SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the Quarterly Period Ended June 30, 2004.

or

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.

Commission File Number: 000-31146

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

|Canada(State or Other Jurisdiction of
Incorporation or Organization)                  |  | Inapplicable(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------- |  | ------------------------------------------------
|1221 State Street, Suite 200
Santa Barbara, CA(Address of Principal Executive Office) |  | 93101(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.

Yes  ý                   No  o

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

Yes  o                   No  ý

Common Shares, no par value  5,983,349 shares outstanding as of August 6, 2004
(together with associated rights to purchase additional Common Shares)



---





724 SOLUTIONS INC.

Table of Contents

|                              |                                                                                                  | Page                       
|----------------------------- | ------------------------------------------------------------------------------------------------ | ---------------------------
|PART I.                       |                                                                                                  |                            
|FINANCIAL INFORMATION         |                                                                                                  | 1                          
|                              | Item 1.    Financial Statements                                                                  |                            
|                              | Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations |                            
|                              | Item 3.    Quantitative and Qualitative Disclosures About Market Risk                            |                            
|                              | Item 4.    Controls and Procedures                                                               |                            
|PART II.    OTHER INFORMATION |                                                                                                  | 31                         
|                              | Item 1.    Legal Proceedings                                                                     |                            
|                              | Item 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |                            
|                              | Item 3.    Defaults Upon Senior Securities                                                       |                            
|                              | Item 4.    Submission of Matters to a Vote of Security Holders                                   |                            
|                              | Item 5.    Other Information                                                                     |                            
|                              | Item 6.    Exhibits and Reports on Form 8-K                                                      |                            
|                              |                                                                                                  | (a)    Exhibits:           
|                              |                                                                                                  | (b)    Reports on Form 8-K:
|SIGNATURES                    |                                                                                                  |                            

i

---





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

724 SOLUTIONS INC.
Consolidated Balance Sheets
(In thousands of U.S. dollars)
June 30, 2004 and December 31, 2003

|                                           |                                                                   | 2004                    |                                                         | 2003     |  
|------------------------------------------ | ----------------------------------------------------------------- | ----------------------- | ------------------------------------------------------- | -------- | -
|
|Assets                                     |                                                                   |                         |                                                         |          |  
|Current assets:                            |                                                                   |                         |                                                         |          |  
|                                           | Cash and cash equivalents (note 2)                                |                         | $                                                       | 14,174   |  
|                                           | Short-term investments (note 2)                                   |                         |                                                         | 1,500    |  
|                                           | Restricted cash (note 2)                                          |                         |                                                         | 190      |  
|                                           | Accounts receivable  trade, net of allowance of $31 (2003  $60) |                         |                                                         | 2,505    |  
|                                           | Prepaid expenses and other receivables                            |                         |                                                         | 734      |  
|                                           |                                                                   |                         |                                                         |          |  
|Total current assets                       |                                                                   |                         | 19,103                                                  |          |  
|Deferred charges (note 3)                  |                                                                   |                         | 345                                                     |          |  
|Fixed assets                               |                                                                   |                         | 891                                                     |          |  
|                                           |                                                                   |                         |                                                         |          |  
|Total assets                               |                                                                   | $                       | 20,339                                                  |          | $
|                                           |                                                                   |                         |                                                         |          |  
|Liabilities and Shareholders' Equity       |                                                                   |                         |                                                         |          |  
|Current liabilities:                       |                                                                   |                         |                                                         |          |  
|                                           | Accounts payable                                                  |                         | $                                                       | 541      |  
|                                           | Accrued liabilities                                               |                         |                                                         | 2,691    |  
|                                           | Deferred revenue                                                  |                         |                                                         | 344      |  
|                                           |                                                                   |                         |                                                         |          |  
|Total current liabilities                  |                                                                   |                         | 3,576                                                   |          |  
|Long-term liabilities                      |                                                                   |                         | 188                                                     |          |  
|Notes payable (note 3)                     |                                                                   |                         | 8,000                                                   |          |  
|                                           |                                                                   |                         |                                                         |          |  
|Total liabilities                          |                                                                   |                         | 11,764                                                  |          |  
|Shareholders' equity:                      |                                                                   |                         |                                                         |          |  
|                                           | Share capital (note 5):                                           |                         |                                                         |          |  
|                                           |                                                                   | Authorized:             |                                                         |          |  
|                                           |                                                                   |                         | Unlimited common shares                                 |          |  
|                                           |                                                                   |                         | Unlimited preferred shares                              |          |  
|                                           |                                                                   | Issued and outstanding: |                                                         |          |  
|                                           |                                                                   |                         | 5,983,349 common shares (December 31, 2003  5,983,349) |          |  
|                                           | Contributed surplus                                               |                         |                                                         | 112      |  
|                                           | Accumulated deficit                                               |                         |                                                         | (756,146 | )
|                                           | Accumulated other comprehensive income                            |                         |                                                         | 101      |  
|                                           |                                                                   |                         |                                                         |          |  
|Total shareholders' equity                 |                                                                   |                         | 8,575                                                   |          |  
|Contingent liabilities (note 9)            |                                                                   |                         |                                                         |          |  
|                                           |                                                                   |                         |                                                         |          |  
|Total liabilities and shareholders' equity |                                                                   | $                       | 20,339                                                  |          | $

See
accompanying notes to consolidated financial statements.

1

---



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

|                                                                                                    |                                   | Three months ended June 30, |        | Six months ended June 30, |   
|--------------------------------------------------------------------------------------------------- | --------------------------------- | --------------------------- | ------ | ------------------------- | --
|
|
|Revenue:                                                                                            |                                   |                             |        |                           |   
|                                                                                                    | Product                           |                             | $      | 1,930                     |   
|                                                                                                    | Services                          |                             |        | 1,119                     |   
|                                                                                                    |                                   |                             |        |                           |   
|                                                                                                    |                                   |                             | 3,049  |                           |   
|Operating expenses:                                                                                 |                                   |                             |        |                           |   
|                                                                                                    | Cost of revenue                   |                             |        | 1,537                     |   
|                                                                                                    | Research and development          |                             |        | 1,433                     |   
|                                                                                                    | Sales and marketing               |                             |        | 1,197                     |   
|                                                                                                    | General and administrative        |                             |        | 755                       |   
|                                                                                                    | Depreciation                      |                             |        | 120                       |   
|                                                                                                    | Amortization of intangible assets |                             |        |                          |   
|                                                                                                    | Stock-based compensation:         |                             |        |                           |   
|                                                                                                    |                                   | Cost of revenue             |        |                           | 3 
|                                                                                                    |                                   | Research and development    |        |                           | 9 
|                                                                                                    |                                   | Sales and marketing         |        |                           | 7 
|                                                                                                    |                                   | General and administrative  |        |                           | 14
|                                                                                                    | Restructuring costs (note 6)      |                             |        | (900                      | ) 
|                                                                                                    |                                   |                             |        |                           |   
|                                                                                                    |                                   |                             | 4,175  |                           |   
|                                                                                                    |                                   |                             |        |                           |   
|Loss from operations                                                                                |                                   |                             | (1,126 | )                         |   
|Interest income (expense)                                                                           |                                   |                             | (19    | )                         |   
|                                                                                                    |                                   |                             |        |                           |   
|Loss for the period                                                                                 |                                   | $                           | (1,145 | )                         | $ 
|                                                                                                    |                                   |                             |        |                           |   
|Basic and diluted loss per share                                                                    |                                   | $                           | (0.19  | )                         | $ 
|                                                                                                    |                                   |                             |        |                           |   
|Weighted average number of shares used in computing basic and diluted loss per share (in thousands) |                                   |                             | 5,983  |                           |   
|                                                                                                    |                                   |                             |        |                           |   

See
accompanying notes to consolidated financial statements.

2

---



724 SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(In thousands of U.S. dollars, except number of common shares)
Six months ended June 30, 2004 and 2003
(Unaudited)

|                                                  |                   | Common shares |           |   |         | Deferred stock-based compensation related to stock options |   |     |   |   |       |        |  
|------------------------------------------------- | ----------------- | ------------- | --------- | - | ------- | ---------------------------------------------------------- | - | --- | - | - | ----- | ------ | -
|
|
|Balances                                          |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|                                                  | December 31, 2002 |               | 5,983,349 |   | $       | 764,508                                                    |   | $   |  |   | $     | (1,616 | )
|Loss for the period                               |                   |              |           |   |        |                                                            |   |    |   |   |      |        |  
|Cumulative translation adjustment                 |                   |              |           |   |        |                                                            |   |    |   |   |      |        |  
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Comprehensive loss                                |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Amortization of deferred stock-based compensation |                   |              |           |   |        |                                                            |   |    |   |   | 1,616 |        |  
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Balances, June 30, 2003                           |                   | 5,983,349     |           | $ | 764,508 |                                                            | $ |    |   | $ |      |        | $
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Balances                                          |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|December 31, 2003                                 |                   | 5,983,349     |           | $ | 764,508 |                                                            | $ | 62  |   | $ |      |        | $
|Loss for the period                               |                   |              |           |   |        |                                                            |   |    |   |   |      |        |  
|Cumulative translation adjustment                 |                   |              |           |   |        |                                                            |   |    |   |   |      |        |  
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Comprehensive loss                                |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Amortization of stock-based compensation          |                   |              |           |   |        |                                                            |   | 50  |   |   |      |        |  
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  
|Balances, June 30, 2004                           |                   | 5,983,349     |           | $ | 764,508 |                                                            | $ | 112 |   | $ |      |        | $
|                                                  |                   |               |           |   |         |                                                            |   |     |   |   |       |        |  

The historic common share numbers have been adjusted to reflect the 10 for 1 share consolidation completed in the second quarter of 2003.

See
accompanying notes to consolidated financial statements.

3

---



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

|                                                 |                                                 | Three months ended June 30,            |        | Six months ended June 30, |       
|------------------------------------------------ | ----------------------------------------------- | -------------------------------------- | ------ | ------------------------- | ------
|
|
|Cash flows from operating activities:            |                                                 |                                        |        |                           |       
|                                                 | Loss for the period                             |                                        | $      | (1,145                    | )     
|                                                 | Items not affecting cash:                       |                                        |        |                           |       
|                                                 |                                                 | Depreciation and amortization          |        |                           | 127   
|                                                 |                                                 | Stock-based compensation               |        |                           | 33    
|                                                 |                                                 | Other non-cash expenses                |        |                           | 4     
|                                                 | Change in operating assets and liabilities:     |                                        |        |                           |       
|                                                 |                                                 | Accounts receivable                    |        |                           | 119   
|                                                 |                                                 | Prepaid expenses and other receivables |        |                           | 134   
|                                                 |                                                 | Deferred charges                       |        |                           | (352  
|                                                 |                                                 | Accounts payable                       |        |                           | 264   
|                                                 |                                                 | Long-term accounts payable             |        |                           | 188   
|                                                 |                                                 | Accrued liabilities                    |        |                           | (2,270
|                                                 |                                                 | Deferred consideration                 |        |                           |      
|                                                 |                                                 | Deferred revenue                       |        |                           | 18    
|                                                 |                                                 |                                        |        |                           |       
|                                                 | Net cash flows from operating activities        |                                        |        | (2,880                    | )     
|Cash flows from financing activities:            |                                                 |                                        |        |                           |       
|                                                 | Issuance (principal repayment) of notes payable |                                        |        | 8,000                     |       
|Cash flows from investing activities:            |                                                 |                                        |        |                           |       
|                                                 | Purchase of fixed assets                        |                                        |        | (546                      | )     
|                                                 | Sale (purchase) of short-term investments, net  |                                        |        | (1,500                    | )     
|                                                 | Increase (decrease) in restricted cash          |                                        |        |                          |       
|                                                 |                                                 |                                        |        |                           |       
|                                                 | Net cash flows from investing activities        |                                        |        | (2,046                    | )     
|                                                 |                                                 |                                        |        |                           |       
|Increase (decrease) in cash and cash equivalents |                                                 |                                        | 3,074  |                           |       
|Cash and cash equivalents, beginning of period   |                                                 |                                        | 11,100 |                           |       
|                                                 |                                                 |                                        |        |                           |       
|Cash and cash equivalents, end of period         |                                                 | $                                      | 14,174 |                           | $     
|                                                 |                                                 |                                        |        |                           |       

See
accompanying notes to consolidated financial statements.

4

---



1.     Basis of presentation:



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



3.     Secured convertible notes:



5

---





4.     Segmented information:



6

---





|                                    |               | Three months ended June 30, |       | Six months ended June 30,
|----------------------------------- | ------------- | --------------------------- | ----- | -------------------------
|
|
|Net revenue by geographic location: |               |                             |       |                          
|                                    | North America |                             | $     | 2,748                    
|                                    | Europe        |                             |       | 214                      
|                                    | Asia Pacific  |                             |       | 87                       
|                                    |               |                             |       |                          
|                                    |               | $                           | 3,049 |                          
|                                    |               |                             |       |                          



|(In thousands of U.S. dollars) |  | June 30, 2004 |     | December 31, 2003
|------------------------------ |  | ------------- | --- | -----------------
|North America                  |  | $             | 806 |                  
|Europe                         |  |               | 85  |                  
|                               |  |               |     |                  
|                               |  | $             | 891 |                  
|                               |  |               |     |                  

7

---



5.     Share capital:







Exercise price ranges

Number of options

Weighted average exercise price

Weighted average remaining contractual life (years)

Number of options exerciseable

Weighted average exercise price$


$
5.00

559,008

$
3.82

9.2

44,454

$
3.475.01


10.00

160,036


6.40

8.1

83,361


5.8510.01


20.00

19,325


17.92

6.2

17,335


16.7720.01


50.00

4,578


34.22

6.3

4,503


33.2850.01


100.00

7,729


90.52

6.6

4,854


80.62100.01


500.00

21,688


236.81

6.5

13,109


230.34772,364

$
14.21

8.5

167,616

$
27.85






8

---





Three months ended June 30,

Six months ended June 30,(In thousands of U.S. dollars, except per share amounts)

June 30,
2004

June 30,
2003

June 30,
2004

June 30,
2003Loss for the period

$
(1,145
)
$
(6,849
)
$
(6,259
)
$
(13,181
)Compensation expense related to the fair value of stock options In excess of amounts recognized


(268
)

(3,704
)

(271
)

(8,226
)Pro forma loss for the period

$
(1,413
)
$
(10,553
)
$
(6,530
)
$
(21,407
)Pro forma loss per share:Basic and diluted

$
(0.24
)
$
(1.76
)
$
(1.09
)
$
(3.58
)




6.     Restructuring costs:



9

---





(In thousands of U.S. dollars)

Severance costs

Lease exit costs

Hosting exit costs

TotalProvision, December 31, 2003

$
292

$
140

$
591

$
1,023Activity during the period ended June 30, 2004Restructuring charges


1,600


500





2,100Reversal of provision


(900
)







(900
)Cash payments


(913
)

(488
)

(394
)

(1,795
)Provision, June 30, 2004

$
79

$
152

$
197

$
428




(In thousands of U.S. dollars)

Severance costs

Lease exit costs

Hosting exit costs

TotalProvision, December 31, 2002

$
967

$
1,528

$
2,487

$
4,982Activity during the period ended June 30, 2003Restructuring charges


525


175





700Reversal of provision








(400
)

(400
)Cash payments


(783
)

(1,183
)

(587
)

(2,553
)Provision, December 31, 2002

$
709

$
520

$
1,500

$
2,729


7.     Reconciliation to Canadian GAAP:



10

---





(In thousands of U.S. dollars)

U.S. GAAP

Adjustments

Canadian GAAPAssetsCurrent assets:Cash and cash equivalents


14,174





14,174Short-term investments


1,500





1,500Restricted cash


190





190Accounts receivable, net of allowance of $31


2,505





2,505Prepaid expenses and other receivables


734





734Total current assets


19,103





19,103Deferred charges


345





345Fixed assets


891





891Total assets

$
20,339

$


$
20,339Liabilities and shareholders' equityCurrent liabilities:Accounts payable


541





541Accrued liabilities


2,691





2,691Deferred revenue


344





344Total current liabilities


3,576





3,576Long-term accounts payable


188





188Notes payable


8,000


(919
)

7,081Total liabilities


11,764


(919
)

10,845Shareholders' equity:Share capital


764,508





764,508Contributed surplus


112





112Equity portion of notes payable





933


933Accumulated deficit


(756,146
)

(14
)

(756,160
)Accumulated other comprehensive income


101





101Total shareholders' equity


8,575


919


9,494Total liabilities and shareholders' equity

$
20,339

$


$
20,339


11

---





(In thousands of U.S. dollars, except per share amounts)

U.S. GAAP

Adjustments

Canadian GAAPRevenue:Product


1,930





1,930Services


1,119





1,119$
3,049

$


$
3,049Operating expenses:Cost of revenue


1,537





1,537Research and development


1,433





1,433Sales and marketing


1,197





1,197General and administrative


755





755Depreciation


120





120Stock-based compensation:Cost of revenue


3





3Research and development


9





9Sales and marketing


7





7General and administrative


14





14Restructuring charges


(900
)




(900
)Total operating expenses

$
4,175

$


$
4,175Loss from operations


(1,126
)




(1,126
)Interest income (expense)


(19
)

(14
)

(33
)Loss for the period

$
(1,145
)
$
(14
)
$
(1,159
)Basic and diluted loss per share

$
(0.19
)
$


$
(0.19
)Weighted average number of shares used in computing basic and diluted loss per share (000's)


5,983





5,983




(In thousands of U.S. dollars, except per share amounts)

U.S. GAAP

Adjustments

Canadian GAAPRevenue:Product


3,691





3,691Services


2,359





2,359$
6,050

$


$
6,050Operating expenses:Cost of revenue


3,065





3,065Research and development


3,522





3,522Sales and marketing


2,576





2,576General and administrative


1,588





1,588Depreciation


305





305Stock-based compensation:Cost of revenue


5





5Research and development


13





13Sales and marketing


11





11General and administrative


21





21Restructuring charges


1,200





1,200Total operating expenses

$
12,306

$


$
12,306Loss from operations


(6,256
)




(6,256
)Interest income (expense)


(3
)

(14
)

(17
)Loss for the period

$
(6,259
)
$
(14
)
$
(6,273
)Basic and diluted loss per share

$
(1.05
)
$


$
(1.05
)Weighted average number of shares used in computing basic and diluted loss per share (000's)


5,983





5,983


12

---





(In thousands of U.S. dollars)

U.S. GAAP

Adjustments

Canadian GAAPCash flows from (used in) operating activities:Loss for the period


(1,145
)

(14
)

(1,159
)Items not affecting cash:Accretion on convertible notes payable





14


14Depreciation and amortization


127





127Stock-based compensation


33





33Other non-cash expenses


4





4Changes in operating assets and liabilities:Accounts receivable


119





119Prepaid expenses and other receivables


134





134Deferred charges


(352
)




(352
)Accounts payable


264





264Long-term accounts payable


188





188Accrued liabilities


(2,270
)




(2,270
)Deferred revenue


18





18Net cash flows from operating activities

$
(2,880
)
$


$
(2,880
)Cash flows from financing activities:Issuance (principal repayment) of notes payable


8,000





8,000Cash flows from investing activities:Purchase of fixed assets


(546
)




(546
)Sale (purchase) of short-term investments, net


(1,500
)




(1,500
)Net cash flows from investing activities

$
(2,046
)
$


$
(2,046
)Increase (decrease) in cash and cash equivalents


3,074





3,074Cash and cash equivalents, beginning of period


11,100





11,100Net cash flows from operating activities

$
14,174

$


$
14,174


13

---





(In thousands of U.S. dollars)

U.S. GAAP

Adjustments

Canadian GAAPCash flows from (used in) operating activities:Loss for the period


(6,259
)

(14
)

(6,273
)Items not affecting cash:Accretion on convertible notes payable





14


14Depreciation and amortization


312





312Stock-based compensation


50





50Other non-cash expenses


32





32Changes in operating assets and liabilities:Accounts receivable


(208
)




(208
)Prepaid expenses and other receivables


(86
)




(86
)Deferred charges


(352
)




(352
)Accounts payable


130





130Long-term accounts payable


188





188Accrued liabilities


(711
)




(711
)Deferred revenue


(66
)




(66
)Net cash flows from operating activities

$
(6,970
)
$


$
(6,970
)Cash flows from financing activities:Issuance (principal repayment) of notes payable


8,000





8,000Cash flows from investing activities:Purchase of fixed assets


(548
)




(548
)Sale (purchase) of short-term investments, net


248





248Increase (decrease) in restricted cash


8





8Net cash flows from investing activities

$
(292
)
$


$
(292
)Increase (decrease) in cash and cash equivalents


738





738Cash and cash equivalents, beginning of period


13,436





13,436Net cash flows from operating activities

$
14,174

$


$
14,174


14

---



8.     Guarantees:







15

---





9.     Contingent liabilities:



16

---



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

724
Solutions Inc. is a leading provider of next-generation IP-based network and data services. We were incorporated in 1997, and in 1999 we introduced our
initial products and solutions for the financial services industry ("FI"). In 2001, we began offering our products to mobile network operators ("MNO's").

During
2002, we concluded that adoption of wireless technologies by the financial services industry had slowed considerably and that such organizations would remain conservative about
this type of investment for the foreseeable future. At the same time, our analysis indicated that the opportunity in the MNO sector was potentially larger and also likely to develop sooner. We,
therefore, made the decision to principally focus on the MNO market, with a corresponding diminished focus on the delivery of financial services applications.

Accordingly,
we have adjusted the size of our investments in these two market segments, substantially reducing the level of investment for the FI market, while bolstering that for the
MNO market. We continue to monitor our cost structure to ensure that the investments we make on a product-by-product basis are appropriate to the revenue opportunities we
believe exist.

We
believe that MNO's planning next-generation data networks face two distinct challenges. Firstly, data networks must be designed to support a wide variety of new revenue
opportunities, partnerships and technologies so that the mobile operators can adjust their strategies quickly. Secondly, mobile operators must deploy data networks that can grow smoothly and reliably,
without creating economic barriers or compromising return on investment.

724
Solutions designed the X-treme Mobility Suite ("XMS") of products to address the challenges mobile operators face in deploying next-generation data networks.
Our XMS gateway products enable mobile operators to implement solutions based on emerging open standards technologies including WAP 2.0, MMS, SMS and J2ME. XMS application enablers support a wide
variety of third party content initiatives. The X-treme Mobility Suite provides the flexibility, scalability and total cost of ownership metrics that help ensure both the
short-term and long-term success of next-generation mobile data networks.

Our
customers currently include leading mobile network operators. 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.

DEVELOPMENTS IN THE SECOND QUARTER OF 2004

ADOPTION OF U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR REPORTING PURPOSES

Our
consolidated financial statements have historically been prepared in accordance with Canadian generally accepted accounting principles. As of the second quarter of 2004, our
consolidated financial statements have been prepared under U.S. generally accepted accounting principles. We have determined that this is appropriate as the majority of our shareholders reside
in the United States. Comparative financial statements have been restated to reflect this change and a reconciliation setting out the differences between U.S. and Canadian generally accepted
accounting principles as applied to our consolidated financial statements is provided in note 7.

17

---



CONVERTIBLE DEBT ISSUANCE

In
the second quarter of 2004, we arranged a non-brokered private placement of secured convertible promissory notes with Austin Ventures for a total principal amount of
$8,000,000. The first tranche of the financing involved the issuance of $3,044,000 of convertible notes and was completed on May 14, 2004. In accordance with the policies of the Toronto Stock
Exchange and the NASDAQ National Market, shareholder approval was required to complete the second tranche of the financing. We obtained such approval on June 29, 2004 and completed the second
tranche of the financing by issuing $4,956,000 of convertible notes.

The
notes have a three (3) year term and carry an interest rate of 2.5% per quarter. All outstanding principal and interest is convertible into common shares of 724 Solutions at a
conversion price of $3.07 per share. 724 Solutions also agreed to include two nominees from Austin Ventures in any slate of Directors proposed for shareholder approval, and that the Board would now
consist of seven Directors. See note 3 to our consolidated financial statements for the three and six months ended June 30, 2004 for further details.

ASSET PURCHASE

In
the second quarter of 2004, we completed an agreement with Nokia (NYSE: NOK) to acquire the Nokia Multimedia Application Gateway (AGW) product and a separate OEM agreement under which
Nokia will continue to offer the product to its existing and future customers.

We
have transitioned the development and support of the product to our Toronto development center. The Multimedia Application Gateway joins 724 Solutions' X-treme Mobility
Suite and, in addition to distribution through Nokia, will be available to 724 Solutions' mobile operator customers through direct and other partner channels.

RESTRUCTURING AND OTHER CHARGES

Due
to the Nokia asset purchase, we determined that we would not carry out some employee terminations planned as of the end of the prior quarter. Therefore, in the three months ended
June 30, 2004, we reversed $900,000 in severance costs included in restructuring charges. This amount was part of the restructuring charge of $2.1 million recorded in the prior quarter
related to the planned termination of approximately forty employees and the consolidation of facilities. Employee terminations not related to the Nokia asset purchase and the consolidation of
facilities proceeded as planned. See note 6 to our consolidated financial statements for the three and six months ended June 30, 2004 for further details.

SUBSEQUENT EVENT

NASDAQ LISTING

Effective
at the opening of business on July 13, 2004, we transferred our U.S. listing from the Nasdaq National Market to the Nasdaq Smallcap Market. Our stock continues to
trade under the symbol of "SVNX." There is no change to our Toronto Stock Exchange listing where our stock trades under the symbol "SVN."

CRITICAL ACCOUNTING POLICIES

We
periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current
economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. We have determined
that the critical accounting policies relating to our core ongoing business activities are primarily those that relate to revenue recognition. Other important accounting policies are described in
note 2 to our audited annual consolidated financial statements for the year ended December 31, 2003.

18

---



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 all the following conditions are met:



Typically,
software license agreements are 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. For those contracts 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 can record the remaining value of the contract as license revenue
after allocating full value to the undelivered elements.

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 on unproven products until we achieve contractually defined milestones or until customer
acceptance has occurred, as the case may be for such agreements.

PRODUCT REVENUE

Product
revenue consists of the following:



19

---





SERVICE REVENUE

IMPLEMENTATION AND CUSTOMER SERVICE FEES

Revenue
from implementation and customer services includes fees for implementation of our product offerings, consulting and training services. Customers are charged a fee based on time
and expenses. Revenue from implementation and customer service fees is recognized as the services are performed or deferred until we achieve contractually defined milestones or until customer
acceptance has occurred, as the case may be, for such contracts.

MAINTENANCE FEES

We
receive revenue from maintaining and servicing our products for customers. The maintenance fee is typically equal to a specified percentage of the customer's license fee. 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.

20

---



RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2003

Our
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The significant differences
between U.S. and Canadian generally accepted accounting principles as applied to our consolidated financial statements are reconciled in note 7.

REVENUE

PRODUCT REVENUE

Product
revenue increased to $1.9 million and $3.7 million for the three and six months ended June 30, 2004, respectively, compared to $1.6 million and
$3.6 million in the corresponding periods in 2003. As indicated in the "Overview" section, we have increased our focus on MNO's through our XMS suite of products while we have reduced our focus
on the financial services industry. Product revenue from our XMS suite of products increased to $1.8 million and $3.5 million for the three and six months ended June 30, 2004,
respectively, from $1.5 million and $2.6 million for the same periods in 2003. Product revenue from the financial services industry was $125,000 and $174,000 for the three and six months
ended June 30, 2004, respectively, compared to $109,000 and $1.0 million for the same periods in 2003.

SERVICE REVENUE

Service
revenue decreased to $1.1 million and $2.4 million for the three and six months ended June 30, 2004, respectively, compared to $1.4 million and
$2.9 million in the corresponding periods in 2003. The decrease resulted from changing our customer focus to MNO's and our product focus to the XMS suite of products. Service revenue from our
XMS suite of products increased to $852,000 and $1.8 million for the three and six months ended June 30, 2004, respectively, from $560,000 and $919,000 for the same periods of 2003.
Service revenue from the financial services industry decreased to $267,000 and $578,000 for the three and six months ended June 30, 2004, respectively, from $813,000 and $2.0 million for
the same periods in 2003.

OPERATING EXPENSES

COST OF REVENUE

Cost
of revenue (COR) consists primarily of personnel costs associated with customer support, training and implementation, as well as amounts paid to third-party consulting firms for
those services, together with an allocation of expenses for our facilities and administration.

Cost
of revenue was $1.5 million and $3.1 million for the three and six months ended June 30, 2004, respectively, compared to $1.4 million and
$3.0 million for the corresponding periods in 2003. Cost of revenue, as a percentage of revenue, was 50% and 51% for the three and six months ended June 30, 2004, respectively, compared
to 47% and 46% for the corresponding periods in 2003.

RESEARCH AND DEVELOPMENT

Research
and development (R&D) expenses include compensation of software development teams working on the continuing enhancement of our products as well as our quality assurance and
testing activities. These expenses also include independent contractors and consultants, software licensing expenses and allocated operating expenses.

21

---



Research
and development decreased to $1.4 million and $3.5 million for the three and six months ended June 30, 2004, respectively, compared to $2.6 million
and $5.5 million for the corresponding periods in 2003. The decreases are a result of our restructuring initiatives through which we have reduced our R&D headcount and developed a more
streamlined, integrated and focused product road map that reduced duplication in the R&D process. 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 47% and 58% for the three and six months ended June 30, 2004, respectively, compared to 85% and 84% for the same
periods in 2003.

SALES AND MARKETING

Sales
and marketing (S&M) expenses include compensation of sales and marketing personnel as well as expenses related to public relations and advertising, trade shows, marketing materials
and allocated operating expenses.

Sales
and marketing expenses were $1.2 and $2.6 million for the three and six months ended June 30, 2004, respectively, compared to $2.2 million and
$4.4 million for the corresponding periods in 2003. The decrease is a result of the reduction in the number of sales and marketing personnel and reduced spending on discretionary marketing
programs. 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 39% and 43% for the three and six months ended June 30, 2004, compared to 72% and 67% for the same periods in 2003.

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 $755,000 and $1.6 million for the three and six months ended June 30, 2004, respectively, compared to $1.3 million and $2.2 million
for the corresponding periods in 2003. The decrease in G&A expenses reflects our efforts in our restructuring initiatives to reduce complexity in our business and to make our infrastructure efficient
in order to support our business in the current market environment. G&A expense, as a percentage of revenue, was 25% and 26% for the three and six months ended June 30, 2004, compared to 43%
and 34% for the same periods in 2003.

DEPRECIATION AND AMORTIZATION

Depreciation
expense decreased to $120,000 and $305,000 in the three and six months ended June 30, 2004, respectively, from $203,000 and $562,000 in the corresponding periods in
2003. The decreases are a result of the decommissioning of redundant fixed assets and reductions in capital expenditures resulting from our restructuring initiatives.

Amortization
expense was nil for the three and six months ended June 30, 2004, compared to $1.2 million and $2.3 million for the same periods in 2003. The
amortization expense in 2003 represented the amortization of acquired technology, which was amortized over a period of two to five years. The carrying value of acquired technology is nil.

STOCK-BASED COMPENSATION

Effective
January 1, 2003, we prospectively adopted full 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 accounted for under the fair value method, we accounted for stock based compensation 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.

22

---



We
adopted full fair value accounting for stock based awards prospectively for all awards granted, modified or settled on or after January 1, 2003. Under the fair value based
method, compensation cost is measured at fair value at the date of grant and is expensed over the award's vesting period.

Under
the fair value based method, compensation cost is measured at fair value at the date of grant and is expensed over the award's vesting period. In accordance with the prospective
transitional option permitted under FAS148, we retroactively applied the fair value based method to all employee stock options granted on or after January 1, 2003. Since the total stock option
expense for 2003 using the fair value based method was only $62,000, we have determined that it is not necessary to restate our 2003 quarterly results.

Historically,
our stock-based compensation has primarily represented the amortization of deferred stock-based compensation recorded as a result of assuming, through acquisitions, stock
option plans that included unvested options and common shares. This stock-based compensation was amortized on a straight-line basis over the vesting period of these options, and was fully
amortized by June 30, 2003.

Stock-based
compensation decreased to $33,000 and $50,000 for the three and six months ended June 30, 2004, respectively, compared to $852,000 and $1.6 million for the same
periods in 2003. The 2004 amounts relate to the amortization of the fair value of stock options granted since January 1, 2003, while the 2003 amounts primarily relate to the amortization of
deferred stock compensation associated with acquisitions.

RESTRUCTURING COSTS

As
noted in the "Developments in the Second Quarter of 2004" section, due to the asset purchase completed in the three months ended June 30, 2004, we determined that we would not
carry out some employee terminations planned as of the end of the prior quarter. Therefore, in the three months ended June 30, 2004, we reversed $900,000 in severance costs included in
restructuring charges. This amount was part of the restructuring charge of $2.1 million, including $1.6 million related to the planned termination of approximately forty employees and
$500,000 related to the consolidation of facilities, recorded in the prior quarter. Employee terminations not related to the asset purchase and the consolidation of facilities proceeded as planned.
The restructuring charge in the six months ended June 30, 2004 was $1.2 million, $700,000 related to severances and $500,000 related to the consolidation of facilities.

In
the three months ended June 30, 2003 we recorded a net restructuring charge of $300,000. There was no charge in the first quarter of 2003. The $300,000 net charge in the second
quarter of 2003 included $525,000 related to severance costs, $175,000 related to lease exit costs, offset by a $400,000 adjustment to reduce our estimated obligation under our hosting provision.

We
have $428,000 Included in our "Accrued Liabilities" as of June 30, 2004 in restructuring reserves. This includes severance costs of $79,000, lease exit costs of $152,000 and
hosting exit costs of $197,000. See note 6 to our consolidated financial statements for the three and six months ended June 30, 2004 for further details.

23

---



NET LOSS

For
the three months ended June 30, 2004, our net loss decreased to $1.1 million from $6.8 million in the same period in 2003. Revenue increased by $39,000 and our
restructuring initiatives resulted in significantly lower costs as COR, R&D, S&M and G&A expenses decreased by a total of $2.5 million in the three months ended June 30, 2004 compared to
the corresponding period in 2003. Other items positively impacting the results for the three months ended June 30, 2004 compared to the same period in 2003 included: the severance cost reversal
of $900,000 described above, compared to a net restructuring charge of $300,000 in 2003; depreciation of $120,000 in 2004 compared to $203,000 in 2003; amortization of nil in 2004 compared to
$1.2 million in 2003; and stock-based compensation of $33,000 in 2004 compared to $852,000 in 2003.

For
the six months ended June 30, 2004, our net loss decreased to $6.3 million from $13.2 million in the same period in 2003. Despite the revenue decline of $475,000
resulting from our reduced focus on the financial services industry, we improved results through significantly lower costs. COR, R&D, S&M and G&A expenses decreased by a total of $4.3 million
in the six months ended June 30, 2004 compared to the corresponding period in 2003. Other items positively impacting results for the six months ended June 30, 2004 compared to the same
period in 2003 included: depreciation was $305,000 in 2004 compared to $562,000 in 2003; amortization of intangible assets was nil in the current period verses $2.3 million in 2003, and
stock-based compensation was $50,000 in the current period verses $1.6 million in 2003. Items negatively impacting results included: restructuring charges were $1.2 million in 2004
verses $300,000 in the same period in 2003; and there was a net interest expense of $3,000 in the six months ended June 30, 2004 compared to interest income of $178,000 for the same period in
2003.

LIQUIDITY AND CAPITAL RESOURCES

Net
cash used in operating activities decreased to $2.9 million and $7.0 million for the three and six months ended June 30, 2004, respectively, compared to
$5.7 million and $12.7 million for the corresponding periods in 2003, as we have significantly reduced our workforce and expense structure as a result of our restructuring efforts. Net
cash used in operating activities for the three months ended June 30, 2004 consisted of our net loss of $1.1 million and a cash outflow of $1.9 million related to working capital
account changes, offset by non-cash items, specifically depreciation and amortization of $127,000 and stock-based compensation expense of $33,000.

Cash
flows from financing activities was $8.0 million for the three and six month periods ended June 30, 2004, compared to nil and a cash use of $600,000 in the
corresponding periods in 2003. The $8.0 million represents the proceeds from the convertible debt issuance completed in the second quarter of 2004. The $600,000 payment in 2003 represents the
final two payments of a note payable that was repaid by the end of the first quarter of 2003. There have been no common shares issuances in 2003 or 2004.

Excluding
the sale (purchase) of short-term investments and restricted cash changes, cash used in investing activities was $546,000 and $548,000 for the three and six month
periods ended June 30, 2004, respectively, compared to $18,000 and $88,000 in the corresponding periods in 2003. The amounts relate to net purchases of fixed assets.

Total
cash flows, excluding the sale (purchase) of short-term investments, and restricted cash changes, was $4.6 million and $482,000 for the three and six month
periods ended June 30, 2004, respectively, compared to cash use of $5.7 million and $13.4 million in the corresponding periods in 2003. Cash flows have improved because of the
convertible debt issuance in the second quarter of 2004 and because we have significantly reduced operating costs.

As
a result of the operational savings resulting from our restructurings and based on current estimates, we expect that cash from the sales of our products and our existing cash and cash
equivalents and short-term investments will be sufficient to cover our cash requirements, including planned capital expenditures, for at least the next 12 months. We may require
additional financing if we expand our operations at a faster rate than currently expected, if our costs unexpectedly increase, if our revenues decrease or if we seek to effect one or more significant
acquisitions.

24

---



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS  UNITED STATES AND CANADA

In
December 2003, the SEC issued Staff Accounting Bulletin No.104 ("SAB 104"), "Revenue Recognition", which supersedes Staff Accounting Bulletin No. 101 ("SAB101"),
"Revenue Recognition in Financial Statements." The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of Emerging Issues Task Force 00-21 ("EITF 00-21"), "Accounting for Revenue Arrangement with Multiple Deliverables."
SAB 104 also incorporated certain sections of the SEC's "Revenue Recognition in Financial Statements  Frequently Asked Questions and Answers" document.
While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance
of SAB 104. The adoption of SAB 104 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). In December 2003, the FASB issued
FIN 46R that supersedes FIN 46 and contains numerous exemptions. FIN 46R applies to financial statements of public entities that have or potentially have interests in entities
considered special purpose entities for periods ended after December 15, 2003 and otherwise to interests in VIE's for periods ending after March 15, 2004. VIE's are entities that have
insufficient equity and/or their equity investors lack one or more specified essential characteristics of a controlling financial interest. FIN 46R provides specific guidance for determining
when an entity is a VIE and who, if anyone, should consolidate the VIE. The adoption of this standard did not have material impact on our consolidated financial statements.

In
April 2003, the FASB issued SFAS No. 149. "Amendment of Statement 133 on Derivative Instruments and Hedging". SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The provisions of SFAS No. 149 are effective for contracts entered into after June 30, 2003. The adoption of
SFAS No. 149 did not have a material effect on our consolidated financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or and asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of
SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on our consolidated financial statements.

25

---



QUARTERLY RESULTS OF OPERATIONS

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

|                                                                                                    |                                   | Quarter ended                                                       |       
|--------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------------------- | ------
|
|
|Revenue:                                                                                            |                                   |                                                                     |       
|                                                                                                    | Product                           |                                                                     | $     
|                                                                                                    | Services                          |                                                                     |       
|                                                                                                    |                                   |                                                                     |       
|Total revenue                                                                                       |                                   |                                                                     | 3,049 
|Operating expenses:                                                                                 |                                   |                                                                     |       
|                                                                                                    | Cost of revenue                   |                                                                     |       
|                                                                                                    | Research and development          |                                                                     |       
|                                                                                                    | Sales and marketing               |                                                                     |       
|                                                                                                    | General and administrative        |                                                                     |       
|                                                                                                    | Depreciation                      |                                                                     |       
|                                                                                                    | Amortization of intangible assets |                                                                     |       
|                                                                                                    | Stock-based compensation:         |                                                                     |       
|                                                                                                    |                                   | Cost of revenue                                                     |       
|                                                                                                    |                                   | Research and development                                            |       
|                                                                                                    |                                   | Sales and marketing                                                 |       
|                                                                                                    |                                   | General and administrative                                          |       
|                                                                                                    | Restructuring costs               |                                                                     |       
|                                                                                                    |                                   | Write-down of fixed assets and goodwill and other intangible assets |       
|                                                                                                    |                                   |                                                                     |       
|                                                                                                    | Total operating expenses          |                                                                     |       
|                                                                                                    |                                   |                                                                     |       
|Loss from operations                                                                                |                                   |                                                                     | (1,126
|Interest income (expense)                                                                           |                                   |                                                                     | (19   
|Gain (loss) on sale of investments                                                                  |                                   |                                                                     |      
|Write-down of long-term investments                                                                 |                                   |                                                                     |      
|                                                                                                    |                                   |                                                                     |       
|Loss for the period                                                                                 |                                   | $                                                                   | (1,145
|                                                                                                    |                                   |                                                                     |       
|Basic and diluted loss per share                                                                    |                                   | $                                                                   | (0.19 
|Weighted-average number of shares used in computing basic and diluted loss per share (in thousands) |                                   |                                                                     | 5,983 

The historic common share numbers have been adjusted to reflect the 10 for 1 share consideration completed in the second quarter
of 2003.

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 our customer base; the services that we or our customers will introduce and the benefits that end users will receive from
these services; the impact of entering new markets; our plans to use or not to use certain types of technologies in the future; our future cost of revenue, gross margins and net losses; our future
restructuring, research and development, sales and marketing, general and administrative, stock-based compensation, depreciation and amortization expenses; our future interest income; the value of our
goodwill and other intangible assets; our future capital expenditures and capital requirements; and the anticipated impact of changes in applicable accounting rules.

26

---



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 markets of mobile network operators and financial institutions. As economic activity slowed in these markets beginning in 2001, our customers began deferring their spending on our products and
our revenues began to decline. Our sales cycle has lengthened significantly as potential customers have reduced their spending commitments and their willingness to make investments in new wireless
services. Moreover, adoption of wireless services has not proceeded as rapidly as we previously anticipated. If general economic conditions are adverse, if the economies in which our target customers
are located enter into a recession, or if demand for our solutions does not expand, our ability to increase our customer base may be limited, and our revenue may decrease further.

ENTERING NEW MARKETS

We
have made mobile network operators an important focus of our activities. In order to encourage these potential customers to adopt and implement our solutions, we may incur higher
costs than we have in the past, and we may not be able to attract a large number of these customers. In the three months ended June 30, 2004, 58% of our revenue was derived from one North
American MNO. Mobile network operators may not be successful in rolling out our 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, may increase our expenses and may damage our reputation.

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. 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 reduces risk to their customers. Also, consolidation of mobile network operators increases the competition among our competitors and us.

27

---



INTERNATIONAL MARKETS

In
December 2000, we first recognized revenues from sales in international markets. We had expected that sales in these regions would 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. However, some key countries in these regions experienced decreasing economic
activity, and our sales to these regions declined beginning in the third quarter of 2001. This trend has not reversed to date and it may not reverse in the second half of 2004 or thereafter, resulting
in us not being able to increase our customer base, and accordingly, limited growth from these markets.

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 since the second quarter of 2001 to
reduce our operating expenses. However, most of our operating expenses, such as employee compensation and lease payments for facilities and equipment, are relatively stable, and these expense levels
are based in part on our expectations regarding future revenues. As a result, any sustained shortfall in our revenues relative to our expectations would negatively impact our operating results.
Accordingly, if the cost-cutting actions that we have taken are insufficient, we may not have sufficient capital to fund our operations, and additional capital may not be available on
acceptable terms, if at all. Any of these outcomes could adversely impact our ability to respond to competitive pressures or could prevent us from conducting all or a portion of our planned
operations. We may need to undertake additional measures to reduce our operating expenses in the future.

INVESTMENTS IN OTHER COMPANIES & 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. However, if our workforce
is not properly sized to meet our operating needs, our ability to achieve and maintain profitability is likely to suffer. As indicated in this report, we have substantially reduced the number of our
employees. This means that we use a smaller number of employees to conduct some of the operations that were previously performed by a larger workforce, which could cause disruption of our business. In
addition, 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.

28

---



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, which could also cause our revenues to decrease. With a greater
percentage of our revenues coming from services, if we are not successful in reducing our costs of sales, and our customers continue to purchase licenses on an as-needed basis, we will
experience a decrease in our gross margins.

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.

29

---





Item 3. Quantitative and Qualitative Disclosures About Market Risk

IMPACT OF INTEREST RATE EXPOSURE

As
of June 30, 2004, we had approximately $15.9 million in cash and cash equivalents, 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 sensitive to changes in the level of prevailing interest rates.

IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE

Our
functional currency is the U.S. dollar. 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. In the three months ended June 30, 2004, we incurred realized and unrealized foreign currency gains relating to the translation of our non-US denominated
monetary assets and liabilities of approximately $25,000.

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 June 30, 2004, 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. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company
carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken.

30

---



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 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 Company is unable to determine whether or when the settlement will be approved or be finalized.

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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

PRIVATE
PLACEMENT. On May 14, 2004, the Company entered into a series of agreements, including a Secured Convertible Note Purchase Agreement, dated May 14, 2004, among the
Company, its wholly-owned subsidiary, 724 Solutions Software Inc., and Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII, L.P. in
connection with the private placement of up to $8 million of secured convertible promissory notes for cash. As a result of these agreements, the Company completed, or agreed to complete,
subject to obtaining shareholder approval, the following transactions:



31

---





Shareholders
approved the second tranche of this transaction at a Special Meeting of Shareholders held on June 29, 2004 and it closed that day.

The
principal amount of the secured convertible promissory notes and all interest owing under the secured convertible promissory notes, is convertible at the option of the noteholder
into common shares at an initial conversion price of $3.07 per share. In the event the Company issues, or is deemed to have issued, common shares at a price per share that is less than the conversion
price then in effect (other than certain specified exempt issuances), then the conversion price shall be reduced to the weighted average of the purchase prices of the previously outstanding stock
(including common shares issuable upon the conversion or exercise of outstanding convertible securities and stock options) and the newly-issued stock. However, the conversion price shall not be
reduced by more than 15 percent, or to a conversion price of less than $2.61 per share.

The
Company's Board of Directors also agreed to waive the terms of its shareholder rights plan such that the acquisition by Austin Ventures or its affiliates of up to 49% of the
outstanding common shares (whether through the conversion of the Notes or the acquisition of common shares from third-parties) will not result in a flip-in event under the plan.

Exemption
from registration for these transactions are claimed pursuant to Section 4(2) of the Securities Act regarding transactions by the issuer not involving a public offering,
in that these transactions were made, without general solicitation or advertising, to sophisticated investors with access to all relevant information necessary to evaluate these investments and who
represented to the Company that the shares were being acquired for investment.

The
Secured Convertible Note Purchase Agreement, the Security Agreement, the Registration Rights Agreement, the Guaranty and the Form of Secured Convertible Promissory Note has been
filed with the Securities and Exchange Commission on the Company's Form 8-K on May 18, 2004.

RIGHTS
PLAN. The Rights Plan, adopted by the Board of Directors of the Company and initially ratified by the Company's shareholders at the annual shareholders' meeting held on
April 24, 2003, was renewed by the Company's shareholders at the annual shareholders' meeting held on April 29, 2004. The Rights Plan will continue until the close of the annual meeting
of shareholders of the Company in 2005.

Item 3. Defaults Upon Senior Securities

None.

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

Annual and Special Meeting.The Company's Annual and Special Meeting of Shareholders (the "Annual Meeting") was held on
April 29, 2004. The following matters were submitted to the Company's shareholders for their vote, and the results of the vote taken at the Annual Meeting were as follows:



32

---





2,557,438
votes for; 0 votes against; 5,904 abstentions; and 0 broker held non-voted shares.

1,529,851
votes for; 97,853 votes against; 0 abstentions; and 0 broker held non-voted shares.

Special Meeting.A Special Meeting of Shareholders (the "Special Meeting") was held on June 29, 2004. The following
matter was submitted to the Company's shareholders for their vote, and the results of the vote taken at the Special Meeting were as follows:

1.     A
resolution authorizing the Company to issue and sell certain secured convertible promissory notes in an aggregate principal amount of $8,000,000, reserve for issuance
up to 3,973,605 common shares issuable upon the conversion of such notes and the interest payable thereon, and to issue those shares, in an amount which may be greater than 19.9% of the Company's
outstanding common shares as of the date of such issuance, and ratifying all such action.

1,347,316
votes for; 733,160 votes against; 29,706 abstentions; and 0 broker held non-voted shares.

33

---



Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:

The
following exhibits are filed with this Report:

No.

Description31.1

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer31.2

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer32.1

Section 1350 Certification of the Chief Executive Officer32.2

Section 1350 Certification of the Chief Financial Officer


(b)   Reports on Form 8-K:

During
the period covered by this Report, the Company furnished two reports on Form 8-K:

|April 29, 2004: |  | reporting the Company's results of operations for the three months ended March 31, 2004.                                                                                     
|--------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|May 18, 2004:   |  | announcing that it has arranged a non-brokered private placement of secured convertible promissory notes with Austin Ventures for a total principal amount of USD $8 million.

34

---



SIGNATURES

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

|Signatures                    |  | Titles                                                               |  | Date           
|----------------------------- |  | -------------------------------------------------------------------- |  | ---------------
|                              |  |                                                                      |  |                
|/s/JOHN J. SIMSJohn J. Sims   |  | Chief Executive Officer (principal executive officer)                |  | August 10, 2004
|                              |  |                                                                      |  |                
|/s/GLENN BARRETTGlenn Barrett |  | Chief Financial Officer (principal financial and accounting officer) |  | August 10, 2004

---



QuickLinks