SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q

|ý |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2006.

or

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

Commission File Number: 000-31146

724 SOLUTIONS INC.

(Exact Name of Registrant as Specified in its Charter)

|Canada(State or Other Jurisdiction of
Incorporation or Organization) |  | Inapplicable(I.R.S. Employer
Identification No.) |  | 93101(Zip Code)
|-------------------------------------------------------------------- |  | ------------------------------------------------ |  | ---------------

1221 State Street, Suite 200, Santa Barbara, CA(Address of Principal Executive Office)

(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.

Yes

ý

No

o


Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

o

Accelerated Filer

o

Non-Accelerated Filer

ý


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

Yes

o

No

ý


Common
Shares, no par value  6,074,703 shares outstanding as of May 12, 2006
(together with associated rights to purchase additional Common Shares)



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724 SOLUTIONS INC.

Table of Contents

|PART I.    |          | FINANCIAL INFORMATION |                                                                                       | 1 
|---------- | -------- | --------------------- | ------------------------------------------------------------------------------------- | --
|           | Item 1.  |                       | Financial Statements                                                                  |   
|           | Item 2.  |                       | Management's Discussion and Analysis of Financial Condition and Results of Operations |   
|           | Item 3.  |                       | Quantitative and Qualitative Disclosures About Market Risk                            |   
|           | Item 4.  |                       | Controls and Procedures                                                               |   
|PART II.   |          | OTHER INFORMATION     |                                                                                       | 39
|           | Item 1.  |                       | Legal Proceedings                                                                     |   
|           | Item 1A. |                       | Risk Factors                                                                          |   
|           | Item 2.  |                       | Unregistered Sales of Equity Securities and Use of Proceeds                           |   
|           | Item 3.  |                       | Defaults upon Senior Securities                                                       |   
|           | Item 4.  |                       | Submission of Matters to a Vote of Security Holders                                   |   
|           | Item 5.  |                       | Other Information                                                                     |   
|           | Item 6.  |                       | Exhibits                                                                              |   
|SIGNATURES |          | 47                   

i

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements.

724 SOLUTIONS INC.        CONSOLIDATED BALANCE SHEETS        (In thousands of U.S. dollars)  March 31, 2006 and December 31, 2005

|                                                                          |                                                                   | 2006                    |                                                         | 2005     |  
|------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------- | ------------------------------------------------------- | -------- | -
|
|Assets                                                                    |                                                                   |                         |                                                         |          |  
|Current assets:                                                           |                                                                   |                         |                                                         |          |  
|                                                                          | Cash and cash equivalents (note 2)                                |                         | $                                                       | 3,698    |  
|                                                                          | Short-term investments (note 2)                                   |                         |                                                         | 1,475    |  
|                                                                          | Restricted cash (note 2)                                          |                         |                                                         | 221      |  
|                                                                          | Accounts receivable  trade, net of allowance of $19 (2005  $19) |                         |                                                         | 4,278    |  
|                                                                          | Prepaid expenses and other receivables                            |                         |                                                         | 725      |  
|                                                                          |                                                                   |                         |                                                         |          |  
|                                                                          | Total current assets                                              |                         |                                                         | 10,397   |  
|Deferred charges                                                          |                                                                   |                         | 138                                                     |          |  
|Fixed assets, net of accumulated amortization of $14,095 (2005  $13,884) |                                                                   |                         | 713                                                     |          |  
|                                                                          |                                                                   |                         |                                                         |          |  
|                                                                          |                                                                   | $                       | 11,248                                                  |          | $
|                                                                          |                                                                   |                         |                                                         |          |  
|Liabilities and shareholders' equity (deficit)                            |                                                                   |                         |                                                         |          |  
|Current liabilities:                                                      |                                                                   |                         |                                                         |          |  
|                                                                          | Accounts payable                                                  |                         | $                                                       | 334      |  
|                                                                          | Accrued liabilities                                               |                         |                                                         | 2,121    |  
|                                                                          | Interest payable to related parties                               |                         |                                                         | 110      |  
|                                                                          | Deferred revenue                                                  |                         |                                                         | 151      |  
|                                                                          |                                                                   |                         |                                                         |          |  
|                                                                          | Total current liabilities                                         |                         |                                                         | 2,716    |  
|                                                                          | Convertible notes payable to related parties in 2007 (note 3)     |                         |                                                         | 7,975    |  
|                                                                          | Long-term interest payable to related parties in 2007 (note 3)    |                         |                                                         | 878      |  
|                                                                          |                                                                   |                         |                                                         |          |  
|                                                                          | Total liabilities                                                 |                         |                                                         | 11,569   |  
|Shareholders' equity (deficit):                                           |                                                                   |                         |                                                         |          |  
|                                                                          | Share capital (note 5):                                           |                         |                                                         |          |  
|                                                                          |                                                                   | Authorized:             |                                                         |          |  
|                                                                          |                                                                   |                         | Unlimited common shares                                 |          |  
|                                                                          |                                                                   |                         | Unlimited preferred shares                              |          |  
|                                                                          |                                                                   | Issued and outstanding: |                                                         |          |  
|                                                                          |                                                                   |                         | 6,074,703 common shares (December 31, 2005  6,039,444) |          |  
|                                                                          | Additional paid-in capital                                        |                         |                                                         | 1,334    |  
|                                                                          | Accumulated deficit                                               |                         |                                                         | (766,847 | )
|                                                                          | Accumulated other comprehensive income                            |                         |                                                         | 207      |  
|                                                                          |                                                                   |                         |                                                         |          |  
|                                                                          | Total shareholders' equity (deficit)                              |                         |                                                         | (321     | )
|Contingent liabilities (note 9)                                           |                                                                   |                         |                                                         |          |  
|                                                                          |                                                                   |                         |                                                         |          |  
|                                                                          |                                                                   | $                       | 11,248                                                  |          | $
|                                                                          |                                                                   |                         |                                                         |          |  

See accompanying notes to consolidated financial statements.

1

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724 SOLUTIONS INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands of U.S. dollars)  Three months ended March 31, 2006 and 2005  (Unaudited)

|                                                                                                    |                            | 2006                       |        | 2005  |    
|--------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ------ | ----- | ---
|Revenue:                                                                                            |                            |                            |        |       |    
|                                                                                                    | Product                    |                            | $      | 1,679 |    
|                                                                                                    | Services                   |                            |        | 1,583 |    
|                                                                                                    |                            |                            |        |       |    
|                                                                                                    |                            |                            | 3,262  |       |    
|Operating expenses:                                                                                 |                            |                            |        |       |    
|                                                                                                    | Cost of product revenue    |                            |        | 3     |    
|                                                                                                    | Cost of services revenue   |                            |        | 1,412 |    
|                                                                                                    | Research and development   |                            |        | 2,021 |    
|                                                                                                    | Sales and marketing        |                            |        | 1,107 |    
|                                                                                                    | General and administrative |                            |        | 1,127 |    
|                                                                                                    | Depreciation               |                            |        | 211   |    
|                                                                                                    | Stock-based compensation:  |                            |        |       |    
|                                                                                                    |                            | Cost of revenue            |        |       | 12 
|                                                                                                    |                            | Research and development   |        |       | 29 
|                                                                                                    |                            | Sales and marketing        |        |       | 36 
|                                                                                                    |                            | General and administrative |        |       | 163
|                                                                                                    |                            |                            |        |       |    
|                                                                                                    |                            |                            | 6,121  |       |    
|                                                                                                    |                            |                            |        |       |    
|Loss from operations                                                                                |                            |                            | (2,859 | )     |    
|Interest income (expense), net                                                                      |                            |                            | (191   | )     |    
|Loss on settlement of liability (note 3)                                                            |                            |                            | (19    | )     |    
|                                                                                                    |                            |                            |        |       |    
|Net loss before cumulative effect of accounting change                                              |                            |                            | (3,069 | )     |    
|Cumulative effect of accounting change (note 5c)                                                    |                            |                            | 218    |       |    
|                                                                                                    |                            |                            |        |       |    
|Net loss for the period                                                                             |                            | $                          | (2,851 | )     | $  
|                                                                                                    |                            |                            |        |       |    
|Basic and diluted loss per share                                                                    |                            | $                          | (0.47  | )     | $  
|                                                                                                    |                            |                            |        |       |    
|Weighted-average number of shares used in computing basic and diluted loss per share (in thousands) |                            |                            | 6,074  |       |    
|                                                                                                    |                            |                            |        |       |    

See accompanying notes to consolidated financial statements.

2

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724 SOLUTIONS INC.        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)  AND COMPREHENSIVE INCOME (LOSS)        (In thousands of U.S. dollars, except share amounts)  Three
months ended March 31, 2006 and 2005 (unaudited)

|                                       |  | Common shares |  |   |         |  |   |       |   |   |         
|-------------------------------------- |  | ------------- |  | - | ------- |  | - | ----- | - | - | --------
|
|
|Balances December 31, 2004             |  | 5,989,300     |  | $ | 764,530 |  | $ | 279   |   | $ | (757,921
|Loss for the period                    |  |              |  |   |        |  |   |      |   |   | (466    
|Cumulative translation adjustment      |  |              |  |   |        |  |   |      |   |   |        
|                                       |  |               |  |   |         |  |   |       |   |   |         
|Total comprehensive loss               |  |               |  |   |         |  |   |       |   |   |         
|                                       |  |               |  |   |         |  |   |       |   |   |         
|Issuance on exercise of options        |  | 9,972         |  |   | 41      |  |   |      |   |   |        
|Issuance of common shares              |  | 33,549        |  |   | 268     |  |   |      |   |   |        
|Stock-based compensation expense       |  |              |  |   |        |  |   | 73    |   |   |        
|                                       |  |               |  |   |         |  |   |       |   |   |         
|Balances, March 31, 2005               |  | 6,032,821     |  | $ | 764,839 |  | $ | 352   |   | $ | (758,387
|                                       |  |               |  |   |         |  |   |       |   |   |         
|Balances December 31, 2005             |  | 6,039,444     |  | $ | 764,859 |  | $ | 1,312 |   | $ | (763,996
|Cumulative effect of accounting change |  |              |  |   |        |  |   | (218  | ) |   |        
|Loss for the period                    |  |              |  |   |        |  |   |      |   |   | (2,851  
|Issuance of common shares              |  | 35,259        |  |   | 126     |  |   |      |   |   |        
|Stock-based compensation expense       |  |              |  |   |        |  |   | 240   |   |   |        
|                                       |  |               |  |   |         |  |   |       |   |   |         
|Balances, March 31, 2006               |  | 6,074,703     |  | $ | 764,985 |  | $ | 1,334 |   | $ | (766,847
|                                       |  |               |  |   |         |  |   |       |   |   |         

See accompanying notes to consolidated financial statements.

3

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724 SOLUTIONS INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands of U.S. dollars)  Three months ended March 31, 2006 and 2005  (Unaudited)

|                                                |                                                    | 2006                                          |        | 2005   |       
|----------------------------------------------- | -------------------------------------------------- | --------------------------------------------- | ------ | ------ | ------
|Cash flows from (used in) operating activities: |                                                    |                                               |        |        |       
|                                                | Loss for the period                                |                                               | $      | (2,851 | )     
|                                                | Items not affecting cash:                          |                                               |        |        |       
|                                                |                                                    | Depreciation and amortization                 |        |        | 211   
|                                                |                                                    | Amortization of deferred charges              |        |        | 29    
|                                                |                                                    | Stock-based compensation                      |        |        | 240   
|                                                |                                                    | Loss on settlement of liability               |        |        | 19    
|                                                |                                                    | Cumulative effect of accounting change        |        |        | (218  
|                                                |                                                    | Other non-cash items                          |        |        | 132   
|                                                | Change in operating assets and liabilities:        |                                               |        |        |       
|                                                |                                                    | Accounts receivable                           |        |        | (1,807
|                                                |                                                    | Prepaid expenses and other receivables        |        |        | (203  
|                                                |                                                    | Accounts payable                              |        |        | (24   
|                                                |                                                    | Long-term liabilities                         |        |        |      
|                                                |                                                    | Long-term interest payable to related parties |        |        | 110   
|                                                |                                                    | Accrued liabilities                           |        |        | 499   
|                                                |                                                    | Deferred revenue                              |        |        | (138  
|                                                |                                                    |                                               |        |        |       
|                                                | Net cash flows used in operating activities        |                                               |        | (4,001 | )     
|Cash flows from financing activities:           |                                                    |                                               |        |        |       
|                                                | Issuance of common shares on exercise of options   |                                               |        |       |       
|                                                |                                                    |                                               |        |        |       
|                                                | Net cash flows from financing activities           |                                               |        |       |       
|Cash flows from (used in) investing activities: |                                                    |                                               |        |        |       
|                                                | Purchase of fixed assets, net                      |                                               |        | (87    | )     
|                                                | Maturity of short-term investments                 |                                               |        | 2,500  |       
|                                                | Purchases of short-term investments                |                                               |        |       |       
|                                                |                                                    |                                               |        |        |       
|                                                | Net cash flows from (used in) investing activities |                                               |        | 2,413  |       
|                                                |                                                    |                                               |        |        |       
|Effect of exchange rate changes on cash         |                                                    |                                               | 14     |        |       
|                                                |                                                    |                                               |        |        |       
|Net decrease in cash and cash equivalents       |                                                    |                                               | (1,574 | )      |       
|Cash and cash equivalents, beginning of period  |                                                    |                                               | 5,272  |        |       
|                                                |                                                    |                                               |        |        |       
|Cash and cash equivalents, end of period        |                                                    | $                                             | 3,698  |        | $     
|                                                |                                                    |                                               |        |        |       

See accompanying notes to consolidated financial statements.

4

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1.     Basis of presentation:



2.     Cash and cash equivalents and short-term investments:



5

---



3.     Convertible notes payable to related parties:



6

---





7

---





4.     Segment information:



March 31,
2006

March 31,
2005United States

$
2,002

$
2,286Europe


1,204


3,334Asia Pacific


56


185Canada





$
3,262

$
5,805




8

---





March 31,
2006

December 31,
2005Canada

$
528

$
621United States


3


74Europe


174


133Asia Pacific


8


8$
713

$
836


5.     Share capital:





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

280,496

$
3.14

7.7

106,650

$
3.103.51


5.00

408,679


4.09

8.3

112,112


3.965.01


6.50

433,053


5.71

8.2

177,778


5.486.51


10.00

84,621


7.52

7.6

46,346


7.4710.01


50.00

19,392


18.27

5.8

13,854


21.2350.01


550.00

24,557


189.18

4.8

24,557


189.181,250,798

$
8.53

8.0

481,297

$
14.61








9

---





March 31,
2005Loss for the period

$
(466
)Compensation expense related to the fair value of stock options in excess of amounts recognized


(66
)Pro forma loss for the period

$
(532
)Pro forma loss per share:
Basic and diluted

$
(0.09
)




10

---





Number of options

Weighted average exercise priceOptions outstanding at December 31, 2005

1,434,448

$
8.10Activity in the three months ended March 31, 2006Options granted

2,000


3.49Options cancelled

(185,650
)

5.19Options outstanding at March 31, 2006

1,250,798

$
8.53


6.     Restructuring charges:





Severance

Lease exit costs

Hosting exit costs

TotalRestructuring charges in 2002

$
7,991

$
2,472

$
7,438

$
17,901Cash payments


(7,024
)

(364
)

(4,951
)

(12,339
)Non-cash charges





(580
)




(580
)Provision, December 31, 2002


967


1,528


2,487


4,982Activity during 2003:Restructuring charge reversal








(900
)

(900
)Cash payments


(967
)

(1,388
)

(996
)

(3,351
)Provision, December 31, 2003





140


591


731Activity during 2004:Restructuring charge reversal








(181
)

(181
)Cash payments





(47
)

(410
)

(457
)Provision, December 31, 2004 and 2005





93





93Activity during the three months ended March 31, 2006:Cash payments





(39
)




(39
)Provision, March 31, 2006

$


$
54

$


$
54


11

---





7.     Supplemental disclosure:

March 31,
2006

March 31,
2005Supplemental cash flow information: Interest received

$
79

$
56Supplemental disclosure of non-cash financing and investing activities:Common shares issued upon settlement of interest due on convertible notes payable to related parties

$
127

$
268


12

---



8.     Guarantees:





13

---





9.     Contingent liabilities:



14

---





10.   Related parties:



11.   Subsequent events:



15

---









12.   Reconciliation to Canadian GAAP:



16

---





17

---



Reconciliation to Canadian GAAP  Balance sheet at March 31, 2006:

|                                                      |                                                                | U.S. GAAP |        | Adjustments |   | Canadian GAAP |     
|----------------------------------------------------- | -------------------------------------------------------------- | --------- | ------ | ----------- | - | ------------- | ----
|Assets                                                |                                                                |           |        |             |   |               |     
|Current assets:                                       |                                                                |           |        |             |   |               |     
|                                                      | Cash and cash equivalents                                      |           | $      | 3,698       |   | $             |    
|                                                      | Short-term investments                                         |           |        | 1,475       |   |               |    
|                                                      | Restricted cash                                                |           |        | 221         |   |               |    
|                                                      | Accounts receivable, net of allowance                          |           |        | 4,278       |   |               |    
|                                                      | Prepaid expenses and other receivables                         |           |        | 725         |   |               |    
|                                                      |                                                                |           |        |             |   |               |     
|Total current assets                                  |                                                                |           | 10,397 |             |   |              |     
|Deferred charges                                      |                                                                |           | 138    |             |   | (15           | )   
|Fixed assets                                          |                                                                |           | 713    |             |   |              |     
|                                                      |                                                                |           |        |             |   |               |     
|Total assets                                          |                                                                | $         | 11,248 |             | $ | (15           | )   
|                                                      |                                                                |           |        |             |   |               |     
|Liabilities and shareholders' equity (deficit)        |                                                                |           |        |             |   |               |     
|Current liabilities:                                  |                                                                |           |        |             |   |               |     
|                                                      | Accounts payable                                               |           | $      | 334         |   | $             |    
|                                                      | Accrued liabilities                                            |           |        | 2,121       |   |               |    
|                                                      | Interest payable to related parties                            |           |        | 110         |   |               |    
|                                                      | Deferred revenue                                               |           |        | 151         |   |               |    
|                                                      |                                                                |           |        |             |   |               |     
|Total current liabilities                             |                                                                |           | 2,716  |             |   |              |     
|Convertible notes payable to related parties in 2007  |                                                                |           | 7,975  |             |   | (349          | )   
|Long-term interest payable to related parties in 2007 |                                                                |           | 878    |             |   |              |     
|                                                      |                                                                |           |        |             |   |               |     
|Total liabilities                                     |                                                                |           | 11,569 |             |   | (349          | )   
|Shareholders' equity (deficit):                       |                                                                |           |        |             |   |               |     
|                                                      | Common shares                                                  |           |        | 764,985     |   |               |    
|                                                      | Additional paid-in capital                                     |           |        | 1,334       |   |               | (65 
|                                                      | Equity portion of convertible notes payable to related parties |           |        |            |   |               | 892 
|                                                      | Accumulated deficit                                            |           |        | (766,847    | ) |               | (493
|                                                      | Accumulated other comprehensive income                         |           |        | 207         |   |               |    
|                                                      |                                                                |           |        |             |   |               |     
|Total shareholders' equity (deficit)                  |                                                                |           | (321   | )           |   | 334           |     
|                                                      |                                                                |           |        |             |   |               |     
|Total liabilities and shareholders' equity (deficit)  |                                                                | $         | 11,248 |             | $ | (15           | )   
|                                                      |                                                                |           |        |             |   |               |     

18

---



Balance sheet at December 31, 2005

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

19

---



Reconciliation to Canadian GAAP  Statement of operations for the three months ended March 31, 2006:

|                                                                                             |                                | U.S. GAAP                  |        | Adjustments |     | Canadian GAAP |  
|-------------------------------------------------------------------------------------------- | ------------------------------ | -------------------------- | ------ | ----------- | --- | ------------- | -
|Revenue:                                                                                     |                                |                            |        |             |     |               |  
|                                                                                             | Product                        |                            | $      | 1,679       |     | $             | 
|                                                                                             | Services                       |                            |        | 1,583       |     |               | 
|                                                                                             |                                |                            |        |             |     |               |  
|                                                                                             |                                |                            | 3,262  |             |     |              |  
|Operating expenses:                                                                          |                                |                            |        |             |     |               |  
|                                                                                             | Cost of product revenue, other |                            |        | 3           |     |               | 
|                                                                                             | Cost of services revenue       |                            |        | 1,412       |     |               | 
|                                                                                             | Research and development       |                            |        | 2,021       |     |               | 
|                                                                                             | Sales and marketing            |                            |        | 1,107       |     |               | 
|                                                                                             | General and administrative     |                            |        | 1,127       |     |               | 
|                                                                                             | Depreciation                   |                            |        | 211         |     |               | 
|                                                                                             | Stock-based compensation:      |                            |        |             |     |               |  
|                                                                                             |                                | Cost of revenue            |        |             | 12  |               |  
|                                                                                             |                                | Research and development   |        |             | 29  |               |  
|                                                                                             |                                | Sales and marketing        |        |             | 36  |               |  
|                                                                                             |                                | General and administrative |        |             | 163 |               |  
|                                                                                             |                                |                            |        |             |     |               |  
|Total operating expenses                                                                     |                                |                            | 6,121  |             |     |              |  
|                                                                                             |                                |                            |        |             |     |               |  
|Loss from operations                                                                         |                                |                            | (2,859 | )           |     |              |  
|Interest income (expense), net                                                               |                                |                            | (191   | )           |     | (69           | )
|Loss on settlement of liability                                                              |                                |                            | (19    | )           |     |              |  
|                                                                                             |                                |                            |        |             |     |               |  
|Net loss before cumulative effect of accounting change                                       |                                |                            | (3,069 | )           |     | (69           | )
|Cumulative effective of accounting change                                                    |                                |                            | 218    |             |     | (218          | )
|                                                                                             |                                |                            |        |             |     |               |  
|Loss for the period                                                                          |                                | $                          | (2,851 | )           | $   | (287          | )
|                                                                                             |                                |                            |        |             |     |               |  
|Basic and diluted loss per share                                                             |                                | $                          | (0.47  | )           | $   | (0.05         | )
|                                                                                             |                                |                            |        |             |     |               |  
|Weighted average number of shares used in computing basic and diluted loss per share (000's) |                                |                            | 6,074  |             |     | 6,074         |  
|                                                                                             |                                |                            |        |             |     |               |  

20

---



Reconciliation to Canadian GAAP  Statement of operations for the three months ended March 31, 2005:

|                                                                                             |                                | U.S. GAAP                  |       | Adjustments |    | Canadian GAAP |  
|-------------------------------------------------------------------------------------------- | ------------------------------ | -------------------------- | ----- | ----------- | -- | ------------- | -
|Revenue:                                                                                     |                                |                            |       |             |    |               |  
|                                                                                             | Product                        |                            | $     | 2,985       |    | $             | 
|                                                                                             | Services                       |                            |       | 2,820       |    |               | 
|                                                                                             |                                |                            |       |             |    |               |  
|                                                                                             |                                |                            | 5,805 |             |    |              |  
|Operating expenses:                                                                          |                                |                            |       |             |    |               |  
|                                                                                             | Cost of product revenue, other |                            |       | 5           |    |               | 
|                                                                                             | Cost of services revenue       |                            |       | 2,026       |    |               | 
|                                                                                             | Research and development       |                            |       | 1,687       |    |               | 
|                                                                                             | Sales and marketing            |                            |       | 1,168       |    |               | 
|                                                                                             | General and administrative     |                            |       | 804         |    |               | 
|                                                                                             | Depreciation                   |                            |       | 157         |    |               | 
|                                                                                             | Stock-based compensation:      |                            |       |             |    |               |  
|                                                                                             |                                | Cost of revenue            |       |             | 7  |               |  
|                                                                                             |                                | Research and development   |       |             | 19 |               |  
|                                                                                             |                                | Sales and marketing        |       |             | 16 |               |  
|                                                                                             |                                | General and administrative |       |             | 31 |               |  
|                                                                                             |                                |                            |       |             |    |               |  
|Total operating expenses                                                                     |                                |                            | 5,920 |             |    |              |  
|                                                                                             |                                |                            |       |             |    |               |  
|Loss from operations                                                                         |                                |                            | (115  | )           |    |              |  
|Interest income (expense), net                                                               |                                |                            | (186  | )           |    | (70           | )
|Loss on settlement of liability                                                              |                                |                            | (165  | )           |    |              |  
|                                                                                             |                                |                            |       |             |    |               |  
|Loss for the period                                                                          |                                | $                          | (466  | )           | $  | (70           | )
|                                                                                             |                                |                            |       |             |    |               |  
|Basic and diluted loss per share                                                             |                                | $                          | (0.08 | )           | $  | (0.01         | )
|                                                                                             |                                |                            |       |             |    |               |  
|Weighted average number of shares used in computing basic and diluted loss per share (000's) |                                |                            | 6,027 |             |    | 6,027         |  
|                                                                                             |                                |                            |       |             |    |               |  

21

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Reconciliation to Canadian GAAP  Cash flows from operating activities for three months ended March 31,
2006:

|                                                |                                                    | U.S. GAAP                                                 |        | Adjustments |        | Canadian GAAP |     
|----------------------------------------------- | -------------------------------------------------- | --------------------------------------------------------- | ------ | ----------- | ------ | ------------- | ----
|Cash flows from (used in) operating activities: |                                                    |                                                           |        |             |        |               |     
|                                                | Loss for the period                                |                                                           | $      | (2,851      | )      | $             | (287
|                                                | Items not involving cash:                          |                                                           |        |             |        |               |     
|                                                |                                                    | Accretion on convertible notes payable to related parties |        |             |       |               |     
|                                                |                                                    | Depreciation and amortization                             |        |             | 211    |               |     
|                                                |                                                    | Amortization of deferred charges                          |        |             | 29     |               |     
|                                                |                                                    | Stock-based compensation                                  |        |             | 240    |               |     
|                                                |                                                    | Loss on settlement of liability                           |        |             | 19     |               |     
|                                                |                                                    | Cumulative effect of accounting change                    |        |             | (218   | )             |     
|                                                |                                                    | Other non-cash expenses                                   |        |             | 132    |               |     
|                                                | Changes in operating assets and liabilities:       |                                                           |        |             |        |               |     
|                                                |                                                    | Accounts receivable                                       |        |             | (1,807 | )             |     
|                                                |                                                    | Prepaid expenses and other receivables                    |        |             | (203   | )             |     
|                                                |                                                    | Accounts payable                                          |        |             | (24    | )             |     
|                                                |                                                    | Long-term interest payable to related parties             |        |             | 110    |               |     
|                                                |                                                    | Accrued liabilities                                       |        |             | 499    |               |     
|                                                |                                                    | Deferred revenue                                          |        |             | (138   | )             |     
|                                                |                                                    |                                                           |        |             |        |               |     
|                                                | Net cash flows used in operating activities        |                                                           |        | (4,001      | )      |               |    
|Cash flows from (used in) investing activities: |                                                    |                                                           |        |             |        |               |     
|                                                | Purchase of fixed assets, net                      |                                                           |        | (87         | )      |               |    
|                                                | Maturity of short-term investments                 |                                                           |        | 2,500       |        |               |    
|                                                |                                                    |                                                           |        |             |        |               |     
|                                                | Net cash flows from (used in) investing activities |                                                           |        | 2,413       |        |               |    
|                                                |                                                    |                                                           |        |             |        |               |     
|Effect of exchange rate changes on cash         |                                                    |                                                           | 14     |             |        |              |     
|                                                |                                                    |                                                           |        |             |        |               |     
|Net decrease in cash and cash equivalents       |                                                    |                                                           | (1,574 | )           |        |              |     
|Cash and cash equivalents, beginning of period  |                                                    |                                                           | 5,272  |             |        |              |     
|                                                |                                                    |                                                           |        |             |        |               |     
|Cash and cash equivalents, end of period        |                                                    | $                                                         | 3,698  |             | $      |              |     
|                                                |                                                    |                                                           |        |             |        |               |     

22

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Reconciliation to Canadian GAAP  Cash flows from operating activities for three months ended March 31,
2005:

|                                                |                                                    | U.S. GAAP                                                 |        | Adjustments |        | Canadian GAAP |    
|----------------------------------------------- | -------------------------------------------------- | --------------------------------------------------------- | ------ | ----------- | ------ | ------------- | ---
|Cash flows from (used in) operating activities: |                                                    |                                                           |        |             |        |               |    
|                                                | Loss for the period                                |                                                           | $      | (466        | )      | $             | (70
|                                                | Items not involving cash:                          |                                                           |        |             |        |               |    
|                                                |                                                    | Accretion on convertible notes payable to related parties |        |             |       |               |    
|                                                |                                                    | Depreciation and amortization                             |        |             | 157    |               |    
|                                                |                                                    | Stock-based compensation                                  |        |             | 73     |               |    
|                                                |                                                    | Amortization of deferred charges                          |        |             | 31     |               |    
|                                                |                                                    | Loss on settlement of liability                           |        |             | 165    |               |    
|                                                |                                                    | Other non-cash expenses                                   |        |             | 93     |               |    
|                                                | Changes in operating assets and liabilities:       |                                                           |        |             |        |               |    
|                                                |                                                    | Accounts receivable                                       |        |             | (2,541 | )             |    
|                                                |                                                    | Prepaid expenses and other receivables                    |        |             | (99    | )             |    
|                                                |                                                    | Accounts payable                                          |        |             | 282    |               |    
|                                                |                                                    | Long-term liabilities                                     |        |             | (62    | )             |    
|                                                |                                                    | Long-term interest payable to related parties             |        |             | 104    |               |    
|                                                |                                                    | Accrued liabilities                                       |        |             | (64    | )             |    
|                                                |                                                    | Deferred revenue                                          |        |             | (48    | )             |    
|                                                |                                                    |                                                           |        |             |        |               |    
|                                                | Net cash flows used in operating activities        |                                                           |        | (2,375      | )      |               |   
|Cash flows from financing activities:           |                                                    |                                                           |        |             |        |               |    
|                                                | Issuance of common shares on exercise of options   |                                                           |        | 41          |        |               |   
|                                                |                                                    |                                                           |        |             |        |               |    
|                                                | Net cash flows from financing activities           |                                                           |        | 41          |        |               |   
|Cash flows from (used in) investing activities: |                                                    |                                                           |        |             |        |               |    
|                                                | Purchase of fixed assets, net                      |                                                           |        | (44         | )      |               |   
|                                                | Maturity of short-term investments                 |                                                           |        | 2,478       |        |               |   
|                                                | Purchases of short-term investments                |                                                           |        | (2,478      | )      |               |   
|                                                |                                                    |                                                           |        |             |        |               |    
|                                                | Net cash flows from (used in) investing activities |                                                           |        | (44         | )      |               |   
|                                                |                                                    |                                                           |        |             |        |               |    
|Net decrease in cash and cash equivalents       |                                                    |                                                           | (2,378 | )           |        |              |    
|Cash and cash equivalents, beginning of period  |                                                    |                                                           | 5,417  |             |        |              |    
|                                                |                                                    |                                                           |        |             |        |               |    
|Cash and cash equivalents, end of period        |                                                    | $                                                         | 3,039  |             | $      |              |    
|                                                |                                                    |                                                           |        |             |        |               |    

23

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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 Nextel, Vodafone and China Mobile, some of which currently license our products.

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

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

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

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 China, Switzerland, Canada, the United Kingdom and the
United States.

24

---



SUBSEQUENT EVENTS

ARRANGEMENT
AGREEMENT

On
April 6, 2006 we entered into a definitive arrangement agreement with Austin Ventures VIII, L.P. and an affiliated entity, 724 Holdings, Inc., by
which 724 Holdings, Inc. would acquire all the outstanding common shares of 724 Solutions not owned by Austin Ventures or its related persons for cash consideration of $3.34 per
common share. The transaction is to be carried out by way of a court-approved plan of arrangement. Under the arrangement, holders of options having an exercise price less than $3.34 would receive a
cash payment in an amount per share equal to the difference between $3.34 and the exercise price, and all outstanding options will be cancelled.

The
724 Solutions Board of Directors approved the arrangement agreement following the report and favorable recommendation of its Special Committee of directors, independent of
management of 724 Solutions and independent of Austin Ventures, who reviewed and considered the arrangement. In doing so, the Board determined that the arrangement is in the best interests of
724 Solutions and its shareholders, and authorized the submission of the arrangement to holders of 724 Solutions common shares for their approval as required under applicable law. In
reaching its recommendation, the Special Committee received a fairness opinion from its financial advisor, Thomas Weisel Partners LLC, and a valuation report from its independent valuator,
Paradigm Capital Inc. Copies of the fairness opinion and the valuation report, the factors considered by the Special Committee and the Board and other relevant information are included in the
preliminary Management Information Circular and Proxy Statement filed with the SEC and with the Canadian Securities Administrators on April 21, 2006 and will be included in the definitive
Management Information Circular and Proxy Statement that will be sent to holders of common shares of 724 Solutions in connection with the annual and special meeting to be called to consider the
arrangement.

The
holding of the annual and special meeting will be subject to court approval of an interim order. The arrangement will require approval by 662/3% of the votes cast by
holders of 724 Solutions common shares and holders of in-the-money options (whether or not vested) entitled to vote at the meeting, voting together as one class. Holders
of in-the-money options represent approximately 2.4% of the combined class of holders of 724 Solutions common shares and holders of in-the-money
options. In addition, the arrangement resolution must be approved by a majority of the votes cast by holders of 724 Solutions common shares entitled to vote at the meeting excluding shares held
by Austin Ventures and related persons.

DEFERRAL
AGREEMENT

In
advance of the arrangement agreement, we entered into a deferral agreement, pursuant to which affiliates of Austin Ventures and we agreed that payment of the quarterly interest
amounts due under the notes will be deferred until the earlier of the termination of the arrangement agreement or the effectiveness of the arrangement.

NASDAQ
NOTICE OF NON-COMPLIANCE

The
Company received a Nasdaq Staff Deficiency Letter on March 8, 2006 indicating that it fails to comply with the Nasdaq's Marketplace Rule 4310(c)(2)(B). Marketplace
Rule 4310(c)(2)(B) requires the Company to have a minimum of $2,500,000 in stockholders' equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing
operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. On April 3, 2006 we received a Nasdaq Staff Determination indicating that Nasdaq
had denied our request for an extension to allow us to retain our listing to allow us time to complete the arrangement described above.

We
appealed the ruling and a hearing to consider our appeal was held on May 11, 2006. We expect the Nasdaq panel to issue a decision within thirty days of that hearing.

25

---



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

SOURCES
OF REVENUE

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



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

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

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

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

26

---



PRODUCT
REVENUE

Product
revenue consists of the following:



SERVICES
REVENUE

IMPLEMENTATION
AND CUSTOMER SERVICES FEES

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

MAINTENANCE
FEES

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

MANAGED
ALERTS SERVICES FEES

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

27

---



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 March 31, 2006, our allowance for doubtful accounts totals $19,000. Our maximum exposure to loss on
receivables at any point in time is the total accounts receivable, which was $4.3 million at March 31, 2006. Due to the significant number of estimates utilized in determining an
expected rate of uncollectible receivables, actual results of collections could be materially different from these estimates.

INCOME
TAXES

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

LITIGATION

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

VALUATION
OF INTANGIBLE ASSETS

We
have acquired several other businesses. As part of the completion of any business combination, we are required to value any intangible assets acquired at the date of acquisition. We
utilize the most current internally-generated and publicly available information to develop an estimate of future undiscounted cash flows including, among other things, estimated lives, residual
values and terminal values, and believe the estimates to be reasonable at the date prepared. This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future
cash flows and other operational variables of the intangible assets acquired. There can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance
of the acquired intangible assets. To assist us with the valuation process, we have adopted the practice of using independent valuation experts in the valuation process for intangible assets acquired
through material acquisitions. However, it is possible that either we or the independent valuation experts will make judgments or estimates that differ from actual circumstances. In these cases, we
may be required to record a provision or write-off certain of our intangible assets. Similarly, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
we are required to annually test the value of our goodwill. Changes in estimates could result in different conclusions for the underlying value of goodwill. We perform our annual impairment testing on
goodwill at December 31 of each fiscal year, provided that circumstances do not arise during the year that would necessitate an earlier evaluation. As at March 31, 2006, the carrying
value of our goodwill and intangible assets was nil.

28

---



VALUATION
OF FIXED ASSETS

We
monitor the appropriateness of the carrying values of our fixed assets, primarily office furniture and computer software and equipment, on an ongoing basis, in accordance with
applicable accounting requirements. As required, if an indicator of potential impairment is evident, we will review the projected undiscounted future cash flows associated with the relevant fixed
asset, to determine if the undiscounted cash flows exceed the carrying amount of the fixed asset. If it is determined that the net carrying amount of the fixed asset is not recoverable, then an
adjustment would be made to reduce the net carrying amount to the fair value amount of the asset. We utilize the most current internally-generated and publicly available information to develop our
estimates of future undiscounted cash flows including, among other things, estimated lives, residual values and terminal values, and believe the estimates to be reasonable. Additionally, determination
of fair values of fixed assets may also involve various methods of estimation, if comparable independent fair values are not readily available. Accordingly, different assumptions related to cash flows
or fair values of fixed assets could materially affect our estimates. We have recorded charges to write-down fixed assets, primarily arising due to the restructuring activities we have
undertaken. As at March 31, 2006, our net book value of fixed assets was $713,000.

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 area in which the leased space is located. Unless we have a fixed sub-lease for the remaining term of the
lease arrangement, the actual amount of sub-lease rental income may differ from the estimates used in developing the provision and those changes may be material. Changes in estimated
sub-lease income are recognized as determinable.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2006, COMPARED TO THREE MONTHS ENDED MARCH 31, 2005

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

REVENUE

PRODUCT
REVENUE

In
the three months ended March 31, 2006, product revenue was $1.7 million, compared to $3.0 million in the same period in 2005.

Revenue
from our X-treme Mobility Suite ("XMS") of products was $1.6 million for the three months ended March 31, 2006, compared to $2.9 million in the
same period in 2005. The principal revenue producing deployments for our XMS products in the three months ended March 31, 2006 were with Sprint Nextel and Nokia. The principal revenue producing
deployments for our XMS products in the three months ended March 31, 2005 were with Hewlett-Packard (as a reseller to Sprint Nextel), Nokia and Vodafone. On October 31, 2005, our
subcontract agreement with Hewlett-Packard terminated. This change resulted in a decrease in product revenue of approximately $940,000 in the three months ended March 31, 2006, compared to the
prior year period.

29

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In
the three months ended March 31, 2006, the X-treme Services Activity Manager ("XSAM") product accounted for approximately 76% of revenue from the
X-treme Mobility Suite of products and our AGW product accounted for approximately 18% of the XMS revenue. In the three months ended March 31, 2005, our X-treme Mobility
Gateway ("XMG") product accounted for approximately 60% and the AGW product accounted for approximately 36% of XMS revenue. We anticipate that the XMG, XSAM and AGW products will generate most of our
XMS product revenue in the second quarter of 2006.

During
the three months ended March 31, 2006 and 2005, product revenue from our non-XMS products, including those sold primarily to the financial services industry,
was $49,000 and $71,000, respectively. 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 per quarter for the remainder of 2006. Our ability to achieve this revenue, however, is dependent on our customers for these products renewing their contracts.

SERVICES
REVENUE

Services
revenue was $1.6 million for the three months ended March 31, 2006, compared to $2.9 million in the same period in 2005.

In
the three months ended March 31, 2006, services revenue from XMS decreased to $1.2 million from $2.6 million in the same period in 2005. Implementation and
customer services revenue related to XMS was approximately $700,000 in the three months ended March 31, 2006, compared to $1.2 million in the same period of 2005. The 2005 amount
included approximately $480,000 from the delivery of hardware to a customer in Europe.

XMS
maintenance revenue decreased to $586,000 in the three months ended March 31, 2006, compared to $1.2 million in the same period of 2005. The cancellation of the
Hewlett-Packard (as a reseller to Sprint Nextel) contract had a significant impact on maintenance revenue as we had revenue of nil from Hewlett-Packard (as a reseller to Sprint Nextel)
in the three months ended March 31, 2006, compared to $813,000 in the same period in 2005.

Managed
alerts services revenue was $93,000 in the three months ended March 31, 2006, compared to $143,000 in the same period of 2005. Primarily all of the revenue in both periods
was derived from one customer that has adopted this platform on a managed services basis for its customer retention and loyalty program.

Services
revenue from our non-XMS products, including those sold primarily to the financial services industry, was $185,000 in the three months ended March 31, 2006,
compared to $238,000 in the same period in 2005, as some contracts were not renewed by our financial services customers, resulting in less services and maintenance revenue from these customers.

30

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OPERATING EXPENSES

COST
OF PRODUCT REVENUE

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



COST
OF SERVICES REVENUE

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

Cost
of services revenue decreased to $1.4 million for the three months ended March 31, 2006, from $2.0 million for the same period in 2005. Included in the 2005
amount is approximately $420,000 in hardware costs related to a customer deployment. Cost of services revenue, as a percentage of revenue, was 43% for the three months ended March 31, 2006,
compared to 35% for the same period in 2005. Our average professional services headcount was 25 in the first quarter of 2006, unchanged from same period of 2005. At the end of the first quarter
of 2006, we had 28 professional services personnel, compared to 26 at the end of the first quarter of 2005.

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 increased to $2.0 million for the three months ended March 31, 2006, compared to $1.7 million for the same period in 2005. Our
average R&D headcount was 50 in the three months ended March 31, 2006, compared to 48 in the prior year period. At March 31, 2006 we had 51 R&D employees, compared
to 52 at March 31, 2005.

We
continue to evaluate our R&D expenditure needs based on our new product architecture and services and the current market environment. R&D expense, as a percentage of revenue, was 62%
for the three months ended March 31, 2006, compared to 29% for the same period in 2005.

31

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SALES
AND MARKETING

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.

Sales
and marketing expenses were $1.1 million for the three months ended March 31, 2006, compared to $1.2 million for the same period in 2005. The average number of
S&M personnel in the three months ended March 31, 2006 was 17, unchanged from the prior year period. At March 31, 2006 and 2005, we had 15 and 18 sales and marketing personnel,
respectively. We continue to monitor our sales and marketing expenditures to ensure that they remain aligned with our targeted opportunities as well as prevailing market conditions. S&M expense, as a
percentage of revenue, was 34% for the three months ended March 31, 2006, compared to 20% for the same period in 2005.

GENERAL
AND ADMINISTRATIVE

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

G&A
expenses increased to $1.1 million for the three months ended March 31, 2006, compared to $804,000 for the same period in 2005. The increase was mainly due to increased
legal and professional fees related to the proposed plan of arrangement. Our average G&A headcount in the three months ended March 31, 2006 was 13, unchanged from the same period in 2005. At
March 31, 2006 and 2005, we had 12 and 13 G&A personnel, respectively. G&A expense, as a percentage of revenue, was 35% for the three months ended March 31, 2006, compared to 14%
for the same period in 2005. We believe we may need to add additional G&A staff this year to address increased regulatory compliance requirements if we remain a public company.

DEPRECIATION

Depreciation
expense was $211,000 in the three months ended March 31, 2006, compared to $157,000 for the same period in 2005. In 2004 and 2005, we began to reinvest in fixed
assets and anticipate that we will make further purchases of fixed assets in 2006.

STOCK-BASED
COMPENSATION

Effective
January 1, 2006, we adopted the fair value-based method for measurement and cost recognition of employee share-based compensation arrangements under the provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. ("SFAS") 123 (Revised 2004) "Share-Based Payment" ("SFAS 123R"), using the modified prospective
application transitional approach. For options granted prior to January 1, 2003, we had elected to account for employee share based compensation using the intrinsic value method based on
Accounting Principal Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. For options granted post January 1, 2003, we applied
the fair value recognition provisions of SFAS No. 123 "Accounting for Stock based Compensation" ("SFAS 123") as amended.

32

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Under
the modified prospective application transitional approach, share-based compensation is recognized for awards granted, modified, repurchased or cancelled subsequent to the adoption
of SFAS 123R. In addition, share-based compensation is recognized, subsequent to the adoption of SFAS 123R, for the remaining portion of the vesting period (if any) for
outstanding awards granted prior to the date of adoption. Results for prior periods have not been restated. The cumulative effect of accounting change is an estimated number based on the forfeiture
rate and generated an approximate $218,000 credit to the statements of operations.

We
estimate the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123R, Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 107, and our prior period disclosures, including share-based compensation (determined under a fair value method as prescribed by SFAS 123).
Key input assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company's stock, the risk-free
rate, and the dividend yield. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock options
granted in the period ended March 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

Stock-based
compensation increased to $240,000 for the three months ended March 31, 2006, compared to $73,000 for the same period in 2005. The stock compensation expense in 2006
relates to the fair value of unvested options granted since January 1, 2002 while the stock compensation expense in 2005 relates to the expensing of the fair value of options granted since
January 1, 2003.

RESTRUCTURING
COSTS

In
the three months ended March 31, 2006 and 2005, we recorded restructuring charges of nil.

Included
in our "Accrued Liabilities" as at March 31, 2006 is approximately $54,000 in remaining obligations arising from a restructuring activity undertaken in 2002.
Specifically, it relates to the remaining costs associated with an office in Europe that we have vacated. The space was returned to the landlord in March 2006. The remaining costs associated
with this space are related to refurbishment, which we expect to finalize in the second quarter of 2006.

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

INTEREST
EXPENSE

We
had a net interest expense of $191,000 in the three months ended March 31, 2006, compared to net interest expense of $186,000 in the same period of 2005. The interest expense
associated with the $8.0 million in convertible notes issued in the second quarter of 2004 was $254,000 in the three months ended March 31, 2006, compared to $243,000 in the three months
ended March 31, 2005. Interest earned in the three months ended March 31, 2006 was $63,000, compared to $57,000 in the three months ended March 31, 2005. The interest earned in
each period 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.

33

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Net
interest expense is expected to be approximately $225,000 to $245,000 per quarter in the second, third and fourth quarters of 2006; $257,000 to $263,000 in interest charges related
to the convertible notes payable to related parties offset by interest income of approximately $20,000 to $30,000 per quarter.

LOSS
ON SETTLEMENT OF LIABILITY

In
January 2006, we issued 35,259 Common Shares with a market value of $127,000 to Austin Ventures in connection with the payment of $108,000 in interest due. We recorded a
loss on settlement of liability of $19,000 in the first quarter of 2006 related to this transaction. 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.

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.

NET
LOSS

Our
net loss before cumulative effect of accounting change increased to $3.1 million for three months ended March 31, 2006, compared to $466,000 for the same period in
2005. Our net loss has increased significantly because revenue declined by $2.5 million, compared to the same period in 2005, and total operating expenses were higher by approximately $201,000,
compared to the prior year period.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected balance sheet information as of March 31, 2006 and December 31, 2005 (in thousands):

|                                              |  | March 31, 2006 |       | December 31, 2005
|--------------------------------------------- |  | -------------- | ----- | -----------------
|Cash and cash equivalents                     |  | $              | 3,698 |                  
|Short-term investments                        |  |                | 1,475 |                  
|Restricted cash                               |  |                | 221   |                  
|                                              |  |                |       |                  
|                                              |  |                | 5,394 |                  
|Other current assets less current liabilities |  |                | 2,287 |                  
|                                              |  |                |       |                  
|Working capital                               |  | $              | 7,681 |                  
|                                              |  |                |       |                  

At
March 31, 2006, our cash and short-term investments and restricted cash were $5.4 million, compared to $9.5 million at December 31, 2005, a
reduction of $4.1 million. The reduction in our cash balance was primarily due to uses of cash in operating activities, most notably related to our loss, offset by non-cash items,
and the increase in accounts receivable of $1.8 million.

Our
accounts receivables balance at March 31, 2006 was $4.3 million, with over 92% of the balance being either current or less than 30 days past due. We did not
incur any bad debt expense in either the three months ended March 31, 2006 or 2005 and we believe that the current allowance of $19,000 is sufficient and that accounts receivable will be
collected. Our accrued liabilities balance of $2.1 million includes approximately $54,000 of restructuring allowance that we anticipate will be paid in the second quarter of 2006.

34

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The
following table presents selected cash flow information for the three months ended March 31, 2006 and 2005 (in thousands):

|For the three months ended March 31,     |  | 2006 |        | 2005 |  
|---------------------------------------- |  | ---- | ------ | ---- | -
|Cash from (used in) operating activities |  | $    | (4,001 | )    | $
|Cash from (used in) financing activities |  |      |       |      |  
|Cash from (used in) investing activities |  |      | 2,413  |      |  
|Effect of exchange rate changes on cash  |  |      | 14     |      |  
|                                         |  |      |        |      |  
|Net decrease in cash                     |  | $    | (1,574 | )    | $
|                                         |  |      |        |      |  

Net
cash used in operating activities increased to $4.0 million for the three months ended March 31, 2006, compared to $2.4 million for the same period in 2005. Net
cash used in operating activities for the three months ended March 31, 2006 consisted of our net loss of $2.9 million, cumulative effect of accounting change of $218,000, other
non-cash items of $132,000 and net working capital items of $1.6 million, primarily made up of an increase in accounts receivable of $1.8 million, offset by
non-cash items, specifically loss on settlement of liability of $19,000, depreciation of $211,000, amortization of deferred charges of $29,000 and stock-based compensation of $240,000. Net
cash used in operating activities for the three months ended March 31, 2005 consisted of our net loss of $466,000 and net working cash items of $2.4 million, primarily made up of an
increase in accounts receivable of $2.5 million, offset by non-cash items, specifically loss on settlement of liability of $165,000, depreciation of $157,000, amortization of
deferred charges of $31,000, stock-based compensation of $73,000 and other non-cash items of $93,000.

Financing
activities provided a cash source of nil in the three months ended March 31, 2006, compared to a source of $41,000 from the issuance of common shares on the exercise of
options for the three months ended March 31, 2005.

Cash
used in investing activities, before the sale (purchase) of short-term investments, business acquisitions and restricted cash was $87,000 in the three months ended
March 31, 2006, compared to a cash use of $44,000 in the same period in 2005. The amount in each year is related to net purchase of fixed assets. We had a cash source of $2.5 million
related to the maturity of short-term investments in the three months ended March 31, 2006.

We
expect our quarterly cash expenditures in the second quarter of 2006 to increase significantly from the $5.7 million achieved in the first quarter of 2006, as we will have
significant costs associated with the proposed plan of arrangement. Some costs are contingent on the transaction closing, but we expect costs of approximately $1.2 million in the second quarter
that are not contingent on the transaction closing in the second quarter, or thereafter. Not including the transaction related costs, we expect cash expenditures in each of the next four quarters will
be in the range of $5.3 million to $6.0 million including capital expenditures. These expenditures are based on the assumption that we maintain our current staffing level and facilities.
We anticipate, based on current forecasts, that our cash on hand, together with our cash from operations will be sufficient to cover our cash requirements for at least the next twelve months.
Accordingly, the accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We have suffered recurring losses from operations and negative
cash flows. Our ability to continue as a going concern is dependent on our ability to successfully execute our business plan. We cannot provide assurance that we will be able to execute our business
plan or assure that efforts to raise additional financing, if required, would be successful. Our financial statements do not include adjustments or disclosures that may result from our inability to
continue as a going concern. If the going concern assumption was not appropriate for our financial statements, then adjustments would be necessary in the carrying values of assets, the reported net
losses and the balance sheet classification used.

35

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The
principal amount of the convertible notes plus interest due at maturity is payable to Austin Ventures at the maturity date in the second quarter of 2007, but if an event of default
occurs, the convertible notes payable to related parties may become due prior to the maturity date. Additionally, Austin Ventures has the option to convert the debt to shares at the applicable
conversion price at any time prior to the maturity date. If Austin Ventures does not convert the debt to shares prior to or at maturity, we will be required to pay the principal of $8.0 million
plus interest due at maturity of approximately $1.4 million in the second quarter of 2007. These amounts are payable in cash or shares at a conversion price of $3.07 at the option of Austin
Ventures. If Austin Ventures demands cash, we may not have sufficient funds to meet that demand and we may have to raise additional capital. We cannot predict the terms under which capital may be
available to us at that time, if at all. See note 3 to the consolidated financial statements for the three months ended March 31, 2006 for further details.

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. As required, we adopted
SFAS 123R in the first quarter of fiscal 2006. We re-calculated our stock compensation expense for the years ended December 31, 2003, 2004 and 2005 and recorded a "cumulative
effect of accounting change" entry of $218,000, representing the amount by which our expenses would have been lower in the three year period had we been using the method prescribed by SFAS 123R
to calculate stock compensation expense.

In
November 2005, the FASB issued Staff Position ("FSP") FAS 123R-3, "Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards". This
FSP requires an entity to follow either the transition guidance for the additional paid-in-capital as prescribed by SFAS 123R, Share-Based Payment, or the alternative
transition method as described in the FSP. An entity that adopts SFAS 123R using the modified prospective application may make a one-time election to adopt the transition method
described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS 123R or the effective date of this FSP to evaluate its available transition alternatives
and make this one-time election. This FSP became effective in November 2005. We continue to evaluate the impact that the adoption of this FSP could have on our financial statements.

In
November 2005, the FASB issued FSP FAS115-1/124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments", which addresses the determination as to when an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in this FSP amends FASB Statements No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and No. 124, "Accounting
for Certain Investments Held by Not-for-Profit Organizations", and APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock". We
continue to evaluate the impact that the adoption of this FSP could have on our financial statements.

36

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QUARTERLY 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                                                                                       |                            | Mar. 31, 2006              |        | Dec. 31 2005 |     | Sept. 30, 2005 |       | Jun. 30, 2005 |        | Mar. 31, 2005 |     | Dec. 31 2004 |       | Sept. 30 2004 |       | Jun. 30 2004 |   
|--------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ------ | ------------ | --- | -------------- | ----- | ------------- | ------ | ------------- | --- | ------------ | ----- | ------------- | ----- | ------------ | --
|(In thousands of U.S. dollars, except number of shares and per share amounts)                       |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|Revenue:                                                                                            |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|                                                                                                    | Product                    |                            | $      | 1,679        |     | $              | 1,461 |               | $      | 1,295         |     | $            | 1,704 |               | $     | 2,985        |   
|                                                                                                    | Services                   |                            |        | 1,583        |     |                | 1,922 |               |        | 3,166         |     |              | 2,912 |               |       | 2,820        |   
|                                                                                                    |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|Total revenue                                                                                       |                            |                            | 3,262  |              |     | 3,383          |       |               | 4,461  |               |     | 4,616        |       |               | 5,805 |              |   
|Operating expenses:                                                                                 |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|                                                                                                    | Cost of product revenue    |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|                                                                                                    |                            | Other                      |        |              | 3   |                |       | 3             |        |               | 10  |              |       | 10            |       |              | 5 
|                                                                                                    | Cost of services revenue   |                            |        | 1,412        |     |                | 1,693 |               |        | 1,804         |     |              | 1,907 |               |       | 2,026        |   
|                                                                                                    | Research and development   |                            |        | 2,021        |     |                | 1,834 |               |        | 1,768         |     |              | 1,693 |               |       | 1,687        |   
|                                                                                                    | Sales and marketing        |                            |        | 1,107        |     |                | 915   |               |        | 930           |     |              | 1,023 |               |       | 1,168        |   
|                                                                                                    | General and administrative |                            |        | 1,127        |     |                | 957   |               |        | 748           |     |              | 853   |               |       | 804          |   
|                                                                                                    | Depreciation               |                            |        | 211          |     |                | 125   |               |        | 150           |     |              | 165   |               |       | 157          |   
|                                                                                                    | Stock-based compensation:  |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|                                                                                                    |                            | Cost of revenue            |        |              | 12  |                |       | 12            |        |               | 19  |              |       | 15            |       |              | 7 
|                                                                                                    |                            | Research and development   |        |              | 29  |                |       | 25            |        |               | 43  |              |       | 35            |       |              | 19
|                                                                                                    |                            | Sales and marketing        |        |              | 36  |                |       | 24            |        |               | 53  |              |       | 43            |       |              | 16
|                                                                                                    |                            | General and administrative |        |              | 163 |                |       | 270           |        |               | 233 |              |       | 186           |       |              | 31
|                                                                                                    | Restructuring costs        |                            |        |             |     |                |      |               |        |              |     |              |      |               |       |             |   
|                                                                                                    |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|                                                                                                    | Total operating expenses   |                            |        | 6,121        |     |                | 5,858 |               |        | 5,758         |     |              | 5,930 |               |       | 5,920        |   
|                                                                                                    |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|Loss from operations                                                                                |                            |                            | (2,859 | )            |     | (2,475         | )     |               | (1,297 | )             |     | (1,314       | )     |               | (115  | )            |   
|Interest income (expense), net                                                                      |                            |                            | (191   | )            |     | (171           | )     |               | (172   | )             |     | (180         | )     |               | (186  | )            |   
|Loss on settlement of liability                                                                     |                            |                            | (19    | )            |     |               |       |               |       |               |     |             |       |               | (165  | )            |   
|                                                                                                    |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|Net loss before cumulative effect of accounting change                                              |                            |                            | (3,069 | )            |     | (2,646         | )     |               | (1,469 | )             |     | (1,494       | )     |               | (466  | )            |   
|Cumulative effect of accounting change                                                              |                            |                            | 218    |              |     |               |       |               |       |               |     |             |       |               |      |              |   
|                                                                                                    |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|Net loss for the period                                                                             |                            | $                          | (2,851 | )            | $   | (2,646         | )     | $             | (1,469 | )             | $   | (1,494       | )     | $             | (466  | )            | $ 
|                                                                                                    |                            |                            |        |              |     |                |       |               |        |               |     |              |       |               |       |              |   
|Basic and diluted loss per share                                                                    |                            | $                          | (0.47  | )            | $   | (0.44          | )     | $             | (0.24  | )             | $   | (0.25        | )     | $             | (0.08 | )            | $ 
|Weighted-average number of shares used in computing basic and diluted loss per share (in thousands) |                            |                            | 6,074  |              |     | 6,039          |       |               | 6,036  |               |     | 6,033        |       |               | 6,027 |              |   

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. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995 and of
Canadian provincial securities laws. 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 developments in our markets and the markets in which we expect
to compete, including the wireless communications industry; our estimated cost reductions; our future ability to fund our operations and become profitable; our development of new products and
relationships; the rate at which consumers will adopt wireless applications; our ability to increase our customer base; the services that we or our customers will introduce and the benefits that end
users will receive from these services; the impact of entering new markets; our plans to use or not to use certain types of technologies in the future; our future cost of revenue, gross margins and
net losses; our future restructuring, research and development, sales and marketing, general and administrative, stock-based compensation, depreciation and amortization expenses; our future interest
income; the value of our goodwill and other intangible assets; our future capital expenditures and capital requirements; and the anticipated impact of changes in applicable accounting rules.

The
accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.
Some of the key risks that could cause actual results to differ materially from those projected or anticipated include the risks discussed in the section entitled "Risk Factors," below. Additional
information about these and other risks can be found in our filings with the SEC and with the Canadian Securities Administrators, including in the sections "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our annual report on form 10-K. We encourage you to carefully review these risks in order to evaluate an investment
in our securities. We do not undertake any obligation to update this forward-looking information, except as required under applicable law.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

IMPACT
OF INTEREST RATE EXPOSURE

As
of March 31, 2006, we had approximately $5.4 million in cash, cash equivalents, short-term investments and restricted cash, of which $1.7 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. Accordingly, we currently do not have any interest rate exposure on our outstanding indebtedness.

IMPACT
OF FOREIGN EXCHANGE RATE EXPOSURE

Our
functional currency is the U.S. dollar, as we recognize the majority of our revenues in 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
March 31, 2006, 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 $14,000.

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 March 31, 2006, 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 first quarter of 2006 that materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial reporting.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings.

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

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

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

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

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

If
the proposed settlement is not consummated, the Company intends to continue to vigorously defend itself and the Individual Defendants against these claims. However, due to the
inherent uncertainties of litigation, and because the IPO Litigation is at a preliminary stage, we cannot accurately predict the ultimate outcome IPO Allocation Litigation. No amount is accrued at
March 31, 2006, as a loss is not considered probable and estimable.

Item 1A.    Risk Factors.

The Company has included in its Annual Report on Form 10-K for the year ended December 31, 2005 a description of certain risks and uncertainties
that could affect the Company's business, future performance or financial condition. The Company urges you to carefully read those risk factors prior to making an investment decision with respect to
its securities. In addition, the information presented below updates, and should be read in conjunction with, those risk factors.

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 and our revenue may not increase or could decrease.

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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 and have a material adverse affect on our business.

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

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 the market for messaging services, 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 March 31, 2006, 72% of
our revenue was derived from three customers. Most of our revenue from these customers and our other customers depends on their continued use of our products. If our 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.

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.

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INTERNATIONAL
MARKETS

We
expect that sales in international markets will be a major factor in our revenue, 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:



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

LIQUIDITY

The
accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We have suffered recurring losses from operations and negative
cash flows. Our ability to continue as a going concern is dependent on our ability to successfully execute our business plan. We cannot provide assurance that we will be able to execute our business
plan or assure that efforts to raise additional financing, if required, would be successful. Our financial statements do not include adjustments or disclosures that may result from our inability to
continue as a going concern. If the going concern assumption was not appropriate for our financial statements, then adjustments would be necessary in the carrying values of assets, the reported net
losses and the balance sheet classification used.

The
principal amount of the convertible notes plus interest due at maturity is payable to Austin Ventures at the maturity date in the second quarter of 2007, but if an event of default
occurs, the convertible notes payable to related parties may become due prior to the maturity date. Additionally, Austin Ventures has the option to convert the debt to shares at the applicable
conversion price at any time prior to the maturity date. If Austin Ventures does not convert the debt to shares prior to or at maturity, we will be required to pay the principal of $8.0 million
plus interest due at maturity of approximately $1.4 million in the second quarter of 2007. These amounts are payable in cash or shares at a conversion price of $3.07 at the option of Austin
Ventures. If Austin Ventures demands cash, we may not have sufficient funds to meet that demand and we may have to raise additional capital. We cannot predict the terms under which capital may be
available to us at that time, if at all. See note 3 to the consolidated financial statements for the three months ended March 31, 2006 for further details.

INVESTMENTS
IN OTHER COMPANIES AND NEW TECHNOLOGIES

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

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.

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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 and current uncertainties regarding our business,
impacting performance. Our ability to attract potential new employees in the future may suffer if our reputation suffers as a result of these or other issues.

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 may be 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.

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. A proposed
settlement has been reached, however, there is no assurance that such settlement will be finalized in its present form, if at all. If the proposed settlement is not consummated, we intend to continue
to vigorously defend ourselves against these claims. However, due to the inherent uncertainties of litigation we cannot accurately predict the ultimate outcome of the IPO Allocation Litigation. No
amount is accrued at March 31, 2006, as a loss is not considered probable and estimable. Litigation may be time consuming, expensive, and distracting from the conduct of our business, and the
outcome of litigation may be difficult to predict. The adverse resolution of any of these proceedings could have a material adverse effect on our business, results of operations, and financial
condition.

LISTING
REQUIREMENTS

On
March 8, 2006, we received a Nasdaq Staff Deficiency Letter indicating that we are not in compliance with the Nasdaq's Marketplace Rule 4310(c)(2)(B), which requires a
listed company to have a minimum of $2,500,000 in stockholders' equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently
completed fiscal year, or two of the three most recently completed fiscal years. On April 3, 2006 we received a Nasdaq Staff Determination indicating that Nasdaq had denied our request for an
extension to allow us to retain our listing while Austin Ventures and we work to complete a privatization transaction. We have appealed the ruling and a hearing to consider our appeal was held on
May 11, 2006. We expect the Nasdaq panel to issue a decision within thirty days of that hearing.

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

The
TSX has its own listing requirements, with which we currently comply.

SHAREHOLDER
CONCENTRATION

Our
significant shareholders and members of our management team, including Austin Ventures, which is affiliated with a member of our Board of Directors, beneficially owned approximately
41% of our common shares as of March 31, 2006. This figure includes the additional common shares Austin Ventures would receive were it to convert all of the notes that it owns and the interest
payable on those notes (see note 3 to our consolidated financial statements). Accordingly, these shareholders may, if they act together, exercise significant influence over all
matters requiring shareholder approval, including the election of a majority of the directors and the determination of significant corporate actions. This concentration could also have the effect of
delaying or preventing a change in control that could be otherwise beneficial to our shareholders. Furthermore, in the event that Austin Ventures were to convert all or part of the notes as it is
entitled to do, such conversion would have a dilutive effect on the ownership interests of other shareholders, which would be reflected in certain of our performance metrics including earnings per
share, and which may also negatively impact the market value of our securities.

AUSTIN
VENTURES PROPOSED TRANSACTION

On
April 6, 2006 we announced that we had entered into a definitive arrangement agreement with Austin Ventures VIII, L.P. and an affiliated entity,
724 Holdings, Inc., by which 724 Holdings, Inc. would acquire all the outstanding common shares of 724 Solutions not owned by Austin Ventures or its related persons
for cash consideration of $3.34 per common share. The transaction is to be carried out by way of a court-approved plan of arrangement. Under the arrangement, holders of options having an exercise
price less than $3.34 would receive a cash payment in an amount per share equal to the difference between $3.34 and the exercise price, and all outstanding options will be cancelled.

If
the transaction does not proceed, or proceeds on less favorable terms than as proposed, we may not have alternative transactions available to us or our shareholders that are as
beneficial as the transaction that has been proposed. In pursuing this transaction, we will have also expended significant management attention and resources, which may be of little or no value if the
agreement is not closed.

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IMPACT
OF ANY FAILURE TO COMPLETE THE ARRANGEMENT

There
are a number of material risks to which we are subject relating to the proposed plan of arrangement with Austin Ventures not being completed, including the following:



In
addition, our customers and partners, in response to an announcement of the arrangement not being completed, might delay or defer decisions concerning us. Any delay or deferral in those decisions
by customers and partners could have a material adverse effect on our business and operations regardless of whether the arrangement is ultimately completed, due to perceived uncertainties over our
continued commitment to provide products and enhancements or support services. Similarly, our current and prospective employees may experience uncertainty about their future roles with us until Austin
Ventures' strategies with respect to us are announced and executed. This may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel.

TERMINATION
PAYMENT AND EXPENSE REIMBURSEMENT OBLIGATIONS TO 724 HOLDINGS

In
the arrangement agreement, we have agreed to pay 724 Holdings a termination payment and to reimburse 724 Holdings for its reasonable expenses in the event the
arrangement agreement is terminated in certain circumstances. The payment of the termination payment and expense reimbursement could have an adverse effect on our financial condition.

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

In January 2006, the Company issued 35,259 common shares with a market value of $127,000 to Austin Ventures in settlement of interest due of
$108,000 on the Company's secured convertible notes. See note 3 to the Company's unaudited financial statements for additional information.

The
shares were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, to the Company's largest shareholder.

Item 3.    Defaults upon Senior Securities.

None.

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

Not applicable.

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Item 5.    Other Information.

The Company has filed a Management Information Circular and Proxy Statement and other relevant documents in preliminary form with the U.S. Securities and
Exchange Commission (the "SEC") and with the Canadian Securities Administrators regarding its arrangement agreement with Austin Ventures VIII, L.P. and an affiliated entity,
724 Holdings, Inc., by which 724 Holdings, Inc. would acquire all the outstanding common shares of 724 Solutions not owned by Austin Ventures or its related persons.
These documents contain, and when amended and filed in definitive form will contain, important information about the transaction, and 724 Solutions urges you to read these documents. You may
obtain copies of all documents filed with the SEC regarding this transaction, free of charge, at the SEC's website (www.sec.gov) and you may obtain copies of all documents filed with the Canadian
Securities Administrators regarding this transaction, free of charge, at www.sedar.com.

The
Company and certain of its affiliates may be deemed to be participants in the solicitation of proxies in connection with the proposed arrangement. A description of the interests of
certain of the Company's directors and executive officers in the Company is set forth in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2005. Additional information regarding the persons who may, under the rules of the SEC, be deemed participants in the solicitation of proxies in connection with the proposed
arrangement, and a description of their direct and indirect interests in the proposed arrangement, as well as the interests of the Company's executive officers and directors, are set forth in the
Management Information Circular and Proxy Statement.

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.            

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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. SIMSJohn J. Sims         |  | Chief Executive Officer (principal executive officer)                |  | May 15, 2006
|/s/STEPHEN MORRISONStephen Morrison |  | Chief Financial Officer (principal financial and accounting officer) |  | May 15, 2006

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