in the value of these currencies relative to the U.S.
dollar may result in currency gains and losses, which could affect our operating
results.  We do not currently hedge against these currency fluctuations. In
the three months ended September 30, 2005, we incurred realized and unrealized
foreign currency losses relating to the translation of our non-U.S. dollar
denominated monetary assets and liabilities of approximately $2,000.

|Item 4. | Controls and Procedures.
|------- | ------------------------

Prior to the filing date of this report, management, including the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness and operation of the Companys disclosure controls and procedures.  The Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2005, the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. The Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

46



|PART II. | OTHER INFORMATION 
|-------- | ------------------
|         |                   
|Item 1.  | Legal Proceedings.

In June 2001, 724 Solutions, Inc. (the Company) was named as a defendant in a securities class action filed in United States District Court for the Southern District of New York related to its initial public offering (IPO) in January 2000.  The lawsuits also named certain of the underwriters of the IPO, including Credit Suisse First Boston Corporation and FleetBoston Robertson Stephens, as well as former officers and directors of the Company Gregory Wolfond, Christopher Erickson, Andre Boysen, Kerry McLellan, and Karen Basian, as defendants.  Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York (the IPO Litigation).  The complaints allege that the prospectus and the registration statement for the IPO failed to
disclose that the underwriters allegedly solicited and received excessive commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Companys stock.  A consolidated amended complaint was filed April 19, 2002.  The Company and its former officers and directors are named in the suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and other related provisions.  The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.

On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss the IPO Litigation, including the action involving the Company.  On July 15, the Company, along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation.  On February 19, 2003, the Court ruled on the motions.  The Court denied the Companys motion to dismiss the claims against it under Rule 10b-5.  The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including the Company.  In addition, the individual defendants in the IPO Litigation, Gregory Wolfond, Christopher Erickson, Andre Boysen, Kerry McLellan, and Karen Basian signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.

In June 2003, a proposed settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers insurance companies.  On or about July 2, 2003, a committee of the Companys Board of Directors conditionally approved the proposed partial settlement. The settlement would provide, among other things, a release of the Company and of the individual defendants for the conduct alleged to be wrongful in the amended complaint.  The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters.  Any direct financial impact of the proposed settlement is expected to be borne by the Companys insurance carriers.

In June 2004, an agreement of settlement was submitted to the court for preliminary approval.  The court requested that any objections to preliminary approval of the settlement be submitted by July 14, 2004, and the underwriter defendants formally objected to the settlement.  The plaintiffs and issuer defendants separately filed replies to the underwriter defendants objections to the settlement on August 4, 2004.  The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications.

On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes.  The court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005 and completed by January 15, 2006.  The settlement fairness hearing has been set for April 26, 2006.  Following the hearing, if the court determines that the settlement is fair to the class members, the settlement will be approved.  There can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all.

47



Due to the inherent uncertainties of
litigation, and because the settlement approval process is at a preliminary
stage, we cannot accurately predict the ultimate outcome of the matter.

|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

None.

|Item 3. | Defaults upon Senior Securities.
|------- | --------------------------------

None.

|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

Not applicable.

|Item 5. | Other Information.
|------- | ------------------

None.

|Item 6. | Exhibits.
|------- | ---------

The following exhibits are filed with this Report:

| | No.  |  | Description                                                             
| | ---- |  | ------------------------------------------------------------------------
| |      |  |                                                                         
| | 31.1 |  | Rule   13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
| | 31.2 |  | Rule   13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
| | 32.1 |  | Section 1350   Certification of the Chief Executive Officer.            
| | 32.2 |  | Section 1350   Certification of the Chief Financial Officer.            

48



SIGNATURES

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

|Signatures          |  | Titles                                                                   |  | Date               
|------------------- |  | ------------------------------------------------------------------------ |  | -------------------
|                    |  |                                                                          |  |                    
|/s/ John J.   Sims  |  | Chief   Executive Officer (principal   executive officer)                |  | November 14,   2005
|                    |  |                                                                          | 
|John J. Sims        |  |                                                                          |  |                    
|                    |  |                                                                          |  |                    
|/s/ Glenn   Barrett |  | Chief   Financial Officer (principal financial   and accounting officer) |  | November 14,   2005
|                    |  |                                                                          | 
|Glenn   Barrett     |  |                                                                          |  |                    

49