---

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|x                                  | Quarterly   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934   for the Quarterly Period Ended March 31, 2005.
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------
|                                   |                                                                                                                                           
|or                                
|                                   |                                                                                                                                           
|o                                  | Transition   Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of   1934.                                             
|                                   |                                                                                                                                           
|Commission File Number:  000-31146

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

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

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

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

Common Shares, no par value 6,032,821 shares outstanding as of May 6, 2005 (together with associated rights to purchase additional Common Shares)

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724 SOLUTIONS INC.

Table of Contents

|PART I. | FINANCIAL INFORMATION | 2
|------- | --------------------- | -

| | Item 1. | Financial Statements.                                                                    | 2 
| | ------- | ---------------------------------------------------------------------------------------- | --
| | Item 2. | Managements Discussion and Analysis of Financial Condition and   Results of Operations. | 19
| | Item 3. | Quantitative and Qualitative Disclosures   About Market Risk.                            | 34
| | Item 4. | Controls and Procedures.                                                                 | 34

|PART II. | OTHER INFORMATION | 34
|-------- | ----------------- | --

| | Item 1. | Legal Proceedings.                                             | 34
| | ------- | -------------------------------------------------------------- | --
| | Item 2. | Unregistered Sales of Equity Securities and   Use of Proceeds. | 35
| | Item 3. | Defaults Upon Senior Securities.                               | 35
| | Item 4. | Submission of Matters to a Vote of Security   Holders.         | 35
| | Item 5. | Other Information.                                             | 35
| | Item 6. | Exhibits.                                                      | 35

|SIGNATURES | 37
|---------- | --

i



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

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

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

March 31, 2005 and December 31, 2004

|                                                                            |  | 2005        |          | 2004 |  
|--------------------------------------------------------------------------- |  | ----------- | -------- | ---- | -
|                                                                            |  |             |          |      |  
|                                                                            |  | (Unaudited) |          |      |  
|Assets                                                                      |  |             |          |      |  
|Current assets:                                                             |  |             |          |      |  
|Cash   and cash equivalents (note 2)                                        |  | $           | 3,039    |      | $
|Short-term   investments (note 2)                                           |  |             | 8,005    |      |  
|Restricted   cash (note 2)                                                  |  |             | 211      |      |  
|Accounts receivable - trade, net   of allowance  of $26 (2004 - $18)        |  |             | 5,372    |      |  
|Prepaid   expenses and other receivables                                    |  |             | 682      |      |  
|                                                                            |  |             |          |      |  
|Total current assets                                                        |  |             | 17,309   |      |  
|Deferred charges                                                            |  |             | 255      |      |  
|Fixed assets, net of accumulated amortization of $13,860   (2004 - $13,732) |  |             | 1,018    |      |  
|                                                                            |  |             |          |      |  
|                                                                            |  | $           | 18,582   |      | $
|                                                                            |  |             |          |      |  
|Liabilities and   Shareholders Equity                                      |  |             |          |      |  
|Current liabilities:                                                        |  |             |          |      |  
|Accounts   payable                                                          |  | $           | 895      |      | $
|Accrued   liabilities                                                       |  |             | 2,037    |      |  
|Interest   payable to related parties                                       |  |             | 104      |      |  
|Deferred   revenue                                                          |  |             | 125      |      |  
|                                                                            |  |             |          |      |  
|Total current liabilities                                                   |  |             | 3,161    |      |  
|Long-term   liabilities                                                     |  |             | 30       |      |  
|Convertible notes payable to  related parties (note 3)                      |  |             | 7,952    |      |  
|Long-term interest payable to   related parties (note 3)                    |  |             | 447      |      |  
|                                                                            |  |             |          |      |  
|Total liabilities                                                           |  |             | 11,590   |      |  
|Shareholders equity:                                                       |  |             |          |      |  
|Share   capital (note 5):                                                   |  |             |          |      |  
|Authorized:                                                                 |  |             |          |      |  
|Unlimited   common shares                                                   |  |             |          |      |  
|Unlimited   preferred shares                                                |  |             |          |      |  
|Issued   and outstanding:                                                   |  |             |          |      |  
|6,032,821 common shares  (December 31, 2004  5,989,300)                    |  |             | 764,839  |      |  
|Additional   paid-in capital                                                |  |             | 352      |      |  
|Accumulated   deficit                                                       |  |             | (758,387 | )    |  
|Accumulated   other comprehensive income                                    |  |             | 188      |      |  
|                                                                            |  |             |          |      |  
|Total shareholders equity                                                   |  |             | 6,992    |      |  
|Contingent liabilities (note 9)                                             |  |             |          |      |  
|                                                                            |  |             |          |      |  
|                                                                            |  | $           | 18,582   |      | $
|                                                                            |  |             |          |      |  

See accompanying notes to consolidated financial statements.

2



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

Three months ended March 31, 2005 and 2004 (Unaudited)

|                                                                                                        |  | 2005 |       | 2004 |  
|------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | -
|                                                                                                        |  |      |       |      |  
|Revenue:                                                                                                |  |      |       |      |  
|Product                                                                                                 |  | $    | 2,985 |      | $
|Services                                                                                                |  |      | 2,820 |      |  
|                                                                                                        |  |      |       |      |  
|                                                                                                        |  |      | 5,805 |      |  
|Operating   expenses:                                                                                   |  |      |       |      |  
|Cost of product revenue                                                                                 |  |      | 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    |      |  
|Restructuring costs (note 6)                                                                            |  |      |      |      |  
|                                                                                                        |  |      |       |      |  
|                                                                                                        |  |      | 5,920 |      |  
|                                                                                                        |  |      |       |      |  
|Loss from   operations                                                                                  |  |      | (115  | )    |  
|Interest   income (expense), net                                                                        |  |      | (186  | )    |  
|Loss on   settlement of liability (note 3)                                                              |  |      | (165  | )    |  
|                                                                                                        |  |      |       |      |  
|Loss for the   period                                                                                   |  | $    | (466  | )    | $
|                                                                                                        |  |      |       |      |  
|Basic and   diluted loss per share                                                                      |  | $    | (0.08 | )    | $
|                                                                                                        |  |      |       |      |  
|Weighted-average   number of shares used in computing basic and diluted loss per share (in   thousands) |  |      | 6,027 |      |  
|                                                                                                        |  |      |       |      |  

See accompanying notes to consolidated financial statements.

3



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

Three months ended March 31, 2005 and 2004 (unaudited)

|                                    |  |                 |           | Additional   paid in capital |   | Accumulated   deficit |  | Accumulated   other comprehensive income (loss) |     | Total   shareholders   equity |  
|----------------------------------- |  | --------------- | --------- | ---------------------------- | - | --------------------- |  | ----------------------------------------------- | --- | ------------------------------ | -
|                                    |  | Common   shares |           |                              |   |                       | 
|                                    |  |                 |           |                              |   |                       | 
|                                    |  | Number          |           | Amount                       |   |                       |  |                                                 |    
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Balances   December 31, 2003        |  |                 | 5,983,349 |                              | $ | 764,508               |  | $                                               | 62  |                                | $
|Loss for the   period               |  |                 |          |                              |   |                      |  |                                                 |    |                                |  
|Cumulative   translation adjustment |  |                 |          |                              |   |                      |  |                                                 |    |                                |  
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Total   comprehensive loss          |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Additional   paid in capital        |  |                 |          |                              |   |                      |  |                                                 | 17  |                                |  
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Balances,   March 31, 2004          |  |                 | 5,983,349 |                              | $ | 764,508               |  | $                                               | 79  |                                | $
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Balances   December 31, 2004        |  |                 | 5,989,300 |                              | $ | 764,530               |  | $                                               | 279 |                                | $
|Loss for the   period               |  |                 |          |                              |   |                      |  |                                                 |    |                                |  
|Cumulative   translation adjustment |  |                 |          |                              |   |                      |  |                                                 |    |                                |  
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Total   comprehensive loss          |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Issuance on   exercise of options   |  |                 | 9,972     |                              |   | 41                    |  |                                                 |    |                                |  
|Issuance of   common shares         |  |                 | 33,549    |                              |   | 268                   |  |                                                 |    |                                |  
|Additional   paid in capital        |  |                 |          |                              |   |                      |  |                                                 | 73  |                                |  
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  
|Balances,   March 31, 2005          |  |                 | 6,032,821 |                              | $ | 764,839               |  | $                                               | 352 |                                | $
|                                    |  |                 |           |                              |   |                       |  |                                                 |     |                                |  

See accompanying notes to consolidated financial statements.

4



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

Three months ended March 31, 2005 and 2004 (Unaudited)

|                                                   |  | 2005 |        | 2004 |  
|-------------------------------------------------- |  | ---- | ------ | ---- | -
|                                                   |  |      |        |      |  
|Cash flows   from (used in) operating activities:  |  |      |        |      |  
|Loss for the period                                |  | $    | (466   | )    | $
|Items not affecting cash:                          |  |      |        |      |  
|Depreciation and amortization                      |  |      | 157    |      |  
|Amortization of deferred charges                   |  |      | 31     |      |  
|Stock-based compensation                           |  |      | 73     |      |  
|Loss on settlement of liability                    |  |      | 165    |      |  
|Other non-cash items                               |  |      | 93     |      |  
|Change 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  |      | $
|                                                   |  |      |        |      |  

See accompanying notes to consolidated financial statements.

5



|1. | Basis of presentation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The   accompanying consolidated financial statements include the accounts of 724   Solutions Inc. and its wholly owned subsidiaries (collectively referred to as   the Company). Inter-company transactions and balances are eliminated on   consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The   Companys consolidated financial statements are expressed in U.S. dollars and   have been prepared in accordance with accounting principles generally   accepted in the United States. The interim financial statements follow the   same accounting policies and methods of application as the most recent annual   financial statements.  For further   information, reference should be made to the audited annual consolidated   financial statements for the year ended December 31, 2004 that are included   in the Companys Annual Report filed with the Canadian Securities   Administrators on March 17, 2005 and with the Securities and Exchange   Commission on Form 10-K filed on March 18, 2005.                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The   preparation of the financial statements requires use of management estimates.   The information furnished for the three months ended March 31, 2005 and March   31, 2004 reflects, in the opinion of management, all adjustments, consisting   only of normal recurring adjustments, necessary for a fair presentation of   the results of the interim periods presented.  Interim results are not necessarily indicative of results for a   full year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | Cash and cash equivalents and short-term investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | All   short-term investments are classified as held-to-maturity because the Company   has the positive intent and ability to hold the securities to maturity.  Held-to-maturity securities are stated at   amortized cost, adjusted for amortization of premiums and accretion discounts   to maturity.  The Company owns no   short-term investments that are considered to be trading securities or available-for-sale   securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company   has entered into letters of credit in the amount of $211,000 (December 31,   2004  $210,000) to guarantee future payments. Letters of credit are secured   by segregated instruments and disclosed as restricted cash on the   consolidated balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3. | Convertible notes payable to related parties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | On May 14,   2004, the Company entered into a series of agreements, including a Secured   Convertible Note Purchase Agreement (the Purchase Agreement) between 724   Solutions Inc. and its wholly owned subsidiary, 724 Solutions Software Inc.,   and Austin Ventures VI, L.P. (AV VI), Austin Ventures VI Affiliates Fund,   L.P. (AV VI A), and Austin Ventures VIII, L.P. (AV VIII), (collectively,   the Lenders or Austin Ventures) in connection with the private placement   of $8,000,000 of Secured Convertible Promissory Notes (the Notes) for   cash.  The non-brokered private   placement of secured convertible promissory notes was completed in two   tranches.  The first tranche of the   financing involved the issuance of $3,044,000 of convertible notes and was   completed on May 14, 2004.  The second   tranche of the financing involved the issuance of $4,956,000 of
convertible   notes and was completed on June 29, 2004, after the Company obtained   shareholder approval of the transactions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Notes   have a three-year term and accrue interest at a rate of 2.5% per quarter, of   which 1.25% is payable in arrears at the beginning of each quarter starting   in the first quarter of 2005 and the remainder of which is due at maturity.  The principal amounts of the Notes and all   interest owing at maturity are convertible at the option of the Lenders into   common shares at a conversion price of $3.07 per share. The interest payable   quarterly is convertible at the option of the Company into common shares at a   conversion price of $3.07 per share. The conversion price was based on the   volume weighted average trading price of the Companys common shares on the   TSX for the five                                                                                                                                                                                                                                                                                                                     

6



| | trading days   prior to May 14, 2004. If the Company issues any common shares or securities   convertible into common shares at a price that is less than the conversion   price of the Notes then in effect, then such conversion price shall be   subject to a weighted average anti-dilution adjustment, whereby the conversion   price will be reduced based on the weighted average price of the additional   securities issued. The conversion price will not be lowered by more than 15%   of the initial conversion price of $3.07.                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | In   accordance with FASB EITF No. 00-27, Application of EITF No. 98-5, Accounting   for Convertible Securities with Beneficial Conversion Features or   Contingently Adjustable Conversion Ratios, the Company has determined that a   beneficial conversion feature existed for the second tranche of its convertible   notes.  On the date the required   shareholder approval was obtained, the Companys common shares closed at a   premium of $0.04 per share to the conversion price of $3.07, resulting in a   beneficial conversion feature on that date of approximately $65,000.  Under issue 6 of EITF 00-27, this   conversion feature is to be amortized over the period to the stated   redemption date being May 14, 2007.    The amortization in the three months ended March 31, 2005 was $5,000.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Company   also analyzed the arrangement to determine whether any accounting was   required for the contingent beneficial conversion feature that may arise if   the Company were to issue additional shares in the future at a price less   than $3.07.  The Company considered   EITF 00-27, Issue 7, and concluded that since the terms of the contingent   conversion option do not permit the Company to compute the additional number   of shares that it would need to issue upon conversion of the Notes if the   contingent event occurs and the conversion price is adjusted, the Company   should compute any additional beneficial conversion feature only if the   contingent event occurs.                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Austin   Ventures is the Companys largest beneficial shareholder. Assuming that all   of the Notes are converted into common shares at the lowest possible   conversion price on the maturity date, all accrued interest on the Notes is   paid with common shares, and that no additional common shares are issued,   Austin Ventures could be deemed to beneficially own up to 44.75% of the   Companys issued and outstanding common shares.                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Joseph C.   Aragona is currently a member of the Companys Board of Directors.  He is also a general partner of AV   Partners VI, L.P., which serves as the general partner of both AV VI and AV   VI A.  In addition, Mr. Aragona is a   general partner of AV Partners VIII, L.P., which serves as the general   partner of AV VIII.  As a general   partner of AVP VI and AVP VIII, Mr. Aragona may have a limited pecuniary   interest in the Private Placement Transactions.  Mr. Aragona did not participate in the deliberations or voting   of the Companys Board with respect to the approval of the Private Placement   Transactions.                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Company   and its material subsidiaries granted the Lenders a blanket security interest   in all of their assets to secure the timely payment and performance in full   of all of the obligations under the Notes.    The security interest ranks senior to all indebtedness of the Company   other than fully-funded indebtedness of up to $1,500,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Notes   are subject to customary events of default, including the failure to pay   interest or principal, and specified types of bankruptcy events. Additional   events of default include the issuance of certain capital securities that, if   not for the limitation noted above, would cause the conversion price of the   notes to be lowered by more than 15% of the initial conversion price and the   Company engaging in specified types of merger or acquisition   transactions.  An event of default   would require the Company to repay all amounts owing under the Notes.                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Total   interest expense recorded in the three months ended March 31, 2005 was   $209,000 (2004 - nil). At March 31, 2005, $552,000 remains outstanding   (2004-nil).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | On January   3, 2005, the Company issued 33,549 shares with a market value of $268,000 in   settlement of interest owing of $103,000 and recorded a loss on settlement of   liability of $165,000 in three month period ended March 31, 2005 related to   the extinguishment of the liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

7



|4. | Segment information:                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company   operates in a single reportable operating segment, that is, the design and   delivery of software products for use by mobile network operators and other   customers.  The single reportable   operating segment derives its revenue from the sale of software and related   services.  Information about the   Companys geographical net revenue and assets is set forth below.
|   |                                                                                                                                                                                                                                                                                                                                                                                                
|   | Net revenue   by geographic revenue distribution:                                                                                                                                                                                                                                                                                                                                              

|                |  | March 31,   2005 |       | March 31,   2004 |  
|--------------- |  | ---------------- | ----- | ---------------- | -
|                |  |                  |       |                  |  
|United   States |  | $                | 2,286 |                  | $
|Europe          |  |                  | 3,334 |                  |  
|Asia Pacific    |  |                  | 185   |                  |  
|Canada          |  |                  |      |                  |  
|                |  |                  |       |                  |  
|                |  | $                | 5,805 |                  | $
|                |  |                  |       |                  |  

| | In the three   months ended March 31, 2005, three customers accounted for 28%, 28% and 26%   of revenue.  In the three months ended   March 31, 2004, one customer accounted for 73% of revenue.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                 
| | At March 31,   2005, two customers accounted for 53% and 28% of accounts receivable. At   March 31, 2004, one customer accounted for 68% of accounts receivable.                                
| |                                                                                                                                                                                                 
| | Fixed assets   by geographic location:                                                                                                                                                          

|                |  | March 31,   2005 |       | December   31,   2004 |  
|--------------- |  | ---------------- | ----- | --------------------- | -
|                |  |                  |       |                       |  
|Canada          |  | $                | 700   |                       | $
|United   States |  |                  | 116   |                       |  
|Europe          |  |                  | 191   |                       |  
|Asia Pacific    |  |                  | 11    |                       |  
|                |  |                  |       |                       |  
|                |  | $                | 1,018 |                       | $
|                |  |                  |       |                       |  

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

|Exercise   price ranges |        | Number of   options |   | Weighted   average   exercise price |  | Weighted   average   remaining   contractual life   (years) |         | Number of   options   exerciseable |   | Weighted   average   exercise price | 
|----------------------- | ------ | ------------------- | - | ----------------------------------- |  | ----------------------------------------------------------- | ------- | ---------------------------------- | - | ----------------------------------- | 
|                        |        |                     |   |                                     |  |                                                             |         |                                    |   |                                     | 
|$                       |       |                     | $ | 5.00                                |  |                                                             | 713,461 |                                    | $ | 3.53                                | 
|                        | 5.01   |                     |   | 10.00                               |  |                                                             | 191,994 |                                    |   | 6.09                                | 
|                        | 10.01  |                     |   | 20.00                               |  |                                                             | 15,554  |                                    |   | 12.82                               | 
|                        | 20.01  |                     |   | 50.00                               |  |                                                             | 6,688   |                                    |   | 27.26                               | 
|                        | 50.01  |                     |   | 100.00                              |  |                                                             | 5,919   |                                    |   | 82.46                               | 
|                        | 100.01 |                     |   | 550.00                              |  |                                                             | 19,188  |                                    |   | 216.45                              | 
|                        |        |                     |   |                                     |  |                                                             |         |                                    |   |                                     | 
|                        |        |                     |   |                                     |  |                                                             | 952,804 |                                    | $ | 9.14                                | 
|                        |        |                     |   |                                     |  |                                                             |         |                                    |   |                                     | 

8



| | (b) | Loss per   share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The Company   has excluded from the calculation of diluted earnings per share all common   shares potentially issuable upon the exercise of stock options and other   potentially convertible instruments that could dilute basic earnings per   share in the future, because to do so would have been anti-dilutive.                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (c) | Stock-based   compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Effective   January 1, 2003, the Company adopted, on a prospective basis, the fair value   measurement for stock-based compensation.    Under the fair value based method, compensation cost for option grants   is measured at fair value at the date of grant and is expensed over the   awards vesting period. The fair value of options issued in the three months   ended March 31, 2005 was $224,000, while the fair value of options issued in   the three months ended March 31, 2004 was $26,000. These amounts are being   amortized as expenses over the vesting period of 4 years.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The fair   value of each option granted in the three months ended March 31, 2005 was   estimated at the date of grant using the Black-Scholes option pricing model   under the following assumptions: dividend yield of 0%, expected volatility of   62% (2004 - 60%), risk-free rate of interest of 3.66% (2004  3.41%) and an   expected life of the option of five years.                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The Company   has assumed no forfeiture rate, as adjustments for actual forfeitures are   made in the period in which they occur. The weighted average grant date fair   value of options issued in the three months ended March 31, 2005 was $4.18   (2004 - $1.83).                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (d) | Pro forma   disclosure for stock-based compensation and other stock-based payments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | For options   issued prior to January 1, 2003, the Company is required to disclose the pro   forma information as if it had accounted for stock options issued from   inception on July 28, 1997 to December 31, 2002 under the fair value method.  The following table presents the required   disclosure of pro forma earnings and earnings per share.                                                                                                                                                                                                                                       

|                                                                                                  |  | March 31,   2005 |       | March 31,   2004 |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | ---------------- | -
|                                                                                                  |  |                  |       |                  |  
|Loss 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 | )                | $
|                                                                                                  |  |                  |       |                  |  

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

9



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

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

| |  | During 2002, the Company reduced its worldwide workforce by   approximately 198 people, closed redundant facilities, wrote down inventory   assets that were no longer part of its future strategy and wrote down unused   fixed assets.  The Company realigned   its workforce following this reduction to allow it to focus on delivering   software applications and infrastructure software to MNOs while servicing   its global installed base of financial services clients.  In addition, as part of the restructuring,   the Company formalized a three-year arrangement with Computer Sciences   Corporation (CSC), an unrelated party, whereby CSC will provide application   hosting services to support the Companys current hosting agreements until   such time as the agreements expire or are assigned to CSC.  The Company does not intend to enter into   any further hosting agreements and will promote CSC as its preferred supplier   of such
services.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The restructuring activities undertaken in 2002 were completed within   the year, shortly after the reductions in the workforce occurred in the first   and fourth quarters of the year. All amounts provided for were settled in the   year except for: (i) severance in the amount of $967,000 which was settled in   the first half of 2003; (ii) lease exit costs related to abandoned premises   in the amount of $1,528,000, $1,388,000 of which was settled in 2003 and   $47,000 of which was settled in 2004 leaving $93,000 at March 31, 2005 that the   Company expects will be settled by the end of the first quarter of 2006; and   (iii) hosting exit costs in the amount of $2,487,000,                                                                                                                                                                                                                                                                          

10



| |     | $996,000 of which was paid out in 2003, $900,000 of which was   reversed in 2003 upon the re-negotiation of certain agreements, $410,000 of   which was paid out in 2004 and $181,000 of which was reversed in 2004 because   certain costs were lower than the Company had estimated.  The Company has now fully exited all hosting   arrangements related to legacy customers.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                 
| | (b) | Restructuring   provisions at March 31, 2004:                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                 
| |     | (i) 2004 Restructuring, provision at March 31, 2004:                                                                                                                                                                                                                                                                                                                            

|                                |  | Severance |       | Lease exit   costs |   | Total |  
|------------------------------- |  | --------- | ----- | ------------------ | - | ----- | -
|                                |  |           |       |                    |   |       |  
|Restructuring   charges in 2004 |  | $         | 1,600 |                    | $ | 500   |  
|Cash payments                   |  |           | (15   | )                  |   | (77   | )
|                                |  |           |       |                    |   |       |  
|Provision,   March 31, 2004     |  | $         | 1,585 |                    | $ | 423   |  
|                                |  |           |       |                    |   |       |  

| | In the three months ended March 31, 2004, the Company completed a   plan to reduce its overall operating costs and to realign its operating   expenses and investments by reducing its worldwide workforce by approximately   40 people and consolidating facilities.    As a result of these decisions, the Company recorded $2,100,000 in   restructuring charges related to severance and lease exit costs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | (ii) 2003 Restructuring, provision at March 31, 2004:                                                                                                                                                                                                                                                                                                                                                         

|                                                         |  | Severance |      | Lease exit   costs |   | Total |  
|-------------------------------------------------------- |  | --------- | ---- | ------------------ | - | ----- | -
|                                                         |  |           |      |                    |   |       |  
|Restructuring   charges in 2003                          |  | $         | 775  |                    | $ | 175   |  
|Cash   payments                                          |  |           | (483 | )                  |   | (175  | )
|                                                         |  |           |      |                    |   |       |  
|Provision,   December 31, 2003                           |  |           | 292  |                    |   |      |  
|Activity   during the three months ended March 31, 2004: |  |           |      |                    |   |       |  
|Cash   payments                                          |  |           |     |                    |   |      |  
|                                                         |  |           |      |                    |   |       |  
|Provision,   March 31, 2004                              |  | $         | 292  |                    | $ |      |  
|                                                         |  |           |      |                    |   |       |  

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

11



| | (iii) 2002 Restructuring, provision at March 31, 2004:
| | ------------------------------------------------------

|                                                         |  | Severance |        | Lease exit   costs |   | Hosting   exit   costs |   | Total |       
|-------------------------------------------------------- |  | --------- | ------ | ------------------ | - | ---------------------- | - | ----- | ------
|                                                         |  |           |        |                    |   |                        |   |       |       
|Restructuring   charges in 2002                          |  | $         | 7,991  |                    | $ | 2,472                  |   | $     | 7,438 
|Cash   payments                                          |  |           | (7,024 | )                  |   | (364                   | ) |       | (4,951
|Non-cash   charges                                       |  |           |       |                    |   | (580                   | ) |       |      
|                                                         |  |           |        |                    |   |                        |   |       |       
|Provision,   December 31, 2002                           |  |           | 967    |                    |   | 1,528                  |   |       | 2,487 
|Activity   during 2003:                                  |  |           |        |                    |   |                        |   |       |       
|Restructuring charge reversal                            |  |           |       |                    |   |                       |   |       | (900  
|Cash payments                                            |  |           | (967   | )                  |   | (1,388                 | ) |       | (996  
|                                                         |  |           |        |                    |   |                        |   |       |       
|Provision,   December 31, 2003                           |  |           |       |                    |   | 140                    |   |       | 591   
|Activity   during the three months ended March 31, 2004: |  |           |        |                    |   |                        |   |       |       
|Cash payments                                            |  |           |       |                    |   | (25                    | ) |       | (165  
|                                                         |  |           |        |                    |   |                        |   |       |       
|Provision, March 31, 2004                                |  | $         |       |                    | $ | 115                    |   | $     | 426   
|                                                         |  |           |        |                    |   |                        |   |       |       

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

|                                                                                                         |  | March 31,   2005 |     | March 31,   2004 | 
|-------------------------------------------------------------------------------------------------------- |  | ---------------- | --- | ---------------- | 
|                                                                                                         |  |                  |     |                  | 
|Supplemental   cash flow information:                                                                    |  |                  |     |                  | 
|Interest   received                                                                                      |  |                  | 56  |                  | 
|Supplemental disclosure of non-cash   financing and investing activities:                                |  |                  |     |                  | 
|Common   shares issued upon settlement of interest due on convertible notes payable to   related parties |  |                  | 268 |                  | 

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

12



| | (c) | Letters of   credit:                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | At March 31,   2005, the Company had one outstanding letter of credit in the amount of   $211,000 to secure Company credit cards. At December 31, 2004, the Company   had one outstanding letter of credit in the amount of $210,000 to secure   Company credit cards. Letters of credit are secured by segregated short-term   investments and are disclosed as restricted cash on the consolidated balance   sheets.

|9. | Contingent liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company   has been named in several class actions filed in federal court in the   Southern District of New York between approximately June 13, 2001 and June   28, 2001 (collectively the IPO Allocation Litigation). The IPO Allocation   Litigation was filed on behalf of purported classes of plaintiffs who   acquired the Companys common shares during certain periods. These lawsuits   have since been consolidated into a single action and an amended complaint   was filed on or about April 19, 2002. Similar actions have or since been   filed against over 300 other issuers that have had initial public offerings   since 1998 and all are included in a single coordinated proceeding in the   Southern District of New York.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The amended   complaint in the IPO Allocation Litigation names as defendants, in addition   to the Company, some former directors and officers of the Company (the   Individual Defendants) and certain underwriters of the Companys initial   public offering of securities (the Underwriter Defendants). In general, the   amended complaint alleges that the Underwriter Defendants: (1) allocated   shares of the Companys offering of equity securities to certain of their   customers, in exchange for which these customers agreed to pay the Underwriter   Defendants extra commissions on transactions in other securities; and (2)   allocated shares of the Companys initial public offering to certain of the   Underwriter Defendants customers, in exchange for which the customers agreed   to purchase additional common shares of the Company in the after-market at   certain pre-determined prices. The amended complaint also alleges that
the   Company and the Individual Defendants failed to disclose these facts and that   the Company and the Individual Defendants were aware of, or disregarded, the   Underwriter Defendants conduct. In October 2002, the Individual Defendants   were dismissed from the IPO Allocation Litigation without prejudice.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 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.  If the modifications   agreed upon by the parties are acceptable to the Court, notice will be given   to all class members of the settlement, a fairness hearing will be held and   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, the Company cannot accurately predict   the ultimate outcome IPO Allocation Litigation. No amount is accrued at March   31, 2005, as a loss is not considered probable and estimable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

13



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

14



The following tables present the adjustments required to reconcile the March 31, 2005 consolidated financial statements presented under U.S. GAAP to Canadian GAAP.

Reconciliation to Canadian GAAP - Balance sheet at March 31, 2005:

|                                                                 |  | U.S. GAAP |          | Adjustments |   | Canadian   GAAP |  
|---------------------------------------------------------------- |  | --------- | -------- | ----------- | - | --------------- | -
|                                                                 |  |           |          |             |   |                 |  
|Assets                                                           |  |           |          |             |   |                 |  
|Current assets:                                                  |  |           |          |             |   |                 |  
|Cash   and cash equivalents                                      |  | $         | 3,039    |             | $ |                |  
|Short-term   investments                                         |  |           | 8,005    |             |   |                |  
|Restricted   cash                                                |  |           | 211      |             |   |                |  
|Accounts   receivable, net of allowance of $26                   |  |           | 5,372    |             |   |                |  
|Prepaid   expenses and other receivables                         |  |           | 682      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current assets                                             |  |           | 17,309   |             |   |                |  
|Deferred charges                                                 |  |           | 255      |             |   | (30             | )
|Fixed assets                                                     |  |           | 1,018    |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total assets                                                     |  | $         | 18,582   |             | $ | (30             | )
|                                                                 |  |           |          |             |   |                 |  
|Liabilities   and shareholders equity                           |  |           |          |             |   |                 |  
|Current liabilities:                                             |  |           |          |             |   |                 |  
|Accounts   payable                                               |  | $         | 895      |             | $ |                |  
|Accrued   liabilities                                            |  |           | 2,037    |             |   |                |  
|Interest   payable                                               |  |           | 104      |             |   |                |  
|Deferred   revenue                                               |  |           | 125      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current liabilities                                        |  |           | 3,161    |             |   |                |  
|Long-term liabilities                                            |  |           | 30       |             |   |                |  
|Convertible notes payable   to related parties                   |  |           | 7,952    |             |   | (638            | )
|Long-term interest payable                                       |  |           | 447      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities                                                |  |           | 11,590   |             |   | (638            | )
|Shareholders equity:                                            |  |           |          |             |   |                 |  
|Common   shares                                                  |  |           | 764,839  |             |   |                |  
|Additional   paid-in capital                                     |  |           | 352      |             |   | (65             | )
|Equity   portion of convertible notes payable to related parties |  |           |         |             |   | 892             |  
|Accumulated   deficit                                            |  |           | (758,387 | )           |   | (219            | )
|Accumulated   other comprehensive income                         |  |           | 188      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total shareholders equity                                       |  |           | 6,992    |             |   | 608             |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities and   shareholders equity                     |  | $         | 18,582   |             | $ | (30             | )
|                                                                 |  |           |          |             |   |                 |  

15



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

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

16



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 service revenue                                                                       |  |           | 2,026 |             |   |                |  
|Research   and development                                                                      |  |           | 1,687 |             |   |                |  
|Sales   and marketing                                                                           |  |           | 1,168 |             |   |                |  
|General   and administrative                                                                    |  |           | 804   |             |   |                |  
|Depreciation                                                                                    |  |           | 157   |             |   |                |  
|Stock-based   compensation:                                                                     |  |           |       |             |   |                 |  
|Cost   of revenue                                                                               |  |           | 7     |             |   |                |  
|Research   and development                                                                      |  |           | 19    |             |   |                |  
|Sales   and marketing                                                                           |  |           | 16    |             |   |                |  
|General   and administrative                                                                    |  |           | 31    |             |   |                |  
|                                                                                                |  |           |       |             |   |                 |  
|Total operating expenses                                                                        |  |           | 5,920 |             |   |                |  
|                                                                                                |  |           |       |             |   |                 |  
|Loss from operations                                                                            |  |           | (115  | )           |   |                |  
|Interest income (expense),   net                                                                |  |           | (186  | )           |   | (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           |  
|                                                                                                |  |           |       |             |   |                 |  

17



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 |  |           |       |             |   | 73              |  
|Depreciation and amortization                               |  |           | 157    |             |   |                |  
|Amortization of deferred charges                            |  |           | 31     |             |   | (3              | )
|Loss on settlement of liability                             |  |           | 165    |             |   |                |  
|Stock-based compensation                                    |  |           | 73     |             |   |                |  
|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  |             | $ |                |  
|                                                            |  |           |        |             |   |                 |  

18



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

OVERVIEW

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

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

We were incorporated in 1997 and in 1999 we introduced our initial products. At that time, we focused on creating software products that assisted financial services companies in making their traditional services available to their customers through mobile phones and handheld computing devices.  In January 2001, we acquired Tantau Software with a view to expanding our customer base, utilizing Tantaus software products to strengthen our products offered to financial services customers, and to expand our sales to mobile network operators.  In 2001, we began offering our mobile alerting software products and our mobile Internet gateway product (software that enables Internet connectivity to mobile devices) to mobile network operators. In October 2002, our products and solutions for mobile network operators and other customers were re-branded as the X-treme Mobility Suite of products (XMS).  We no longer offer products developed
specifically for financial institutions, although we continue to provide services to a small number of financial services customers and continue to support earlier sales to them.

During 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably.  At the same time, we judged that the market for mobile data services in the mobile network operator sector was potentially larger and likely to develop sooner. As a consequence, we began 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 continue to develop and expand our X-treme Mobility Suite of products for mobile network operators to assist them in growing their next-generation data services.  In addition, we may in the future acquire products and/or companies that have developed software that aligns with our X-treme Mobility Suite of products.

With our corporate office in Santa Barbara, California, we have development and sales offices around the world, including Hong Kong, Switzerland, Canada, the United Kingdom and the United States.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We periodically review our financial reporting and disclosure practices and accounting policies to ensure they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed the selection, application and communication of our critical accounting policies and financial disclosures. We have determined that the critical accounting policies relating to our core ongoing business activities are primarily those that relate to revenue recognition, allowance for doubtful accounts, income taxes, litigation, valuation of intangible assets, valuation of fixed assets, and restructuring provisions. Other important accounting policies are described in note 2 to our audited annual consolidated financial statements for the year ended December 31, 2004, which are included in our annual report on form 10-K.

19



REVENUE RECOGNITION

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 the following conditions are met:

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

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

In some software license agreements, some of our products cannot be considered off-the-shelf and the contracted deliverables and professional services 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 per transaction basis.  Accordingly, our revenue is dependent on whether, and the extent to which, our customers continue to use our software. However, in the case of our amended agreement with Hewlett-Packard in connection with Hewlett-Packards re-licensing of our software to Sprint PCS, we license our software on a quarterly and monthly fixed fee basis. If, at any time and for any reason, Sprint PCS decides to no longer use our software for additional customers, Hewlett-Packard will cease paying the quarterly/monthly fixed fees and we will not receive any further license fees under the agreement.

PRODUCT REVENUE

Product revenue consists of the following:

| |  | Variable License Fee Arrangement  a   variable license fee based on the numbers of users or the total capacity in a   period. Revenue is recognized on an ongoing basis when determinable and will   vary with the number or the total capacity of our customers end users.  In some of our agreements, there may be a cap on the total license fees   paid by our customer for a particular product.                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reseller/OEM Arrangement  the reseller or   OEM typically pays a non-refundable licensing fee for our software and/or a   royalty fee based on the related number of users or based on a given   capacity. We recognize revenue associated with non-refundable license fees   when we have met our revenue recognition criteria for license agreements as   outlined above. We recognize royalty fee revenue when the amount is   determinable and all of our other revenue recognition criteria for license   revenue are met.

20



| |  | Fixed License Fee Arrangement  a license   fee for a fixed number of copies or unlimited use of the software for a   period of time ranging from three months to perpetuity.  If the license is not a perpetual license,   we recognize the revenue ratably over the term of the license.  If the license is a perpetual license, we   recognize the revenue when the general conditions outlined above under   Sources of Revenue are met.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SERVICE REVENUE

IMPLEMENTATION AND CUSTOMER SERVICE FEES

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

MAINTENANCE FEES

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

MANAGED ALERTS SERVICE FEES

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our general credit terms are 30 to 60 days from the invoice date.  We perform an ongoing credit evaluation of each customers financial condition and if the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payment, an additional allowance would be required. At March 31, 2005, our allowance for doubtful accounts totaled $26,000.  Our maximum exposure to loss on receivables at any point in time is the total accounts receivable, which was $5.4 million at March 31, 2005.  Due to the significant number of estimates utilized in determining an expected rate of uncollectible receivables, actual results of collections could be materially different from these estimates.

INCOME TAXES

We record a valuation allowance against deferred income tax assets when we believe it is not more likely than not that some portion or all of the deferred income tax assets will be realized. We consider factors such as the reversal of deferred income tax liabilities, projected taxable income, the character of the income tax asset and the potential for realization due to tax planning strategies. At December 31, 2004,

21



while we had $92.2 million in available net tax benefit of loss carry forwards and other deferred tax assets, we have experienced losses in recent years and the extent of future income for tax purposes before utilization of these benefits is uncertain.  Accordingly, the entire balance of deferred tax assets was offset by a valuation allowance.  Due to the significant number of estimates and projections utilized in determining an appropriate valuation for our deferred income tax assets, the actual valuation allowance against the tax assets could be materially different from these estimates.

LITIGATION

We are a party, from time to time, in legal proceedings such as the securities litigation relating to our initial public offering (see note 9 to our consolidated financial statements). In these cases, we assess the likelihood that a loss will result, as well as the amount of the potential loss, and the financial statements provide for the best estimate of the losses. In making our assessment of the existence of losses, we consider advice from legal counsel, the nature of the claim and other settlements, if any, that are occurring from similar claims.  To the extent that any of these legal proceedings are resolved and require us to pay an amount in excess of what has been provided for in the financial statements, we would be required to record, against earnings, the excess at that time. If the resolution resulted in a gain, or a loss less than that provided for, the gain is recognized when received or receivable.

VALUATION OF INTANGIBLE ASSETS

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

VALUATION OF FIXED ASSETS

We monitor the appropriateness of the carrying values of our fixed assets, primarily office furniture and computer software and equipment, on an ongoing basis, in accordance with 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, 2005, the net book value of our fixed assets was $1.0 million.

22



RESTRUCTURING PROVISIONS

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

SUBSEQUENT EVENT

2005 STOCK OPTION PLAN

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

Our stockholders also approved the December 2004 grant of 427,000 options to certain of our executives, officers and directors. Subject to certain conditions, the options vest over four years from the December 2004 grant date. The total fair value at April 28, 2005 was calculated to be $2.8 million using the Black-Scholes option pricing model. The fair value related to those options that remain outstanding will be expensed as stock-based compensation over the remaining vesting period. We expect to expense approximately $750,000 related to this grant in the remainder of 2005.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004

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, 2005, product revenue increased to $3.0 million, from $1.8 million in the same period in 2004.

Revenue from our X-treme Mobility Suite (XMS) of products increased to $2.9 million for the three months ended March 31, 2005 from $1.7 million in the same period in 2004.  The principal revenue producing deployments for our XMS products were with Nokia, Hewlett-Packard (as a reseller to Sprint PCS) and a European MNO.  Nokia contributed $1.1 million of revenue and the European MNO contributed $794,000 compared to nil for both customers in the same period of 2004. Product revenue from Hewlett-Packard (as a reseller to Sprint PCS) declined by $763,000 in the three months ended March 31, 2005 compared to the same period in 2004. We amended our contract in late 2004 to a fixed fee structure so we expect our product revenue from Hewlett-Packard (as a reseller to Sprint PCS) to remain at the same level in the second quarter of 2005. In the three months ended March 31, 2005,

23



the X-treme Mobility Gateway (XMG) product accounted for approximately 60% of revenue from the X-treme Mobility Suite of products and the AGW product, the product we purchased from Nokia in the second quarter of 2004, accounted for approximately 36% of the XMS revenue.  In the three months ended March 31, 2004, our XMG product accounted for approximately 96% of the XMS revenue.  We provide our customers with fixed or variable pricing alternatives. In the three months ended March 31, 2005, Hewlett-Packard (as a reseller to Sprint PCS) was the only significant customer purchasing licenses on a fixed price basis while in the same period in 2004, essentially all of our key revenue producing contracts for the XMS suite were on a variable pricing model.  We anticipate that the XMG and AGW products will generate most of our XMS product revenue in the second quarter of 2005.

During the three months ended March 31, 2005 and 2004, product revenue from our non-XMS products, including those sold primarily to the financial services industry, was $71,000 and $50,000, 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 2005. Our ability to achieve this revenue, however, is dependent on our customers for these products renewing their contracts.

SERVICE REVENUE

Service revenue increased to $2.8 million for the three months ended March 31, 2005, from $1.2 million for the same period in 2004.

In the three months ended March 31, 2005, service revenue from XMS increased to $2.6 million from $929,000 in the same period in 2004. Implementation and customer service fee revenue related to XMS was approximately $1.2 million in the three months ended March 31, 2005 compared to $309,000 in the same period of 2004. Of the increase, approximately 52% resulted from the delivery of hardware to a European MNO, approximately 36% related to integration services at the same European MNO and the remainder primarily related to implementations at an Asia Pacific MNO and a second European MNO.

Managed alerts services revenue increased to $143,000 in the three months ended March 31, 2005 compared to $42,000 in the same period of 2004, primarily due to one customer adopting this platform as a key part of its customer retention and loyalty program. Maintenance revenue increased to $1.2 million in the three months ended March 31, 2005 compared to $579,000 in the same period of 2004. Approximately 50% of the increase was related to our AGW product acquired in the second quarter of 2004. Increased maintenance revenue from Hewlett-Packard (as a reseller to Sprint PCS) accounted for approximately 40% of the increase.

Service revenue from our non-XMS products, including those sold primarily to the financial services industry, was $238,000 in the three months ended March 31, 2005 compared to $311,000 in the same period in 2004, as some contracts were not renewed by our financial services customers, resulting in less service and maintenance revenue from these customers.

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:

| | Development costs: Software development costs are capitalized   beginning when a products technological feasibility has been established,   which generally occurs upon completion of a working model, and ending when a   product is available for general release to customers. All subsequent costs   are expensed as incurred. To date, the completion of working models of our   products has substantially coincided with the general release of the   products. As a result, we have not capitalized any software development   costs, since those costs have not been significant.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Amortization of intangible assets: Intangible assets include   intellectual property we have acquired and either license as a stand-alone   product or embed in one or more of our software products. Acquired software   is amortized on a straight-line basis over a period of two to five years. All   acquired software had been fully amortized or written down to nil by the end   of September 2003. Therefore, amortization expense was nil in each of the   three month periods ending March 31, 2005 and 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third Party Inventory: Cost of product revenue also includes the cost   of third party inventory purchased from third parties and sold to our   customers. In the three months ended March 31, 2005 and the same period in   2004, we did not purchase or sell any third party inventory to our customers.                                                                                                                                                                                                              
| | Other: Some of our products include third party embedded software   that we license.  In the three months   ended March 31, 2005, we recorded $5,000 of license fees to third party   vendors for the use of software embedded in our products compared to nil in   the same period of 2004.                                                                                                                                                                                                                            

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 increased to $2.0 million for the three months ended March 31, 2005, compared to $1.5 million for the same period in 2004. Included in the 2005 amount is approximately $420,000 in hardware costs related to a customer deployment. Our integration, product support and managed services related revenue were all significantly higher in the three months ended March 31, 2005 compared to the same period in 2004, leading to increased costs in these areas. Due to improved resource utilization, cost of services revenue increased by a lower percentage than revenue. Cost of services revenue, as a percentage of revenue, was 35% for the three months ended March 31, 2005, compared to 51% for the same period in 2004. Our average professional services headcount increased to 25 in the first quarter of 2005 compared to 16 in the same period of 2004 as we added personnel to meet commitments to our customers. At the end of the first quarter of 2005, we had 26
professional services personnel compared to 16 at the end of the first quarter of 2004. The geographic mix of our professional services personnel changed from the first quarter of 2004 to the first quarter of 2005 resulting in a lower cost per employee. Costs related to these personnel, therefore, increased by 34% while average headcount increased by 51%.

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 decreased to $1.7 million for the three months ended March 31, 2005, compared to $2.1 million for the same period in 2004, a reduction of 19%. As a result of restructuring initiatives, we reduced our R&D headcount in the first quarter of 2004 from 48 in January 2004 to 34 in March 2004 and the average R&D headcount was 43 in the three months ended March 31, 2004. Due to our acquisition of the Multimedia Application Gateway (AGW) product in the second quarter of 2004 and to meet customer commitments in other areas, we have added R&D personnel since the end of the first quarter of 2004 bringing our average R&D headcount in the three months ended March 31, 2005 to 48 and our headcount at March 31, 2005 to 52. Because we have a higher proportion of our development team in more cost-effective locations, our R&D costs have decreased in the three months ended March 31, 2005 compared to the same period in
2004. The average cost per R&D employee was lower by 16% in the three months ended March 31, 2005 compared to the same period in 2004.

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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 29% for the three months ended March 31, 2005, compared to 70% for the same period in 2004.

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 $1.2 million for the three months ended March 31, 2005, compared to $1.4 million for the same period in 2004, a reduction of 15%. The decrease is a result of the reduction in the average number of S&M personnel in the three months ended March 31, 2005 to 17 compared to 21 in the same period of 2004, a reduction of 19%. At March 31, 2005 and 2004, we had 17 and 21 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 20% for the three months ended March 31, 2005, compared to 46% for the same period in 2004.

GENERAL AND ADMINISTRATIVE

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

G&A expenses decreased to $804,000 for the three months ended March 31, 2005, compared to $833,000 for the same period in 2004. The decrease in G&A expenses reflects our efforts in our restructuring initiatives in which we have reduced our average G&A headcount in the three months ended March 31, 2005 to 13 in 2005 from 16 in 2004, a reduction of 17%.  The reduction in personnel accounted for approximately $48,000 of savings in the quarter but these savings were partially offset by higher costs in other areas. At March 31, 2005 and 2004, we had 13 and 15 G&A personnel, respectively.  G&A expense, as a percentage of revenue, was 14% for the three months ended March 31, 2005, compared to 28% for the same period in 2004. We believe we will need to add additional G&A staff this year to address increased regulatory compliance requirements.

DEPRECIATION

Depreciation expense was $157,000 in the three months ended March 31, 2005, compared to $185,000 for the same period in 2004. Depreciation decreased as we continue to utilize fully depreciated fixed assets. In 2004, we began to reinvest in fixed assets and we also made some purchases in the three months ended March 31, 2005. We anticipate that we will make further purchases of fixed assets in remainder of 2005.

STOCK-BASED COMPENSATION

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

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

Stock-based compensation increased to $73,000 for the three months ended March 31, 2005, compared to $17,000 for the same period in 2004. All stock compensation expenses in both periods related to the expensing of the fair value of options granted since January 1, 2003.

RESTRUCTURING COSTS

In the period ended March 31, 2005, we recorded restructuring charges of nil, compared to $2.1 million in the same period last year, including $1.6 million related to severances and $500,000 related to lease exit costs. In the three months ended March 31, 2004, we planned to reduce our worldwide work force by approximately 40 people and consolidate facilities. These efforts were to be implemented in order to reduce our overall operating costs and to realign our operating expenses and investments with a view to achieving operating profitability. Our acquisition of the AGW product in the second quarter of 2004 caused us to cancel 17 of the planned terminations and to reverse $900,000 in severance charges.

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

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 $186,000 in the three months ended March 31, 2005, compared to net interest income of $16,000 in the same period of 2004. We issued $8.0 million in convertible notes in the second quarter of 2004 and the interest expense associated with this debt was $243,000 in the three months ended March 31, 2005. Interest earned in the three months ended March 31, 2005 was $57,000 and was derived from cash and cash equivalent balances and short-term investments, representing primarily the unused portion of the proceeds from the convertible debt financing completed in the second quarter of 2004.

Net interest expense is expected to be approximately $200,000 per quarter in the second, third and fourth quarters of 2005; $245,000 in interest charges relate to the convertible notes payable to related parties offset by interest income of approximately $45,000 per quarter.

LOSS ON SETTLEMENT OF LIABILITY

On January 3, 2005, we issued 33,549 common shares with a market value of $268,000 in settlement of interest owing of $103,000 and recorded a loss on settlement of liability of $165,000. The payment was related to the extinguishment of the liability related to interest due on the convertible notes payable to related parties. We have the option of paying the interest portion due quarterly on the notes payable in cash or shares at a conversion price of $3.07 (see note 3 to the interim financial statements for further details). In the event we settle future interest obligations in shares, we will record additional charges, the amount of which will depend on the price of our shares at the time of settlement.

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NET LOSS

Our net loss decreased to $466,000 for three months ended March 31, 2005, compared to $5.1 million for the same period in 2004. Our net loss has decreased significantly because revenue increased by $2.8 million compared to the same period in 2004 and total operating expenses were lower. While the 2004 net loss included the $2.1 million restructuring charge discussed previously, total operating costs declined even when the charge is excluded. Because of the financing completed in the second quarter of 2005, net interest expense increased by $202,000.  Additionally, we expensed $165,000 in the three months ended March 31, 2005 related to the loss on settlement of liability described above. There was no such charge in the same period in 2004.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected balance sheet information as of March 31, 2005 and December 31, 2004 (in thousands):

|                                              |  | March 31,   2005 |        | December   31,   2004 |  
|--------------------------------------------- |  | ---------------- | ------ | --------------------- | -
|                                              |  |                  |        |                       |  
|Cash and cash equivalents                     |  | $                | 3,039  |                       | $
|Short-term investments                        |  |                  | 8,005  |                       |  
|Restricted cash                               |  |                  | 211    |                       |  
|                                              |  |                  |        |                       |  
|                                              |  |                  | 11,255 |                       |  
|Other current assets less current liabilities |  |                  | 2,893  |                       |  
|                                              |  |                  |        |                       |  
|Working capital                               |  | $                | 14,148 |                       | $
|                                              |  |                  |        |                       |  

At March 31, 2005, our cash and short-term investments and restricted cash were $11.3 million compared to $13.6 million at December 31, 2004, a reduction of $2.4 million.  The reduction in our cash balance was primarily due to uses of cash in operating activities, most notably the increase in accounts receivable of $2.5 million.

Our accounts receivables balance as at March 31, 2005 was $5.4 million, with over 94% 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, 2005 or 2004 and we believe that the current reserve of $26,000 is sufficient and that accounts receivable will be collected. Our accrued liabilities balance of $2.0 million includes approximately $93,000 of restructuring reserves that we anticipate will be paid in 2006.

The following table presents selected cash flow information for the three months ended March 31, 2005 and 2004 (in thousands):

|For the three months ended March 31,        |  | 2005 |        | 2004 |  
|------------------------------------------- |  | ---- | ------ | ---- | -
|                                            |  |      |        |      |  
|Cash from (used in) operating activities    |  | $    | (2,375 | )    | $
|Cash from  (used in) financing   activities |  |      | 41     |      |  
|Cash from (used in) investing activities    |  |      | (44    | )    |  
|                                            |  |      |        |      |  
|Net decrease in cash                        |  | $    | (2,378 | )    | $
|                                            |  |      |        |      |  

Net cash used in operating activities decreased to $2.4 million for the three months ended March 31, 2005, compared to $4.1 million for the same period in 2004. 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 $92,000. The positive change to our cash flows from operations has been achieved through increased revenue year over year and reduced expenses as a result of significantly reducing our

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workforce and expense structure as a result of our restructuring efforts. Net cash used in operating activities for the three months ended March 31, 2004 consisted of our net loss of $5.1 million, offset by non-cash items, specifically depreciation of $185,000 and stock-based compensation of $17,000 and net working capital items of  $794,000.

Financing activities provided a cash source of $41,000 from the issuance of common shares on the exercise of options for the three months ended March 31, 2005, compared to nil in the same period in 2004.

Cash used in investing activities, before the sale (purchase) of short-term investments, business acquisitions and restricted cash was $44,000 in the three months ended March 31, 2005, compared to a cash use of $2,000 in the same period in 2004. The amount in each year is related to net purchase of fixed assets. We had a cash source of $1.7 million related to the maturity of short term investments in the three months ended March 31, 2004.

We expect our quarterly cash expenditures in the next four quarters to be in the range of $5.5 million to $5.9 million as we add additional personnel to our development and on-site support teams to support our customer installations, but we will maintain our focus on cost management.  We currently expect that our existing cash and cash equivalents, short term investments and our estimated cash from sales in the next twelve months will be sufficient to cover our cash requirements, including planned capital expenditures, for at least the next twelve months.

While we have no current plans to raise additional capital, we may seek to do so in the future depending upon market conditions and conditions in our business.  We may also require additional financing if we expand our operations at a faster rate than currently anticipated, if our costs unexpectedly increase, if our revenues decrease, if we lose one or more significant customers (including Hewlett-Packard), or if we seek to effect one or more significant acquisitions.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS  CANADA AND UNITED STATES

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003.  We were required to apply FIN 46R to such variable interest entities (VIEs) commencing with quarter ended March 31, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an
accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE.  There has been no impact on our accounting as a result of applying FIN 46R.

FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For us, the statement was effective for instruments entered into or modified after May 31, 2003 and otherwise effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for us on January 1, 2005.  The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments.  We currently do not have any financial instruments that are within the scope of this Statement.

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this report which are not historical facts are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as anticipate that, believes, continue to, estimates, expects to, hopes, intends, plans, to be, will be, will continue to be, or similar words. These forward-looking statements include the statements herein regarding: future 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 or retain our customer
base; the services that we or our customers will introduce and the benefits that end users will receive from these services; our plans to use or not to use certain types of technologies in the future; our future revenue and cost of revenue, gross margins and net losses; our future restructuring, research and development, sales and marketing, general and administrative, stock-based compensation, depreciation and amortization expenses; our future interest income and expense; the value of our goodwill and other intangible assets; the collectability of our accounts receivable; our plans to hire additional personnel; our future capital expenditures and capital requirements; and the anticipated impact of changes in applicable accounting rules.

The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include the risks described in our SEC filings, including our annual report on Form 10-K. These risks are also described in our filings with the Canadian Securities Administrators, including our prospectuses, material change reports, Annual Information Form and Management Information Circular. We encourage you to carefully review these risks in order to evaluate an investment in our securities. Some of the key risks that could cause actual results to differ materially from those projected or anticipated also include the risks discussed below. We do not undertake any obligation to update this forward-looking information, except as required under applicable law.

GENERAL INDUSTRY, ECONOMIC AND MARKET CONDITIONS

Our future revenues and operating results are dependent to a large extent upon general economic conditions, conditions in the wireless market and within the wireless market, our primary target market of mobile network operators. If general economic conditions are adverse, if the economies in which our target customers are located enter into a recession, or if demand for our solutions does not expand, our ability to increase our customer base may be limited, our revenue may not increase and our revenue could decrease.

MOBILE NETWORK OPERATOR FOCUS

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

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

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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 (XMS) sales opportunities include Nokia, Ericsson, Comverse, Alcatel and Openwave. Our success is dependent on our ability to win our share of these opportunities against these larger competitors and to retain our customers. Many of these competitors are able to bundle other products (including handsets and/or network equipment) into sales of competitive products, which they might argue 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.

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, 2005, 28% of our revenue was derived from Hewlett-Packard (as reseller to Sprint PCS) and 28% and 26% was derived from two other 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.

INTERNATIONAL MARKETS

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

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

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

LIQUIDITY

In order to help ensure that we would have sufficient capital to take advantage of our core business opportunities, we have taken significant actions to reduce our operating expenses and in the first half of 2004, raised $8 million by issuing convertible debt. However, most of our operating expenses, such as employee compensation and lease payments for facilities and equipment, are relatively stable, and

31



these expense levels are based in part on our expectations regarding future revenues. As a result, any sustained shortfall in our revenues relative to our expectations would negatively impact our operating results. Accordingly, if the cost-cutting actions that we have taken are insufficient, we may not have sufficient capital to fund our operations, and additional capital may not be available on acceptable terms, if at all. Any of these outcomes could adversely impact our ability to respond to competitive pressures or could prevent us from conducting all or a portion of our planned operations. We may need to undertake additional measures to reduce our operating expenses in the future.

INVESTMENTS IN OTHER COMPANIES AND NEW TECHNOLOGIES

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

RECEIVABLES

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

EMPLOYEES

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

GROSS MARGINS

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

INTELLECTUAL PROPERTY

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

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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. 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.

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

IMPACT OF INTEREST RATE EXPOSURE

As of March 31, 2005, we had approximately $11.3 million in cash, cash equivalents, short-term investments and restricted cash, of which $8.2 million consisted of short-term investments and restricted cash. A significant portion of the cash earns interest at variable rates. In addition, although our short-term investments are fixed-rate instruments, the average term is short. Accordingly, our interest income is effectively sensitive to changes in the level of prevailing interest rates. Our convertible notes payable to related parties bear interest at a fixed rate.

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, 2005, we incurred realized and unrealized foreign currency losses relating to the translation of our non-U.S. dollar denominated monetary assets and liabilities of approximately $10,000.

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

There have not been any changes in the Companys internal controls over financial reporting that occurred during the first quarter of 2005 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.

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

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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.  If the modifications agreed upon by the parties are acceptable to the Court, notice will be given to all class members of the settlement, a fairness hearing will be held and 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.

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

In January 2005, the Company issued 33,549 common shares with a market value of $268,000 to Austin Ventures in settlement of interest due of $103,000 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.
|------- | ------------------------------------------------------

None.

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

None.

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

The following exhibits are filed with this Report:

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|No.  |  | Description                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------
|     |  |                                                                                                
|10.1 |  | Form of U.S. Option Agreement under the 724 Solutions Inc. 2005 Stock   Incentive Plan         
|10.2 |  | Form of International Option Agreement under the 724 Solutions Inc.   2005 Stock Incentive Plan
|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. SIMS  |  | Chief Executive Officer (principal executive officer)                |  | May 10, 2005
|                  |  |                                                                      | 
|John J. Sims      |  |                                                                      | 
|                  |  |                                                                      | 
|/s/ GLENN BARRETT |  | Chief Financial Officer (principal financial and accounting officer) |  | May 10, 2005
|                  |  |                                                                      | 
|Glenn Barrett     |  |                                                                      | 

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