---

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

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

Commission File Number:  000-31146

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

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

|(805) 884-8308                                         
|-------------------------------------------------------
|                                                       
|(Registrants   Telephone Number, Including Area Code).

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

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

Common Shares, no par value  6,033,778 shares outstanding as of August 9, 2005 (together with associated rights to purchase additional Common Shares)

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724 SOLUTIONS INC.

Table of Contents

|PART   I.          FINANCIAL   INFORMATION | 2                                                                                       
|------------------------------------------ | ----------------------------------------------------------------------------------------
|                                           |                                                                                         
|Item 1.                                    | Financial Statements.                                                                   
|                                           |                                                                                         
|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        | 47                                                                                      
|                                           |                                                                                         
|Item 1.                                    | Legal Proceedings.                                                                      
|                                           |                                                                                         
|Item 2.                                    | Unregistered Sales of Equity Securities and Use of Proceeds.                            
|                                           |                                                                                         
|Item 3.                                    | Defaults upon Senior Securities.                                                        
|                                           |                                                                                         
|Item 4.                                    | Submission of Matters to a Vote of Security Holders.                                    
|                                           |                                                                                         
|Item 5.                                    | Other Information.                                                                      
|                                           |                                                                                         
|Item 6.                                    | Exhibits.                                                                               
|                                           |                                                                                         
|SIGNATURES                                 |                                                                                         

1



PART I.          FINANCIAL INFORMATION

Item 1.     Financial Statements.

724 SOLUTIONS INC.

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

June 30, 2005 and December 31, 2004

|                                                                                           |  |             | 2005     |   |   | 2004     |  
|------------------------------------------------------------------------------------------ |  | ----------- | -------- | - | - | -------- | -
|                                                                                           |  |             |          |   |   |          |  
|                                                                                           |  | (Unaudited) |          |   |   |         
|Assets                                                                                     |  |             |          |   |   |          |  
|Current assets:                                                                            |  |             |          |   |   |          |  
|Cash and cash   equivalents (note 2)                                                       |  | $           | 3,248    |   | $ | 5,417    |  
|Short-term investments (note 2)                                                            |  |             | 7,999    |   |   | 8,005    |  
|Restricted cash (note   2)                                                                 |  |             | 208      |   |   | 210      |  
|Accounts receivable - trade, net of allowance of $26   (December 31, 2004 - $18)           |  |             | 3,779    |   |   | 2,831    |  
|Prepaid expenses and   other receivables                                                   |  |             | 508      |   |   | 583      |  
|                                                                                           |  |             |          |   |   |          |  
|Total current assets                                                                       |  |             | 15,742   |   |   | 17,046   |  
|Deferred charges                                                                           |  |             | 226      |   |   | 286      |  
|Fixed   assets, net of accumulated amortization of $13,715 (December 31, 2004 -   $13,732) |  |             | 1,045    |   |   | 1,135    |  
|                                                                                           |  |             |          |   |   |          |  
|                                                                                           |  | $           | 17,013   |   | $ | 18,467   |  
|                                                                                           |  |             |          |   |   |          |  
|Liabilities and Shareholders   Equity                                                     |  |             |          |   |   |          |  
|Current liabilities:                                                                       |  |             |          |   |   |          |  
|Accounts payable                                                                           |  | $           | 719      |   | $ | 613      |  
|Accrued liabilities                                                                        |  |             | 1,921    |   |   | 2,101    |  
|Interest payable to   related parties                                                      |  |             |         |   |   | 103      |  
|Deferred revenue                                                                           |  |             | 233      |   |   | 173      |  
|                                                                                           |  |             |          |   |   |          |  
|Total current liabilities                                                                  |  |             | 2,873    |   |   | 2,990    |  
|Long-term liabilities                                                                      |  |             | 18       |   |   | 92       |  
|Convertible notes payable to  related parties (note 3)                                     |  |             | 7,958    |   |   | 7,947    |  
|Long-term interest payable to related parties (note 3)                                     |  |             | 553      |   |   | 343      |  
|                                                                                           |  |             |          |   |   |          |  
|Total liabilities                                                                          |  |             | 11,402   |   |   | 11,372   |  
|Shareholders equity:                                                                      |  |             |          |   |   |          |  
|Share capital (note 5):                                                                    |  |             |          |   |   |          |  
|Authorized:                                                                                |  |             |          |   |   |          |  
|Unlimited common shares                                                                    |  |             |          |   |   |          |  
|Unlimited preferred   shares                                                               |  |             |          |   |   |          |  
|Issued and outstanding:                                                                    |  |             |          |   |   |          |  
|6,033,778 common shares  (December 31, 2004  5,989,300)                                   |  |             | 764,842  |   |   | 764,530  |  
|Additional paid-in capital                                                                 |  |             | 632      |   |   | 279      |  
|Accumulated deficit                                                                        |  |             | (759,881 | ) |   | (757,921 | )
|Accumulated other   comprehensive income                                                   |  |             | 18       |   |   | 207      |  
|                                                                                           |  |             |          |   |   |          |  
|Total shareholders equity                                                                 |  |             | 5,611    |   |   | 7,095    |  
|Contingent   liabilities (note 9)                                                          |  |             |          |   |   |          |  
|                                                                                           |  |             |          |   |   |          |  
|                                                                                           |  | $           | 17,013   |   | $ | 18,467   |  
|                                                                                           |  |             |          |   |   |          |  

See accompanying notes to consolidated financial statements.

2



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

|                                                                                                      |  | Three months ended   June 30, |        | Six months ended   June 30, |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | --------------------------- | -
|                                                                                                      |  |                               |        |                             |  
|                                                                                                      |  |                               | 2005   |                             |  
|                                                                                                      |  |                               |        |                             |  
|                                                                                                      |  | (Unaudited)                   |        | (Unaudited)                 |  
|Revenue:                                                                                              |  |                               |        |                             |  
|Product                                                                                               |  | $                             | 1,704  |                             | $
|Services                                                                                              |  |                               | 2,912  |                             |  
|                                                                                                      |  |                               |        |                             |  
|                                                                                                      |  |                               | 4,616  |                             |  
|Operating expenses:                                                                                   |  |                               |        |                             |  
|Cost of product revenue                                                                               |  |                               | 10     |                             |  
|Cost of services   revenue                                                                            |  |                               | 1,907  |                             |  
|Research and   development                                                                            |  |                               | 1,693  |                             |  
|Sales and marketing                                                                                   |  |                               | 1,023  |                             |  
|General and   administrative                                                                          |  |                               | 853    |                             |  
|Depreciation                                                                                          |  |                               | 165    |                             |  
|Stock-based   compensation:                                                                           |  |                               |        |                             |  
|Cost of revenue                                                                                       |  |                               | 15     |                             |  
|Research and   development                                                                            |  |                               | 35     |                             |  
|Sales and marketing                                                                                   |  |                               | 43     |                             |  
|General and   administrative                                                                          |  |                               | 186    |                             |  
|Restructuring costs   (note 6)                                                                        |  |                               |       |                             |  
|                                                                                                      |  |                               |        |                             |  
|                                                                                                      |  |                               | 5,930  |                             |  
|                                                                                                      |  |                               |        |                             |  
|Loss from operations                                                                                  |  |                               | (1,314 | )                           |  
|Interest expense, net                                                                                 |  |                               | (180   | )                           |  
|Loss on   settlement of liability to related party                                                    |  |                               |       |                             |  
|                                                                                                      |  |                               |        |                             |  
|Loss for the period                                                                                   |  | $                             | (1,494 | )                           | $
|                                                                                                      |  |                               |        |                             |  
|Basic and diluted loss per share                                                                      |  | $                             | (0.25  | )                           | $
|                                                                                                      |  |                               |        |                             |  
|Weighted average number of shares  used in computing basic and diluted  loss per share (in thousands) |  |                               | 6,033  |                             |  
|                                                                                                      |  |                               |        |                             |  

See accompanying notes to consolidated financial statements.

3



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

Six months ended June 30, 2005 and 2004 (unaudited)

|                                  |  | Common   shares |           | Additional   paid in capital |   | Accumulated   deficit |  | Accumulated   other   comprehensive   income (loss) |     | Total   shareholders   equity |  
|--------------------------------- |  | --------------- | --------- | ---------------------------- | - | --------------------- |  | --------------------------------------------------- | --- | ------------------------------ | -
|                                  |  |                 |           |                              |   |                       | 
|                                  |  | Number          |           | Amount                       |   |                       |  |                                                     |    
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Balances December 31, 2003        |  |                 | 5,983,349 |                              | $ | 764,508               |  | $                                                   | 62  |                                | $
|Loss for the period               |  |                 |          |                              |   |                      |  |                                                     |    |                                |  
|Cumulative translation adjustment |  |                 |          |                              |   |                      |  |                                                     |    |                                |  
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Total comprehensive loss          |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Stock-based compensation expense  |  |                 |          |                              |   |                      |  |                                                     | 50  |                                |  
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Balances, June 30, 2004           |  |                 | 5,983,349 |                              | $ | 764,508               |  | $                                                   | 112 |                                | $
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Balances December 31, 2004        |  |                 | 5,989,300 |                              | $ | 764,530               |  | $                                                   | 279 |                                | $
|Loss for the period               |  |                 |          |                              |   |                      |  |                                                     |    |                                |  
|Cumulative translation adjustment |  |                 |          |                              |   |                      |  |                                                     |    |                                |  
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Total comprehensive loss          |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Issuance on exercise of options   |  |                 | 10,939    |                              |   | 44                    |  |                                                     |    |                                |  
|Issuance of common shares         |  |                 | 33,549    |                              |   | 268                   |  |                                                     |    |                                |  
|Stock-based compensation expense  |  |                 |          |                              |   |                      |  |                                                     | 353 |                                |  
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  
|Balances, June 30, 2005           |  |                 | 6,033,788 |                              | $ | 764,842               |  | $                                                   | 632 |                                | $
|                                  |  |                 |           |                              |   |                       |  |                                                     |     |                                |  

See accompanying notes to consolidated financial statements.

4



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

|                                                      |  | Three months ended   June 30, |        | Six months ended   June 30, |  
|----------------------------------------------------- |  | ----------------------------- | ------ | --------------------------- | -
|                                                      |  |                               |        |                             |  
|                                                      |  | 2005                          |        | 2004                        |  
|                                                      |  |                               |        |                             |  
|                                                      |  | (Unaudited)                   |        | (Unaudited)                 |  
|Cash flows from (used in) operating activities:       |  |                               |        |                             |  
|Loss for the period                                   |  | $                             | (1,494 | )                           | $
|Items not affecting   cash:                           |  |                               |        |                             |  
|Depreciation and   amortization                       |  |                               | 165    |                             |  
|Amortization of   deferred charges                    |  |                               | 29     |                             |  
|Stock-based   compensation                            |  |                               | 279    |                             |  
|Loss on settlement of   liability                     |  |                               |       |                             |  
|Other non-cash expenses                               |  |                               | (31    | )                           |  
|Change in operating   assets and liabilities:         |  |                               |        |                             |  
|Accounts receivable                                   |  |                               | 1,593  |                             |  
|Prepaid expenses and other   receivables              |  |                               | 174    |                             |  
|Accounts payable                                      |  |                               | (176   | )                           |  
|Interest payable                                      |  |                               | (104   | )                           |  
|Long-term liabilities                                 |  |                               | (12    | )                           |  
|Long-term interest payable to   related parties       |  |                               | 106    |                             |  
|Accrued liabilities                                   |  |                               | (116   | )                           |  
|Deferred revenue                                      |  |                               | 108    |                             |  
|                                                      |  |                               |        |                             |  
|Net cash flows from (used in) operating activities    |  |                               | 521    |                             |  
|Cash flows from (used in) financing activities:       |  |                               |        |                             |  
|Issuance of notes   payable                           |  |                               |       |                             |  
|Deferred charges                                      |  |                               |       |                             |  
|Issuance of common   shares on exercise of options    |  |                               | 3      |                             |  
|                                                      |  |                               |        |                             |  
|Net cash flows from financing activities              |  |                               | 3      |                             |  
|Cash flows from (used in) investing activities:       |  |                               |        |                             |  
|Purchase of fixed   assets                            |  |                               | (231   | )                           |  
|Maturity of short-term   investments                  |  |                               | 3,969  |                             |  
|Purchases of short-term   investments                 |  |                               | (3,960 | )                           |  
|                                                      |  |                               |        |                             |  
|Net cash flows used in investing activities           |  |                               | (222   | )                           |  
|Effect of exchange rate changes on cash               |  |                               | (93    | )                           |  
|                                                      |  |                               |        |                             |  
|Net increase (decrease) in cash and  cash equivalents |  |                               | 209    |                             |  
|Cash and cash equivalents, beginning  of period       |  |                               | 3,039  |                             |  
|                                                      |  |                               |        |                             |  
|Cash and cash equivalents, end of period              |  | $                             | 3,248  |                             | $
|                                                      |  |                               |        |                             |  

See accompanying notes to consolidated financial statements.

5



|1. | Basis of presentation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The accompanying consolidated financial statements   include the accounts of 724 Solutions Inc. and its wholly owned subsidiaries   (collectively referred to as the Company). Inter-company transactions and   balances are eliminated on consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Companys consolidated financial statements are   expressed in U.S. dollars and have been prepared in accordance with   accounting principles generally accepted in the United States. The interim   financial statements follow the same accounting policies and methods of   application as the most recent annual financial statements.  For further information, reference should   be made to the audited annual consolidated financial statements for the year   ended December 31, 2004 that are included in the Companys Annual Report   filed with the Canadian Securities Administrators on March 17, 2005 and with   the Securities and Exchange Commission on Form 10-K filed on March 18, 2005.                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The preparation of the financial statements requires   use of management estimates. The information furnished for the three and six   months ended June 30, 2005 and June 30, 2004 reflects, in the opinion of   management, all adjustments, consisting only of normal recurring adjustments,   necessary for a fair presentation of the results of the interim periods   presented.  Interim results are not   necessarily indicative of results for a full year.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|2. | Cash and cash equivalents and   short-term investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | All short-term investments are classified as   held-to-maturity because the Company has the positive intent and ability to   hold the securities to maturity.    Held-to-maturity securities are stated at amortized cost, adjusted for   amortization of premiums and accretion discounts to maturity.  The Company owns no short-term investments   that are considered to be trading securities or available-for-sale   securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company has entered into letters of credit in   the amount of $208,000 (December 31, 2004  $210,000) to guarantee future   payments. Letters of credit are secured by segregated instruments and   disclosed as restricted cash on the consolidated balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|3. | Convertible notes payable to   related parties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On May 14, 2004, the Company entered into a series   of agreements, including a Secured Convertible Note Purchase Agreement (the   Purchase Agreement) between 724 Solutions Inc. and its wholly owned   subsidiary, 724 Solutions Software Inc., and a group of partnerships   affiliated with Austin Ventures in connection with the private placement of   $8,000,000 of Secured Convertible Promissory Notes (the Notes) for   cash.  The non-brokered private   placement of secured convertible promissory notes was completed in two   tranches.  The first tranche of the   financing involved the issuance of $3,044,000 of convertible notes and was   completed on May 14, 2004.  The second   tranche of the financing involved the issuance of $4,956,000 of convertible   notes and was completed on June 29, 2004, after the Company obtained   shareholder approval of the transactions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Notes have a three-year term and accrue interest   at a rate of 2.5% per quarter, of which 1.25% is payable in arrears at the   beginning of each quarter starting in the first quarter of 2005 and the   remainder of which is due at maturity.    The principal amounts of the Notes and all interest owing at maturity   are convertible at the option of the Lenders into common shares at a   conversion price of $3.07 per share. The interest payable quarterly is   convertible at the option of the Company into common shares at a conversion   price of $3.07 per share. The conversion price was based on the volume   weighted average trading price of the Companys common shares on the TSX for   the five trading days prior to May 14, 2004. If the Company issues any common   shares or securities                                                                                  

6



| | convertible into common shares at a price that is   less than the conversion price of the Notes then in effect, then such   conversion price shall be subject to a weighted average anti-dilution   adjustment, whereby the conversion price will be reduced based on the   weighted average price of the additional securities issued. The conversion   price will not be lowered by more than 15% of the initial conversion price of   $3.07.                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In accordance with FASB EITF No. 00-27, Application   of EITF No. 98-5, Accounting for Convertible Securities with Beneficial   Conversion Features or Contingently Adjustable Conversion Ratios, the Company   has determined that a beneficial conversion feature existed for the second   tranche of its convertible notes.  On   the date the required shareholder approval was obtained, the Companys common   shares closed at a premium of $0.04 per share to the conversion price of   $3.07, resulting in a beneficial conversion feature on that date of   approximately $65,000.  Under issue 6   of EITF 00-27, this conversion feature is to be amortized over the period to   the stated redemption date of May 14, 2007.    The amortization in the three months ended June 30, 2005 was $6,000.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company also analyzed the arrangement to   determine whether any accounting was required for the contingent beneficial   conversion feature that may arise if the Company were to issue additional   shares in the future at a price less than $3.07.  The Company considered EITF 00-27, Issue 7, and concluded that   since the terms of the contingent conversion option do not permit the Company   to compute the additional number of shares that it would need to issue upon   conversion of the Notes if the contingent event occurs and the conversion   price is adjusted, the Company should compute any additional beneficial   conversion feature only if the contingent event occurs.                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Austin Ventures is the Companys largest beneficial   shareholder. Assuming that all of the Notes are converted into common shares   at the lowest possible conversion price on the maturity date, all accrued interest   on the Notes is paid with common shares, and that no additional common shares   are issued, Austin Ventures could be deemed to beneficially own up to 44.75%   of the Companys issued and outstanding common shares.                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Joseph C. Aragona is currently a member of the   Companys Board of Directors.  He is   also a general partner of Austin Ventures.    As a general partner of Austin Ventures, Mr. Aragona may have a   limited pecuniary interest in the Private Placement Transactions.  Mr. Aragona did not participate in the   deliberations or voting of the Companys Board with respect to the approval   of the Private Placement Transactions.                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company and its material subsidiaries granted   the Lenders a blanket security interest in all of their assets to secure the   timely payment and performance in full of all of the obligations under the   Notes.  The security interest ranks   senior to all indebtedness of the Company, other than fully-funded   indebtedness of up to $1,500,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Notes are subject to customary events of   default, including the failure to pay interest or principal, and specified   types of bankruptcy events. Additional events of default include the issuance   of certain capital securities that, if not for the limitation noted above,   would cause the conversion price of the notes to be lowered by more than 15%   of the initial conversion price and the Company engaging in specified types   of merger or acquisition transactions.    An event of default would require the Company to repay all amounts   owing under the Notes.                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Total interest expense recorded in the three months   ended June 30, 2005 was $211,000 (2004  $39,000). At June 30, 2005, $553,000   remains outstanding (2004  $39,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | On January 3, 2005, the Company issued 33,549 shares   with a market value of $268,000 in settlement of interest owing of $103,000   and recorded a loss on settlement of liability of $165,000 in the three month   period ended March 31, 2005 related to the extinguishment of the liability.   Interest payments made in the three month period ended June 30, 2005 were   made in cash.                                                                                                                                                                                                                                                                                                                                                                                                                    

7



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

|                               |  | Three months ended   June 30, |       | Six months   ended   June 30, |  
|------------------------------ |  | ----------------------------- | ----- | ----------------------------- | -
|                               |  |                               |       |                               |  
|(In thousands of U.S. dollars) |  | 2005                          |       | 2004                          |  
|                               |  |                               |       |                               |  
|United States                  |  | $                             | 2,792 |                               | $
|Europe                         |  |                               | 1,129 |                               |  
|Asia Pacific                   |  |                               | 695   |                               |  
|Canada                         |  |                               |      |                               |  
|                               |  |                               |       |                               |  
|                               |  | $                             | 4,616 |                               | $
|                               |  |                               |       |                               |  

| | In the three months ended June 30, 2005, two   customers accounted for 37% and 11% of revenue. In same period ended June 30,   2004, two customers accounted for 58% and 20% of revenue. In the six months   ended June 30, 2005, three customers accounted for 32%, 21% and 18% of   revenue. In the same period ended June 30, 2004, one customer accounted for   66% of revenue.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                    
| | At June 30, 2005, two customers accounted for 28%   and 24% of accounts receivable and at June 30, 2004, one customer accounted   for 57% of accounts receivable.                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                    
| | Geographic distribution of fixed assets:                                                                                                                                                                                                                                                                                                                                           

|(In thousands of   U.S. dollars) |  | June 30,   2005 |       | December   31,   2004 |  
|-------------------------------- |  | --------------- | ----- | --------------------- | -
|                                 |  |                 |       |                       |  
|Canada                           |  | $               | 776   |                       | $
|United States                    |  |                 | 96    |                       |  
|Europe                           |  |                 | 159   |                       |  
|Asia Pacific                     |  |                 | 14    |                       |  
|                                 |  |                 |       |                       |  
|                                 |  | $               | 1,045 |                       | $
|                                 |  |                 |       |                       |  

8



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

|Exercise price ranges |        | Number of options |   | Weighted average   exercise price |  | Weighted average   remaining   contractual life   (years) |           | Number of options   exerciseable |   | Weighted average   exercise price | 
|--------------------- | ------ | ----------------- | - | --------------------------------- |  | --------------------------------------------------------- | --------- | -------------------------------- | - | --------------------------------- | 
|                      |        |                   |   |                                   |  |                                                           |           |                                  |   |                                   | 
|$                     |       |                   | $ | 5.00                              |  |                                                           | 709,237   |                                  | $ | 3.52                              | 
|                      | 5.01   |                   |   | 10.00                             |  |                                                           | 617,757   |                                  |   | 5.91                              | 
|                      | 10.01  |                   |   | 20.00                             |  |                                                           | 16,554    |                                  |   | 12.57                             | 
|                      | 20.01  |                   |   | 50.00                             |  |                                                           | 6,688     |                                  |   | 27.10                             | 
|                      | 50.01  |                   |   | 100.00                            |  |                                                           | 5,369     |                                  |   | 83.31                             | 
|                      | 100.01 |                   |   | 550.00                            |  |                                                           | 19,188    |                                  |   | 215.93                            | 
|                      |        |                   |   |                                   |  |                                                           |           |                                  |   |                                   | 
|                      |        |                   |   |                                   |  |                                                           | 1,374,793 |                                  | $ | 8.09                              | 
|                      |        |                   |   |                                   |  |                                                           |           |                                  |   |                                   | 

| | (b) | Loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The Company has excluded from the calculation of   diluted earnings per share all common shares potentially issuable upon the   exercise of stock options and other potentially convertible instruments that   could dilute basic earnings per share in the future, because to do so would   have been anti-dilutive.                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (c) | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | Effective January 1, 2003, the Company adopted, on a   prospective basis, the fair value measurement for stock-based   compensation.  Under the fair value   based method, compensation cost for option grants is measured at fair value   at the date of grant and is expensed over the awards vesting period. The   fair value of options issued in the three months ended June 30, 2005 was   $2,845,000, while the fair value of options issued in the three months ended   June 30, 2004 was $377,000. These amounts are being amortized as expenses   over the vesting period of 4 years.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The fair value of each option granted in the three   months ended June 30, 2005 was estimated at the date of grant using the   Black-Scholes option pricing model under the following assumptions: dividend   yield of 0% (2004  0%), expected volatility of 65% (2004 - 60%), risk-free   rate of interest of 3.39% (2004  3.41%) and an expected life of the option   of five years.                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | We have assumed no forfeiture rate, as adjustments   for actual forfeitures are made in the period in which they occur. The   weighted average grant date fair value of options issued in the three months   ended June 30, 2005 was $6.57 (2004 - $1.74).                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (d) | Pro forma disclosure for stock-based compensation   and other stock-based payments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | For options issued prior to January 1, 2003, the   Company is required to disclose the pro forma information as if it had   accounted for stock options issued from inception on July 28, 1997 to   December 31, 2002 under the fair value method.  The following table presents the required disclosure of pro   forma earnings and earnings per share.                                                                                                                                                                                                                                        

9



|                                                                                                  |  | Three months ended |        | Six months ended |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | -
|                                                                                                  |  |                    |        |                  |  
|(In thousands of U.S. dollars,   except per share amounts)                                        |  | June 30,   2005    |        | June 30,   2004  |  
|                                                                                                  |  |                    |        |                  |  
|Loss for the period                                                                               |  | $                  | (1,494 | )                | $
|Compensation expense related to the fair value of   stock options In excess of amounts recognized |  |                    | (56    | )                |  
|                                                                                                  |  |                    |        |                  |  
|Pro forma loss for the period                                                                     |  | $                  | (1,550 | )                | $
|Pro forma loss per share:                                                                         |  |                    |        |                  |  
|Basic and diluted                                                                                 |  | $                  | (0.26  | )                | $
|                                                                                                  |  |                    |        |                  |  

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

10



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

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

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

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

11



| |     | amount of $1,528,000,   $1,388,000 of which was settled in 2003 and $47,000 of which was settled in   2004, leaving $93,000 at June 30, 2005 that the Company expects will be   settled by the end of the first quarter of 2006; and (iii) hosting exit costs   in the amount of $2,487,000, $996,000 of which was paid out in 2003, $900,000   of which was reversed in 2003 upon the re-negotiation of certain agreements,   $410,000 of which was paid out in 2004 and $181,000 of which was reversed in   2004 because certain costs were lower than the Company had estimated.  The Company has now fully exited all   hosting arrangements related to legacy customers.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (b) | Restructuring provisions at June 30, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | (i)  2004   Restructuring, provision at June 30, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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

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

12



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

|                                                         |  | Severance |      | Lease exitcosts |   | Total |  
|-------------------------------------------------------- |  | --------- | ---- | --------------- | - | ----- | -
|                                                         |  |           |      |                 |   |       |  
|Restructuring charges in 2003                            |  | $         | 775  |                 | $ | 175   |  
|Cash payments                                            |  |           | (483 | )               |   | (175  | )
|                                                         |  |           |      |                 |   |       |  
|Provision, December 31, 2003                             |  |           | 292  |                 |   |      |  
|Activity during the three months ended March 31,   2004: |  |           |      |                 |   |       |  
|Cash payments                                            |  |           |     |                 |   |      |  
|                                                         |  |           |      |                 |   |       |  
|Provision, March 31, 2004                                |  |           | 292  |                 |   |      |  
|Activity during the three months ended June 30,   2004:  |  |           |      |                 |   |       |  
|Cash payments                                            |  |           | (292 | )               |   |      |  
|                                                         |  |           |      |                 |   |       |  
|Provision, June 30, 2004                                 |  | $         |     |                 | $ |      |  
|                                                         |  |           |      |                 |   |       |  

| |  | During 2003, the Company   reduced its worldwide workforce by approximately 40 people and closed   redundant facilities in an effort to reduce its overall operating costs and   to realign operating expenses and investments with a view to achieving   operational profitability. The restructuring activities were completed within   the year shortly after the reduction in the workforce occurred in the second   and fourth quarters of the year.  All   amounts provided for were settled in the year except for severance amounts   that were provided for at December 2003. These severance amounts remained   outstanding at March 31, 2004 and were paid out in the second quarter of   2004.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (iii) 2002 Restructuring,   provision at June 30, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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

13



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

|                                                                                                       |  | Three months ended   June 30, |      | Six months   ended   June 30, |  
|------------------------------------------------------------------------------------------------------ |  | ----------------------------- | ---- | ----------------------------- | -
|                                                                                                       |  |                               |      |                               |  
|(In thousands of   U.S. dollars)                                                                       |  | 2005                          |      | 2004                          |  
|                                                                                                       |  |                               |      |                               |  
|Supplemental   cash flow (use) information:                                                            |  |                               |      |                               |  
|Interest received                                                                                      |  | $                             | 50   |                               | $
|Interest paid                                                                                          |  |                               | (210 | )                             |  
|Supplemental disclosure of non-cash financing and   investing activities:                              |  |                               |      |                               |  
|Common shares issued upon settlement of interest due   on convertible notes payable to related parties |  |                               |     |                               |  

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

14



|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Letters of credit:                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | At June 30, 2005, the Company had one outstanding   letter of credit in the amount of $208,000 to secure Company credit cards. At   December 31, 2004, the Company had one outstanding letter of credit in the   amount of $210,000 to secure Company credit cards. Letters of credit are   secured by segregated short-term investments and are disclosed as restricted   cash on the consolidated balance sheets.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|9. | Contingent liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company has been named in several class actions   filed in federal court in the Southern District of New York between   approximately June 13, 2001 and June 28, 2001 (collectively the IPO   Allocation Litigation). The IPO Allocation Litigation was filed on behalf of   purported classes of plaintiffs who acquired the Companys common shares   during certain periods.  These   lawsuits have since been consolidated into a single action and an amended   complaint was filed on or about April 19, 2002. Similar actions have or since   been filed against over 300 other issuers that have had initial public   offerings since 1998 and all are included in a single coordinated proceeding   in the Southern District of New York.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The amended complaint in the IPO Allocation   Litigation names as defendants, in addition to the Company, some former   directors and officers of the Company (the Individual Defendants) and   certain underwriters of the Companys initial public offering of securities   (the Underwriter Defendants). In general, the amended complaint alleges   that the Underwriter Defendants: (1) allocated shares of the Companys   offering of equity securities to certain of their customers, in exchange for   which these customers agreed to pay the Underwriter Defendants extra   commissions on transactions in other securities; and (2) allocated shares of   the Companys initial public offering to certain of the Underwriter   Defendants customers, in exchange for which the customers agreed to purchase   additional common shares of the Company in the after-market at certain   pre-determined prices. The amended complaint also alleges that
the Company   and the Individual Defendants failed to disclose these facts and that the   Company and the Individual Defendants were aware of, or disregarded, the   Underwriter Defendants conduct. In October 2002, the Individual Defendants   were dismissed from the IPO Allocation Litigation without prejudice.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In July 2003, a committee of the Companys Board of   Directors conditionally approved a proposed partial settlement with the   plaintiffs in this matter. The settlement would provide, among other things,   a release of the Company and of the Individual Defendants for the conduct   alleged in the action to be wrongful in the amended complaint. The Company   would agree to undertake other responsibilities under the partial settlement,   including agreeing to assign away, not assert, or release certain potential   claims the Company may have against its underwriters. Any direct financial   impact of the proposed settlement is expected to be borne by the Companys   insurers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In June 2004, an agreement of settlement was submitted to the
     Court for preliminary approval.  The Court granted the preliminary
     approval motion on February 15, 2005, subject to certain
     modifications.  If the parties are able to agree on the required
     modifications, and such modifications are acceptable to the Court, notice
     will be given to all class members of the settlement, a
     fairness hearing will be held and, if the Court determines that
     the settlement is fair to the class members, the settlement will be
     approved. There can be no assurance that this proposed settlement would be approved and implemented in its current form,
     or at all.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | If the settlement process fails, 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 settlement approval process is at a preliminary stage, we cannot   accurately predict the ultimate outcome IPO Allocation Litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

15



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

16



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

|(In   thousands of U.S. dollars)                                 |  | U.S. GAAP |          | Adjustments |   | Canadian   GAAP |  
|---------------------------------------------------------------- |  | --------- | -------- | ----------- | - | --------------- | -
|                                                                 |  |           |          |             |   |                 |  
|Assets                                                           |  |           |          |             |   |                 |  
|Current assets:                                                  |  |           |          |             |   |                 |  
|Cash   and cash equivalents                                      |  | $         | 3,248    |             | $ |                |  
|Short-term   investments                                         |  |           | 7,999    |             |   |                |  
|Restricted   cash                                                |  |           | 208      |             |   |                |  
|Accounts   receivable, net of allowance of $26                   |  |           | 3,779    |             |   |                |  
|Prepaid   expenses and other receivables                         |  |           | 508      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current assets                                             |  |           | 15,742   |             |   |                |  
|Deferred charges                                                 |  |           | 226      |             |   | (26             | )
|Fixed assets                                                     |  |           | 1,045    |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total assets                                                     |  | $         | 17,013   |             | $ | (26             | )
|                                                                 |  |           |          |             |   |                 |  
|Liabilities   and shareholders equity                           |  |           |          |             |   |                 |  
|Current liabilities:                                             |  |           |          |             |   |                 |  
|Accounts   payable                                               |  | $         | 719      |             | $ |                |  
|Accrued   liabilities                                            |  |           | 1,921    |             |   |                |  
|Deferred   revenue                                               |  |           | 233      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total current liabilities                                        |  |           | 2,873    |             |   |                |  
|Long-term liabilities                                            |  |           | 18       |             |   |                |  
|Convertible notes payable   to related parties                   |  |           | 7,958    |             |   | (566            | )
|Long-term interest payable                                       |  |           | 553      |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities                                                |  |           | 11,402   |             |   | (566            | )
|Shareholders equity:                                            |  |           |          |             |   |                 |  
|Common   shares                                                  |  |           | 764,842  |             |   |                |  
|Additional   paid-in capital                                     |  |           | 632      |             |   | (65             | )
|Equity   portion of convertible notes payable to related parties |  |           |         |             |   | 892             |  
|Accumulated   deficit                                            |  |           | (759,881 | )           |   | (287            | )
|Accumulated   other comprehensive income                         |  |           | 18       |             |   |                |  
|                                                                 |  |           |          |             |   |                 |  
|Total shareholders equity                                       |  |           | 5,611    |             |   | 540             |  
|                                                                 |  |           |          |             |   |                 |  
|Total liabilities and   shareholders equity                     |  | $         | 17,013   |             | $ | (26             | )
|                                                                 |  |           |          |             |   |                 |  

17



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

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

18



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

|(In   thousands of U.S. dollars, except per share amounts)                                       |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | ------------- | -
|                                                                                                 |  |           |        |             |   |               |  
|Revenue:                                                                                         |  |           |        |             |   |               |  
|Product                                                                                          |  | $         | 1,704  |             | $ |              |  
|Services                                                                                         |  |           | 2,912  |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|                                                                                                 |  |           | 4,616  |             |   |              |  
|Operating expenses:                                                                              |  |           |        |             |   |               |  
|Cost   of product revenue, other                                                                 |  |           | 10     |             |   |              |  
|Cost   of service revenue                                                                        |  |           | 1,907  |             |   |              |  
|Research   and development                                                                       |  |           | 1,693  |             |   |              |  
|Sales   and marketing                                                                            |  |           | 1,023  |             |   |              |  
|General   and administrative                                                                     |  |           | 853    |             |   |              |  
|Depreciation                                                                                     |  |           | 165    |             |   |              |  
|Stock-based   compensation:                                                                      |  |           |        |             |   |               |  
|Cost   of revenue                                                                                |  |           | 15     |             |   |              |  
|Research   and development                                                                       |  |           | 35     |             |   |              |  
|Sales   and marketing                                                                            |  |           | 43     |             |   |              |  
|General   and administrative                                                                     |  |           | 186    |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Total operating expenses                                                                         |  |           | 5,930  |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Loss from operations                                                                             |  |           | (1,314 | )           |   |              |  
|Interest expense, net                                                                            |  |           | (180   | )           |   | (68           | )
|                                                                                                 |  |           |        |             |   |               |  
|Loss for the period                                                                              |  | $         | (1,494 | )           | $ | (68           | )
|                                                                                                 |  |           |        |             |   |               |  
|Basic and   diluted loss per share                                                               |  | $         | (0.25  | )           | $ | (0.01         | )
|                                                                                                 |  |           |        |             |   |               |  
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 6,033  |             |   | 6,033         |  
|                                                                                                 |  |           |        |             |   |               |  

19



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

|(In   thousands of U.S. dollars, except per share amounts)                                       |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | ------------- | -
|                                                                                                 |  |           |        |             |   |               |  
|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    |             |   |              |  
|Stock-based compensation:                                                                        |  |           |        |             |   |               |  
|Cost of revenue                                                                                  |  |           | 3      |             |   |              |  
|Research and development                                                                         |  |           | 9      |             |   |              |  
|Sales and marketing                                                                              |  |           | 7      |             |   |              |  
|General and administrative                                                                       |  |           | 14     |             |   |              |  
|Restructuring charges                                                                            |  |           | (900   | )           |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Total   operating expenses                                                                       |  |           | 4,175  |             |   |              |  
|Loss from   operations                                                                           |  |           | (1,126 | )           |   |              |  
|Interest expense, net                                                                            |  |           | (19    | )           |   | (14           | )
|                                                                                                 |  |           |        |             |   |               |  
|Loss for the   period                                                                            |  | $         | (1,145 | )           | $ | (14           | )
|                                                                                                 |  |           |        |             |   |               |  
|Basic and   diluted loss per share                                                               |  | $         | (0.19  | )           | $ |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 5,983  |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  

20



| | Reconciliation   to Canadian GAAP - Statement of operations for the six months ended June 30,   2005:
| | -----------------------------------------------------------------------------------------------------

|(In   thousands of U.S. dollars, except per share amounts)                                       |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|------------------------------------------------------------------------------------------------ |  | --------- | ------ | ----------- | - | ------------- | -
|                                                                                                 |  |           |        |             |   |               |  
|Revenue:                                                                                         |  |           |        |             |   |               |  
|Product                                                                                          |  | $         | 4,689  |             | $ |              |  
|Services                                                                                         |  |           | 5,732  |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|                                                                                                 |  |           | 10,421 |             |   |              |  
|Operating expenses:                                                                              |  |           |        |             |   |               |  
|Cost   of product revenue, other                                                                 |  |           | 15     |             |   |              |  
|Cost   of service revenue                                                                        |  |           | 3,933  |             |   |              |  
|Research   and development                                                                       |  |           | 3,380  |             |   |              |  
|Sales   and marketing                                                                            |  |           | 2,191  |             |   |              |  
|General   and administrative                                                                     |  |           | 1,657  |             |   |              |  
|Depreciation                                                                                     |  |           | 322    |             |   |              |  
|Stock-based   compensation:                                                                      |  |           |        |             |   |               |  
|Cost   of revenue                                                                                |  |           | 22     |             |   |              |  
|Research   and development                                                                       |  |           | 54     |             |   |              |  
|Sales   and marketing                                                                            |  |           | 59     |             |   |              |  
|General   and administrative                                                                     |  |           | 217    |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Total operating expenses                                                                         |  |           | 11,850 |             |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Loss from operations                                                                             |  |           | (1,429 | )           |   |              |  
|Interest expense, net                                                                            |  |           | (366   | )           |   | (138          | )
|Loss on   settlement of liability                                                                |  |           | (165   | )           |   |              |  
|                                                                                                 |  |           |        |             |   |               |  
|Loss for the period                                                                              |  | $         | (1,960 | )           | $ | (138          | )
|                                                                                                 |  |           |        |             |   |               |  
|Basic and   diluted loss per share                                                               |  | $         | (0.33  | )           | $ | (0.02         | )
|                                                                                                 |  |           |        |             |   |               |  
|Weighted   average number of shares used in computing basic and diluted loss per share   (000s) |  |           | 6,030  |             |   | 6,030         |  
|                                                                                                 |  |           |        |             |   |               |  

21



| | Reconciliation   to Canadian GAAP - Statement of operations for the six months ended June 30,   2004:
| | -----------------------------------------------------------------------------------------------------

|(In   thousands of U.S. dollars, except per share amounts)                                     |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|---------------------------------------------------------------------------------------------- |  | --------- | ------ | ----------- | - | ------------- | -
|                                                                                               |  |           |        |             |   |               |  
|Revenue:                                                                                       |  |           |        |             |   |               |  
|Product                                                                                        |  | $         | 3,691  |             | $ |              |  
|Services                                                                                       |  |           | 2,359  |             |   |              |  
|                                                                                               |  |           |        |             |   |               |  
|                                                                                               |  |           | 6,050  |             |   |              |  
|Operating expenses:                                                                            |  |           |        |             |   |               |  
|Cost   of service revenue                                                                      |  |           | 3,065  |             |   |              |  
|Research   and development                                                                     |  |           | 3,522  |             |   |              |  
|Sales   and marketing                                                                          |  |           | 2,576  |             |   |              |  
|General   and administrative                                                                   |  |           | 1,588  |             |   |              |  
|Depreciation                                                                                   |  |           | 305    |             |   |              |  
|Stock-based   compensation:                                                                    |  |           |        |             |   |               |  
|Cost   of revenue                                                                              |  |           | 5      |             |   |              |  
|Research   and development                                                                     |  |           | 13     |             |   |              |  
|Sales   and marketing                                                                          |  |           | 11     |             |   |              |  
|General   and administrative                                                                   |  |           | 21     |             |   |              |  
|Restructuring   charges                                                                        |  |           | 1,200  |             |   |              |  
|                                                                                               |  |           |        |             |   |               |  
|Total operating expenses                                                                       |  |           | 12,306 |             |   |              |  
|                                                                                               |  |           |        |             |   |               |  
|Loss from operations                                                                           |  |           | (6,256 | )           |   |              |  
|Interest expense, net                                                                          |  |           | (3     | )           |   | (14           | )
|                                                                                               |  |           |        |             |   |               |  
|Loss for the period                                                                            |  | $         | (6,259 | )           | $ | (14           | )
|                                                                                               |  |           |        |             |   |               |  
|Basic and   diluted loss per share                                                             |  | $         | (1.05  | )           | $ |              |  
|                                                                                               |  |           |        |             |   |               |  
|Weighted   average number of shares used in computing basic and diluted loss per share (000s) |  |           | 5,983  |             |   | 5,983         |  
|                                                                                               |  |           |        |             |   |               |  

22



| | Reconciliation   to Canadian GAAP  Cash flows from operating activities for the three months   ended June 30, 2005:
| | --------------------------------------------------------------------------------------------------------------------

|(In   thousands of U.S. dollars)                          |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|--------------------------------------------------------- |  | --------- | ------ | ----------- | - | ------------- | -
|                                                          |  |           |        |             |   |               |  
|Cash flows from (used in)   operating activities:         |  |           |        |             |   |               |  
|Loss for the period                                       |  | $         | (1,494 | )           | $ | (68           | )
|Items not involving cash:                                 |  |           |        |             |   |               |  
|Accretion on convertible notes payable to related parties |  |           |       |             |   | 72            |  
|Depreciation and amortization                             |  |           | 165    |             |   |              |  
|Amortization of deferred charges                          |  |           | 29     |             |   | (4            | )
|Stock-based compensation                                  |  |           | 279    |             |   |              |  
|Other non-cash expenses                                   |  |           | (31    | )           |   |              |  
|Changes in operating assets and liabilities:              |  |           |        |             |   |               |  
|Accounts receivable                                       |  |           | 1,593  |             |   |              |  
|Prepaid expenses and other receivables                    |  |           | 174    |             |   |              |  
|Accounts payable                                          |  |           | (176   | )           |   |              |  
|Interest payable to related parties                       |  |           | (104   | )           |   |              |  
|Long-term liabilities                                     |  |           | (12    | )           |   |              |  
|Long-term interest payable to related parties             |  |           | 106    |             |   |              |  
|Accrued liabilities                                       |  |           | (116   | )           |   |              |  
|Deferred revenue                                          |  |           | 108    |             |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net cash   flows from operating activities                |  |           | 521    |             |   |              |  
|Cash flows   from financing activities:                   |  |           |        |             |   |               |  
|Issuance of common shares on exercise of options          |  |           | 3      |             |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net cash   flows from financing activities                |  |           | 3      |             |   |              |  
|Cash flows   from (used in) investing activities:         |  |           |        |             |   |               |  
|Purchase of fixed assets, net                             |  |           | (231   | )           |   |              |  
|Maturity of short-term investments                        |  |           | 3,969  |             |   |              |  
|Purchases of short-term investments                       |  |           | (3,960 | )           |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net cash   flows used in investing activities             |  |           | (222   | )           |   |              |  
|Effect of   exchange rate changes on cash                 |  |           | (93    | )           |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net increase   in cash and cash equivalents               |  |           | 209    |             |   |              |  
|Cash and   cash equivalents, beginning of period          |  |           | 3,039  |             |   |              |  
|                                                          |  |           |        |             |   |               |  
|Cash and   cash equivalents, end of period                |  | $         | 3,248  |             | $ |              |  
|                                                          |  |           |        |             |   |               |  

23



| | Reconciliation   to Canadian GAAP  Cash flows from operating activities for the three months   ended June 30, 2004
| | -------------------------------------------------------------------------------------------------------------------

|(In   thousands of U.S. dollars)                   |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|-------------------------------------------------- |  | --------- | ------ | ----------- | - | ------------- | -
|                                                   |  |           |        |             |   |               |  
|Cash flows   from (used in) operating activities:  |  |           |        |             |   |               |  
|Loss for the period                                |  | $         | (1,145 | )           | $ | (14           | )
|Items   not affecting cash:                        |  |           |        |             |   |               |  
|Accretion on convertible notes to related parties  |  |           |       |             |   | 14            |  
|Depreciation and amortization                      |  |           | 120    |             |   |              |  
|Amortization of deferred charges                   |  |           | 7      |             |   |              |  
|Stock-based compensation                           |  |           | 33     |             |   |              |  
|Other non-cash expenses                            |  |           | 7      |             |   |              |  
|Changes in operating assets and liabilities:       |  |           |        |             |   |               |  
|Accounts receivable                                |  |           | 119    |             |   |              |  
|Prepaid expenses and other receivables             |  |           | 134    |             |   |              |  
|Accounts payable                                   |  |           | 264    |             |   |              |  
|Long-term accounts payable                         |  |           | 188    |             |   |              |  
|Accrued liabilities                                |  |           | (2,270 | )           |   |              |  
|Deferred revenue                                   |  |           | 18     |             |   |              |  
|                                                   |  |           |        |             |   |               |  
|Net cash   flows used in operating activities      |  |           | (2,525 | )           |   |              |  
|Cash flows   from financing activities:            |  |           |        |             |   |               |  
|Issuance of notes payable to related parties       |  |           | 8,000  |             |   |              |  
|Notes payable to related parties issuance cost     |  |           | (352   | )           |   |              |  
|                                                   |  |           |        |             |   |               |  
|Net cash   flows from financing activities         |  |           | 7,648  |             |   |              |  
|Cash flows   from investing activities:            |  |           |        |             |   |               |  
|Purchase of fixed assets                           |  |           | (546   | )           |   |              |  
|Maturity of short-term investments                 |  |           |       |             |   |              |  
|Purchases short-term investments                   |  |           | (1,500 | )           |   |              |  
|                                                   |  |           |        |             |   |               |  
|Net cash   flows from investing activities         |  |           | (2,046 | )           |   |              |  
|Effect of   exchange rate changes on cash          |  |           | (3     | )           |   |              |  
|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 |             | $ |              |  
|                                                   |  |           |        |             |   |               |  

24



| | Reconciliation   to Canadian GAAP  Cash flows from operating activities for the six months   ended June 30, 2005:
| | ------------------------------------------------------------------------------------------------------------------

|(In   thousands of U.S. dollars)                          |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|--------------------------------------------------------- |  | --------- | ------ | ----------- | - | ------------- | -
|                                                          |  |           |        |             |   |               |  
|Cash flows   from (used in) operating activities:         |  |           |        |             |   |               |  
|Loss for the period                                       |  | $         | (1,960 | )           | $ | (138          | )
|Items not involving cash:                                 |  |           |        |             |   |               |  
|Accretion on convertible notes payable to related parties |  |           |       |             |   | 145           |  
|Depreciation and amortization                             |  |           | 322    |             |   |              |  
|Amortization of deferred charges                          |  |           | 60     |             |   | (7            | )
|Stock-based compensation                                  |  |           | 352    |             |   |              |  
|Loss on settlement of liability                           |  |           | 165    |             |   |              |  
|Other non-cash expenses                                   |  |           | 74     |             |   |              |  
|Changes in operating assets and liabilities:              |  |           |        |             |   |               |  
|Accounts receivable                                       |  |           | (948   | )           |   |              |  
|Prepaid expenses and other receivables                    |  |           | 75     |             |   |              |  
|Accounts payable                                          |  |           | 106    |             |   |              |  
|Interest payable to related parties                       |  |           | (103   | )           |   |              |  
|Long-term liabilities                                     |  |           | (74    | )           |   |              |  
|Long-term interest payable to related parties             |  |           | 210    |             |   |              |  
|Accrued liabilities                                       |  |           | (180   | )           |   |              |  
|Deferred revenue                                          |  |           | 60     |             |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net cash   flows used in operating activities             |  |           | (1,841 | )           |   |              |  
|Cash flows   from financing activities:                   |  |           |        |             |   |               |  
|Issuance of common shares on exercise of options          |  |           | 44     |             |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net cash   flows from financing activities                |  |           | 44     |             |   |              |  
|Cash flows   from (used in) investing activities:         |  |           |        |             |   |               |  
|Purchase of fixed assets, net                             |  |           | (275   | )           |   |              |  
|Maturity of short-term investments                        |  |           | 6,447  |             |   |              |  
|Purchases of short-term investments                       |  |           | (6,438 | )           |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net cash   flows from investing activities                |  |           | (266   | )           |   |              |  
|Effect of   exchange rate changes on cash                 |  |           | (106   | )           |   |              |  
|                                                          |  |           |        |             |   |               |  
|Net decrease   in cash and cash equivalents               |  |           | (2,169 | )           |   |              |  
|Cash and   cash equivalents, beginning of period          |  |           | 5,417  |             |   |              |  
|                                                          |  |           |        |             |   |               |  
|Cash and   cash equivalents, end of period                |  | $         | 3,248  |             | $ |              |  
|                                                          |  |           |        |             |   |               |  

25



| | Reconciliation   to Canadian GAAP  Cash flows from operating activities for the six months   ended June 30, 2004
| | -----------------------------------------------------------------------------------------------------------------

|(In   thousands of U.S. dollars)                  |  | U.S. GAAP |        | Adjustments |   | Canadian GAAP |  
|------------------------------------------------- |  | --------- | ------ | ----------- | - | ------------- | -
|                                                  |  |           |        |             |   |               |  
|Cash flows   from (used in) operating activities: |  |           |        |             |   |               |  
|Loss for the period                               |  | $         | (6,259 | )           | $ | (14           | )
|Items not affecting cash:                         |  |           |        |             |   |               |  
|Accretion on convertible notes   payable          |  |           |       |             |   | 14            |  
|Depreciation and amortization                     |  |           | 305    |             |   |              |  
|Amortization of deferred   charges                |  |           | 7      |             |   |              |  
|Stock-based compensation                          |  |           | 50     |             |   |              |  
|Other non-cash expenses                           |  |           | 40     |             |   |              |  
|Changes in operating assets   and liabilities:    |  |           |        |             |   |               |  
|Accounts receivable                               |  |           | (208   | )           |   |              |  
|Prepaid expenses and other   receivables          |  |           | (86    | )           |   |              |  
|Accounts payable                                  |  |           | 130    |             |   |              |  
|Long-term accounts payable                        |  |           | 188    |             |   |              |  
|Accrued liabilities                               |  |           | (711   | )           |   |              |  
|Deferred revenue                                  |  |           | (66    | )           |   |              |  
|                                                  |  |           |        |             |   |               |  
|Net cash flows used in operating activities       |  |           | (6,610 | )           |   |              |  
|Cash flows   from financing activities:           |  |           |        |             |   |               |  
|Issuance of notes payable to related parties      |  |           | 8,000  |             |   |              |  
|Notes payable to related parties issuance cost    |  |           | (352   | )           |   |              |  
|                                                  |  |           |        |             |   |               |  
|Net cash   flows from financing activities        |  |           | 7,648  |             |   |              |  
|Cash flows from investing activities:             |  |           |        |             |   |               |  
|Purchase of fixed assets                          |  |           | (548   | )           |   |              |  
|Maturity of short-term   investments              |  |           | 1,748  |             |   |              |  
|Purchases of short-term   investments             |  |           | (1,500 | )           |   |              |  
|                                                  |  |           |        |             |   |               |  
|Net cash flows used in investing activities       |  |           | (300   | )           |   |              |  
|Effect of exchange rate changes on cash           |  |           |       |             |   |              |  
|                                                  |  |           |        |             |   |               |  
|Increase (decrease) in cash and cash equivalents  |  |           | 738    |             |   |              |  
|Cash and cash equivalents, beginning of period    |  |           | 13,436 |             |   |              |  
|                                                  |  |           |        |             |   |               |  
|Cash and cash equivalents,   end of period        |  | $         | 14,174 |             | $ |              |  
|                                                  |  |           |        |             |   |               |  

26



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

OVERVIEW

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

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

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

During 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably.  At the same time, we judged that the market for mobile data services in the mobile network operator sector was potentially larger and likely to develop sooner. As a consequence, we began to restructure our business to focus on opportunities in the mobile network operator marketplace.  During 2004, we completed this process and are now focused on selling our software products to mobile network operators.

We continue to develop and expand our X-treme Mobility Suite of products for mobile network operators to assist them in growing their next-generation data services.  In addition, we may in the future acquire products and/or companies that have developed software that aligns with our X-treme Mobility Suite of products.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We periodically review our financial reporting and disclosure practices and accounting policies to ensure they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed the selection, application and communication of our critical accounting policies and financial disclosures. We have determined that the critical accounting policies relating to our core ongoing business activities are primarily those that relate to revenue

27



recognition, allowance for doubtful accounts, income taxes, litigation, valuation of intangible assets, valuation of fixed assets, and restructuring provisions. Other important accounting policies are described in note 2 to our audited annual consolidated financial statements for the year ended December 31, 2004, which are included in our annual report on form 10-K.

REVENUE RECOGNITION

SOURCES OF REVENUE

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

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

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

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

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

We typically license our software on a per user or per transaction basis.  Accordingly, our revenue is dependent on whether, and the extent to which, our customers continue to use our software. However, in the case of our amended agreement with Hewlett-Packard in connection with Hewlett-Packards re-licensing of our software to Sprint PCS, we license our software on a monthly fixed fee basis. If, at any time and for any reason, Sprint PCS decides to no longer use our software for additional customers, Hewlett-Packard will cease paying the monthly fixed fees and we will not receive any further license fees under the agreement.

28



PRODUCT REVENUE

Product revenue consists of the following:

| |  | Variable License Fee   Arrangement  a variable license fee based on the numbers of users or the   total capacity in a period. Revenue is recognized on an ongoing basis when   determinable and will vary with the number or the total capacity of our   customers end users.  In some   of our agreements, there may be a cap on   the total license fees paid by our customer for a particular product.                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Reseller/OEM Arrangement  the   reseller or OEM typically pays a non-refundable licensing fee for our   software and/or a royalty fee based on the related number of users or based   on a given capacity. We recognize revenue associated with non-refundable   license fees when we have met our revenue recognition criteria for license   agreements as outlined above. We recognize royalty fee revenue when the   amount is determinable and all of our other revenue recognition criteria for   license revenue are met.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Fixed License Fee Arrangement    a license fee for a fixed number of copies or unlimited use of the software   for a period of time ranging from three months to perpetuity.  If the license is not a perpetual license,   we recognize the revenue ratably over the term of the license.  If the license is a perpetual license, we   recognize the revenue when the general conditions outlined above under   Sources of Revenue are met.                                                                                  

SERVICE REVENUE IMPLEMENTATION AND CUSTOMER SERVICE FEES

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

MAINTENANCE FEES

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

MANAGED ALERTS SERVICE FEES

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

29



ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our general credit terms are 30 to 60 days from the invoice date.  We perform an ongoing credit evaluation of each customers financial condition and if the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payment, an additional allowance would be required. At June 30, 2005, our allowance for doubtful accounts totaled $26,000.  Our maximum exposure to loss on receivables at any point in time is the total accounts receivable, which was $3.8 million at June 30, 2005.  Due to the significant number of estimates utilized in determining an expected rate of uncollectible receivables, actual results of collections could be materially different from these estimates.

INCOME TAXES

We record a valuation allowance against deferred income tax assets when we believe it is not more likely than not that some portion or all of the deferred income tax assets will be realized. We consider factors such as the reversal of deferred income tax liabilities, projected taxable income, the character of the income tax asset and the potential for realization due to tax planning strategies. At December 31, 2004, while we had $92.2 million in available net tax benefit of loss carry forwards and other deferred tax assets, we have experienced losses in recent years and the extent of future income for tax purposes before utilization of these benefits is uncertain.  Accordingly, the entire balance of deferred tax assets was offset by a valuation allowance.  Due to the significant number of estimates and projections utilized in determining an appropriate valuation for our deferred income tax
assets, the actual valuation allowance against the tax assets could be materially different from these estimates.

LITIGATION

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

VALUATION OF INTANGIBLE ASSETS

We have acquired several businesses. As part of the completion of any business combination, we are required to value any intangible assets acquired at the date of acquisition. We utilize the most current internally-generated and publicly available information to develop an estimate of future undiscounted cash flows including, among other things, estimated lives, residual values and terminal values, and believe the estimates to be reasonable at the date prepared.  This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the intangible assets acquired. There can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired intangible assets. To assist us with the valuation process, we have adopted the practice of using independent valuation
experts in the valuation

30



process for intangible assets acquired through material acquisitions. However, it is entirely possible that either we or the independent valuation experts will make judgments or estimates that differ from actual circumstances.  In these cases, we may be required to record a provision or write-off certain of our intangible assets. Similarly, in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, we are required to annually test the value of our goodwill. Changes in estimates could result in different conclusions for the underlying value of goodwill. We perform our annual impairment testing on goodwill at December 31 of each fiscal year, provided that circumstances do not arise during the year that would necessitate an earlier evaluation. At times over the past three years, our book value has exceeded our fair value and we have
recorded impairment charges to reflect these assessments.  As at June 30, 2005, the carrying value of our goodwill and intangible assets is nil.

VALUATION OF FIXED ASSETS

We monitor the appropriateness of the carrying values of our fixed assets, primarily office furniture and computer software and equipment, on an ongoing basis, in accordance with accounting requirements. As required, if an indicator of potential impairment is evident, we will review the projected undiscounted future cash flows associated with the relevant fixed asset, to determine if the undiscounted cash flows exceed the carrying amount of the fixed asset. If it is determined that the net carrying amount of the fixed asset is not recoverable, then an adjustment would be made to reduce the net carrying amount to the fair value amount of the asset. We utilize the most current internally-generated and publicly available information to develop our estimates of future undiscounted cash flows including, among other things, estimated lives, residual values and terminal values, and believe the estimates to be
reasonable. Additionally, determination of fair values of fixed assets may also involve various methods of estimation, if comparable independent fair values are not readily available. Accordingly, different assumptions related to cash flows or fair values of fixed assets could materially affect our estimates.  We have recorded charges to write-down fixed assets, primarily arising due to the restructuring activities we have undertaken.  As at June 30, 2005, the net book value of our fixed assets was $1.0 million.

RESTRUCTURING PROVISIONS

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

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2005, COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2004

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

31



REVENUE

PRODUCT REVENUE

Product revenue was $1.7 million and $4.7 million in the three and six months ended June 30, 2005, compared to $1.9 million and $3.7 million in the three and six months ended June 30, 2004.

Product revenue from our X-treme Mobility Suite (XMS) of products decreased to $1.7 million in the three months ended June 30, 2005 from $1.8 million in the same period in 2004. The principal revenue producing deployments for our XMS products in the three months ended June 30, 2005 were with Hewlett-Packard (as a reseller to Sprint PCS), ZTE in China and a North American customer. Sales to ZTE and the North American customer resulted in approximately $570,000 in product revenue in the three months ended June 30, 2005, compared to nil from these two customers in the same period of 2004. Product revenue from Hewlett-Packard (as a reseller to Sprint PCS) decreased by $296,000 and product revenue from Nokia decreased by $615,000 in the three months ended June 30, 2005, compared to the same period in 2004. While we are experiencing a continued competitive threat related to Sprint PCS (see
discussion below), we currently anticipate that product revenue from Hewlett-Packard (as a reseller to Sprint PCS) will remain at the same level in the third quarter of 2005. In the three months ended June 30, 2005, the X-treme Mobility Gateway (XMG) product accounted for approximately 89% of our revenue from the X-treme Mobility Suite of Products.  In the three months ended June 30, 2004, our XMG product contributed approximately 64% of XMS revenue while our Multimedia Application Gateway (AGW) product, the product we purchased from Nokia in the second quarter of 2004, contributed approximately 34% of XMS revenue.

In the six months ended June 30, 2005, product revenue from our X-treme Mobility Suite (XMS) of products increased to $4.6 million from $3.5 million in the same period in 2004.  The principal revenue producing deployments for our XMS products in the six months ended June 30, 2005 were with Hewlett-Packard (as a reseller to Sprint PCS), Nokia and Vodafone.  Combined product revenue from Nokia and Vodafone increased by $1.3 million in the six months ended June 30, 2005, compared to the same period of 2004. Product revenue from Hewlett-Packard (as a reseller to Sprint PCS) declined by $1.0 million in the six months ended June 30, 2005, compared to the same period in 2004. As discussed in the preceding paragraph, new installations in the second quarter of 2005 contributed $570,000 of product revenue. In the six months ended June 30, 2005, our X-treme Mobility Gateway (XMG)
product accounted for approximately 70% of revenue from the X-treme Mobility Suite of products and our AGW product accounted for approximately 23% of XMS revenue.  In the six months ended June 30, 2004, our XMG and AGW products contributed approximately 79% and 18% of XMS revenue, respectively.

In January 2002, 724 Solutions entered into a subcontract agreement with Hewlett-Packard Company in connection with a wireless gateway project at Sprint PCS, Hewlett-Packards customer. Under this agreement, we licensed our XMG product to Hewlett-Packard for re-licensing the product to Sprint PCS. In accordance with the agreement, Hewlett-Packard currently pays us fixed monthly license and maintenance and support fees, which amounted to approximately $545,667 per month in revenue in the three months ended June 30, 2005. If, at any time and for any reason, Sprint PCS decides to no longer use our software for additional customers, we expect that Hewlett-Packard will cease paying the monthly fixed license fees and possibly the maintenance and support fees. In such an event, we will not receive any further license fees and possibly maintenance fees under the agreement, which would result in a substantial
reduction of our revenues from Hewlett-Packard.

32



At this time, Hewlett-Packard has not given us notice that it intends to stop payments in connection with the license or maintenance fees under the agreement on any particular date and our agreement continues to be in full force and effect. We are aware, however, that Sprint PCS has an ongoing project with another vendor that could result in the replacement of our solution. We are working closely with Hewlett-Packard, taking all reasonable measures to prevent such replacement from occurring. We currently do not believe that a replacement of our solution would occur, if at all, before the end of October 2005.

Product revenue from our non-XMS products, including those sold primarily to the financial services industry, was $50,000 and $121,000 in the three and six months ended June 30, 2005, compared to $125,000 and $174,000 in the same periods in 2004. We will continue to perform under the contracts we currently have with these customers and anticipate that revenue from these customers will be approximately $50,000 per quarter for the remainder of 2005. Our ability to achieve this revenue, however, is dependent on our customers for these products renewing their contracts.

We provide our customers with fixed or variable pricing alternatives. In the three months and six months ended June 30, 2005, Hewlett-Packard (as a reseller to Sprint PCS) was the only significant customer purchasing licenses on a fixed price basis, while in the same period in 2004, essentially all of our key revenue producing contracts for the XMS suite were on a variable pricing model.  We anticipate that the XMG and AGW products will generate most of our XMS product revenue in the third and fourth quarters of 2005.

SERVICE REVENUE

Service revenue increased to $2.9 million and $5.7 million in the three and six months ended June 30, 2005, compared to $1.1 million and $2.4 million in the three and six months ended June 30, 2004.

In the three months ended June 30, 2005, service revenue from XMS increased to $2.7 million from $852,000 in the same period in 2004. Implementation and customer service fee revenue related to XMS was approximately $1.3 million in the three months ended June 30, 2005, compared to $204,000 in the same period of 2004. Service revenue in the second quarter of 2005 includes approximately $156,000 in hardware. Maintenance revenue related to XMS increased to $1.2 million in the three months ended June 30, 2005 from $613,000 in the same period of 2004. Approximately 48% of this increase was related to our AGW product and approximately 45% of this increase was related to our XMG product, mostly due to increased maintenance revenue from Hewlett-Packard (as a reseller to Sprint PCS). While we are experiencing a continued competitive threat related to Sprint PCS (see discussion above), we currently anticipate that maintenance revenue from Hewlett-Packard (as a reseller to
Sprint PCS) will remain at the same level in the third quarter of 2005.

In the six months ended June 30, 2005, service revenue from XMS increased to $4.9 million from $1.8 million in the same period in 2004. Implementation and customer service fee revenue related to XMS was approximately $2.3 million in the three months ended June 30, 2005, compared to $513,000 in the same period of 2004. Approximately 34% of this increase resulted from the delivery of hardware to Vodafone, approximately 37% of this increase related to integration services at Vodafone and the remainder related to implementations in Asia Pacific, Europe and North America. Maintenance revenue related to XMS increased to $2.4 million in the three months ended June 30, 2005 from $1.2 million in the prior year period. Of the $1.2 million increase, approximately 50% was related to our AGW product and approximately 47% was related to our XMG product, mostly due to increased maintenance revenue from Hewlett-Packard (as a reseller to Sprint PCS).

Managed alerts services revenue increased to $146,000 and $251,000 in the three and six months ended June 30, 2005, compared to $35,000 and $77,000 in the same periods of 2004, primarily due to one customer adopting this platform as part of its customer retention and loyalty program.

33



Service revenue from our non-XMS products, including those sold primarily to the financial services industry, was $252,000 and $491,000 in the three and six months ended June 30, 2005, compared to $267,000 and $578,000 in the corresponding periods in 2004, as some contracts were not renewed by our financial services customers.

OPERATING EXPENSES

COST OF PRODUCT REVENUE

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

| | Development costs: Software development costs are   capitalized beginning when a products technological feasibility has been   established, which generally occurs upon completion of a working model, and   ending when a product is available for general release to customers. All   subsequent costs are expensed as incurred. To date, the completion of working   models of our products has substantially coincided with the general release   of the products. As a result, we have not capitalized any software   development costs, since those costs have not been significant.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Amortization of intangible assets: Intangible assets   include intellectual property we have acquired and either license as a   stand-alone product or embed in one or more of our software products.   Acquired software is amortized on a straight-line basis over a period of two   to five years. All acquired software had been fully amortized or written down   to nil by the end of September 2003. Therefore, amortization expense was nil   in each of the three and six month periods ending June 30, 2005 and 2004.                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Third Party Inventory: Cost of product revenue also   includes the cost of third party inventory purchased from third parties and   sold to our customers. In the three and six months ended June 30, 2005 and   June 30, 2004, we did not purchase or sell any third party inventory to our   customers.                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Other: Some of our products include third party   embedded software that we license.  In   the three and six months ended June 30, 2005, we recorded $5,000 and $10,000   of license fees to third party vendors for the use of software embedded in   our products, compared to nil in the three and six months ended June 30,   2004.                                                                                                                                                                                                                                                    

COST OF SERVICES REVENUE

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

Cost of services revenue increased to $1.9 million and $3.9 million for the three and six months ended June 30, 2005, compared to $1.5 and $3.1 million for the same periods in 2004. Hardware costs related to a customer deployment of approximately $150,000 and $470,000 in the three and six months ended June 30, 2005, respectively, are included in these totals. Our integration, product support and managed services related revenue were all significantly higher in the three and six months ended June 30, 2005, compared to the same periods in 2004, leading to increased costs in these areas. Due to improved resource utilization, cost of services revenue increased by a lower percentage than revenue. Cost of

34



services revenue, as a percentage of revenue, was 41% and 38% for the three and six months ended June 30, 2005, compared to 50% and 51% in the same periods in 2004. Our average professional services headcount increased to 27 in the second quarter of 2005, compared to 15 in the same period of 2004, as we added personnel to meet commitments to our customers. At the end of the second quarter of 2005, we had 28 professional services personnel, compared to 15 at the end of the second quarter of 2004. Costs related to these personnel increased by 19% and 22% in the three and six months ended June 30, 2005, compared to the same periods of 2004 while average headcount increased by 81% and 63%, compared to the same periods of 2004. The geographic mix of our professional services personnel changed from the second quarter of 2004 to the second quarter of 2005, resulting in a lower cost per employee.

RESEARCH AND DEVELOPMENT

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

Research
     and development expenses were $1.7 and $3.4 million for the three and six
     months ended June 30, 2005, compared to $1.4 and $3.5 million for the same
     periods in 2004. As part of our 2004 restructuring initiative, we reduced
     our R&D headcount in the first quarter of 2004 from 48 in January 2004
     to 34 at March 31, 2004. Due to our acquisition of the AGW product in the
     second quarter of 2004 and to meet customer commitments in other areas, we
     have added R&D personnel since March 2004. Our average R&D
     headcount in the three and six months ended June 30, 2005 was 53 and 51,
     compared to 38 and 41 in the corresponding periods in 2004. Our R&D
     headcount at June 30, 2005 was 55, compared to 43 at June 30, 2004. Costs
     related to R&D personnel increased by 6% in the three months ended June
     30, 2005 and decreased by 1% in the six months ended June 30, 2005,
     compared to the corresponding periods of 2004, while average headcount
     increased by 41% and 23% in the three and six months ended June 30, 2005,
     compared to the corresponding periods in 2004. Our R&D costs have
     increased by a lower percentage than our R&D headcount because we have
     a higher proportion of our development team in more cost-effective
     locations. The average cost per R&D employee was lower by 25% and 21%
     in the three and six months ended June 30, 2005, respectively, compared to
     the same periods in 2004.

We
     continue to evaluate our R&D expenditure needs based on our anticipated
     product development schedule and the current market environment. R&D
     expense, as a percentage of revenue, was 36% and 32% for the three and six
     months ended June 30, 2005, compared to 47% and 58% for the same periods in
     2004.

SALES AND MARKETING

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

Sales and marketing expenses were $1.0 million and $2.2 million for the three and six months ended June 30, 2005, compared to $1.2 million and $2.6 million for the same periods in 2004. The average number of S&M personnel was 18 in both the three and six months ended June 30, 2005, compared to 19 and 20 in the corresponding periods of 2004.  At June 30, 2005 and 2004, we had 18 and 19 sales and marketing personnel, respectively. We continue to monitor our sales and marketing expenditures to ensure that they remain aligned with our targeted opportunities as well as prevailing market conditions. S&M expense, as a percentage of revenue, was 22% and 21% for the three and six months ended June 30, 2005, compared to 39% and 43% for the same periods in 2004.

35



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, professional consulting costs and foreign exchanges gains and losses. Our corporate staff includes several of our executive officers and our business development, financial planning and control, legal, human resources and corporate administration staff.

G&A expenses were $853,000 and $1.7 million for the three and six months ended June 30, 2005, compared to $755,000 and $1.6 million for the same periods in 2004. Our average G&A headcount in both the three and six months ended June 30, 2005 was 13, compared to 14 and 15, respectively, in the corresponding periods of 2004. At June 30, 2005, the number of G&A personnel was 13, unchanged from June 30, 2004.  G&A personnel costs increased by $14,000 and $24,000 in the three and six months ended June 30, 2005, compared to the same periods of 2004. We also had higher G&A costs in other areas, most notably, charges of $87,000 and $97,000 in the three and six months ended June 30, 2005 related to realized and unrealized foreign exchange gains and losses, compared to a gain of $25,000 and a loss of $14,000 in the same periods of 2004. G&A expense, as a percentage of revenue, was 18%
and 16% for the three and six months ended June 30, 2005, compared to 25% and 26% for the same periods in 2004.

DEPRECIATION

Depreciation expense was $165,000 and $322,000 in the three and six months ended June 30, 2005, compared to $120,000 and $305,000 for the same periods in 2004. Since the second quarter of 2004, we have been making more significant investments in fixed assets in order to allow us to pursue business opportunities. We anticipate that we will make further purchases of fixed assets in the second half of 2005.

STOCK-BASED COMPENSATION

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

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

36



Stock-based compensation increased to $279,000 and $352,000 for the three and six months ended June 30, 2005, compared to $33,000 and $50,000 for the corresponding periods in 2004. All stock compensation expenses in both periods related to the expensing of the fair value of options granted since January 1, 2003.

RESTRUCTURING COSTS

In the three and six months ended June 30, 2005, we recorded restructuring charges of nil and nil, compared to a reversal of $900,000 and a net charge of $1.2 million in the corresponding periods of 2004. In the three months ended March 31, 2004, we planned to reduce our worldwide work force by approximately 40 people and consolidate facilities and, accordingly, recorded charges of $1.6 million related to severances and $500,000 related to lease exit costs. These efforts were to be implemented in order to reduce our overall operating costs and to realign our operating expenses and investments with a view to achieving operating profitability. Our acquisition of the AGW product in the second quarter of 2004 caused us to cancel 17 of the planned terminations and to reverse $900,000 in severance charges.

Included in our Accrued Liabilities as at June 30, 2005 is approximately $93,000 in remaining obligations arising from our restructuring activity undertaken in 2002. Specifically, it relates to the remaining costs associated with an office in Europe that we have vacated. Although the space is sublet, we are obligated to refurbish the space at the end of the lease. We expect to pay out the remaining balance by the end of the first quarter of 2006.

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

INTEREST EXPENSE

We had net interest expenses of $180,000 and $366,000 in the three and six months ended June 30, 2005, compared to net interest expenses of $19,000 and $3,000 in the same periods of 2004. We issued $8.0 million in convertible notes in the second quarter of 2004 and the interest expense associated with this debt was $247,000 and $489,000 in the three and six months ended June 30, 2005. Interest earned in the three and six months ended June 30, 2005 was $67,000 and $124,000 and was derived from cash and cash equivalent balances and short-term investments, representing primarily the unused portion of the proceeds from the convertible debt financing completed in the second quarter of 2004.

Net interest expense is expected to be approximately $200,000 per quarter in the third and fourth quarters of 2005; being $250,000 per quarter in interest charges related to the convertible notes payable to related parties offset by interest income of approximately $50,000 per quarter.

LOSS ON SETTLEMENT OF LIABILITY

On January 3, 2005, we issued 33,549 common shares with a market value of $268,000 in settlement of interest owing of $103,000 and recorded a loss on settlement of liability of $165,000. The payment was related to the extinguishment of the liability related to interest due on the convertible notes payable to related parties. We have the option of paying the interest portion due quarterly on the notes payable in cash or shares at a conversion price of $3.07 (see note 3 to the interim financial statements for further details). In the event we settle future interest obligations in shares, we will record additional charges, the amount of which will depend on the price of our shares at the time of settlement. In the three months ended June 30, 2005, we made cash payments in settlement of the interest amounts due related to the first and second quarters of 2005.

37



NET LOSS

Our net loss increased to $1.5 million three months ended June 30, 2005, from $1.1 million in the same period in 2004. Our net loss for the six months ended June 30, 2005 decreased to $2.0 million from $6.3 million for the same period of 2004. The net loss in the quarter ended June 30, 2004 included a reversal of $900,000 in restructuring charges.

Our year to date net loss has decreased significantly from the same period in 2004 because revenue increased by $4.4 million and total operating expenses decreased by $456,000, in each case, compared to the same period in 2004. The year to date 2004 net loss included the net $1.2 million restructuring charge discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected balance sheet information as of June 30, 2005 and December 31, 2004 (in thousands of U.S. dollars):

|                                              |  | June 30,   2005 |        | December   31, 2004 |  
|--------------------------------------------- |  | --------------- | ------ | ------------------- | -
|                                              |  |                 |        |                     |  
|Cash and cash equivalents                     |  | $               | 3,248  |                     | $
|Short-term investments                        |  |                 | 7,999  |                     |  
|Restricted cash                               |  |                 | 208    |                     |  
|                                              |  |                 |        |                     |  
|                                              |  |                 | 11,455 |                     |  
|Other current assets less current liabilities |  |                 | 1,414  |                     |  
|                                              |  |                 |        |                     |  
|Working capital                               |  | $               | 12,869 |                     | $
|                                              |  |                 |        |                     |  

At June 30, 2005, our cash and short-term investments and restricted cash were $11.5 million, compared to $13.6 million at December 31, 2004, a reduction of $2.1 million.  The reduction in our cash balance was primarily due to uses of cash in operating activities, most notably our loss excluding non-cash items of $1.0 million in the six months ended June 30, 2005 and the increase in accounts receivable of $948,000. We have also purchased $275,000 of fixed assets in the six months ended June 30, 2005.

Our accounts receivables balance as at June 30, 2005 was $3.8 million, with over 95% of the balance being either current or less than 30 days past due.  We did not incur any bad debt expense in the three and six months ended June 30, 2005 and 2004 and we believe that the current reserve of $26,000 is sufficient and that our accounts receivable will be collected. Our accrued liabilities balance of $1.9 million includes approximately $93,000 related to our 2002 restructuring that we anticipate will be paid in 2006.

38



The following table presents selected cash flow information for the three and six months ended June 30, 2005 and 2004 (in thousands of U.S. dollars):

|                                                     |  | Three   months ended |      | Six months   ended |  
|---------------------------------------------------- |  | -------------------- | ---- | ------------------ | -
|                                                     |  |                      |      |                    |  
|                                                     |  | June 30,   2005      |      | June 30,   2004    |  
|                                                     |  |                      |      |                    |  
|Net cash flows from operating activities             |  | $                    | 521  |                    | $
|Net cash flows from financing activities             |  |                      | 3    |                    |  
|Net cash flows from investing activities             |  |                      | (222 | )                  |  
|Effect of exchange rate changes on cash              |  |                      | (93  | )                  |  
|                                                     |  |                      |      |                    |  
|Net increase (decrease) in cash and cash equivalents |  | $                    | 209  |                    | $
|                                                     |  |                      |      |                    |  

We had a net cash flow from operating activities of $521,000 in the three months ended June 30, 2005, compared to a net cash use in operating activities of $2.5 million in the same period of 2004. For the six months ended June 30, 2005, net cash used in operating activities decreased to $1.8 million, compared to $6.6 million for the same period in 2004. Net cash used in operating activities for the three months ended June 30, 2005 consisted of our net loss of $1.5 million offset by non-cash items; specifically depreciation of $165,000, amortization of deferred charges of $29,000 and stock-based compensation of $279,000 and a decrease in accounts receivable of $1.6 million (other working capital items balanced to nil). 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 $1.5 million related to working capital account
changes, offset by non-cash items, specifically depreciation of $120,000, amortization of deferred charges of $7,000 and stock-based compensation expense of $33,000. The improved cash flows from operations in the three and six months ended June 30, 2005, compared to the corresponding periods in 2004 has been achieved through increased revenue year over year.

Financing activities provided a cash source of $3,000 and $44,000 in the three and six months ended June 30, 2005. These amounts were related to the issuance of common shares on the exercise of options. Cash flows from financing activities were $7.6 million for both the three and six months ended June 30, 2004. This amount includes the proceeds from the convertible debt issuance completed in the second quarter of 2004 of $8.0 million offset by expenses of $352,000 related to the financing, recorded as deferred charges.

Cash used in investing activities, before the sale (purchase) of short-term investments, business acquisitions and restricted cash was $231,000 and $275,000 in the three and six months ended June 30, 2005, compared to cash use of $546,000 and $548,000 in the same periods in 2004. The amount in each period is related to net purchase of fixed assets.

We anticipate our cash expenditures in the next four quarters to be in the range of $5.6 million to $6.0 million per quarter as we add additional personnel to our development and on-site support teams to support our customer installations. However, we will maintain our focus on cost management. We believe that our existing cash and cash equivalents, short term investments and our estimated cash from sales in the next twelve months will be sufficient to cover our cash requirements, including planned capital expenditures, for at least the next twelve months.

39



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

40



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS    CANADA AND UNITED STATES

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share Based Payment, or SFAS 123R, which requires companies to expense the fair value of employee stock options and other forms of share based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account for share based compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R, we are required to determine the appropriate fair value model to be used for valuing share based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. We currently use the Black Scholes option pricing model to value options. The use of a different model to value options may result in a different fair value than the use of the Black Scholes option pricing model. We are required to adopt
SFAS 123R in the first quarter of fiscal 2006. We are evaluating the requirements of SFAS 123R to assess what impact its adoption will have on our financial position and results of operations.

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

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

41



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                                                                                         |  | Jun. 30,   2005 |        | Mar. 31,   2005 |   | Dec. 31   2004 |   | Sept. 30   2004 |       | Jun. 30   2004 |   | Mar. 31,   2004 |   | Dec. 31   2003 |        | Sept. 30   2003 |  
|----------------------------------------------------------------------------------------------------- |  | --------------- | ------ | --------------- | - | -------------- | - | --------------- | ----- | -------------- | - | --------------- | - | -------------- | ------ | --------------- | -
|                                                                                                      |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|(In thousands of U.S. dollars, except number of shares and per share amounts)                         |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Revenue:                                                                                              |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Product                                                                                               |  | $               | 1,704  |                 | $ | 2,985          |   | $               | 3,140 |                | $ | 2,013           |   | $              | 1,930  |                 | $
|Services                                                                                              |  |                 | 2,912  |                 |   | 2,820          |   |                 | 2,380 |                |   | 1,489           |   |                | 1,119  |                 |  
|                                                                                                      |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Total revenue                                                                                         |  |                 | 4,616  |                 |   | 5,805          |   |                 | 5,520 |                |   | 3,502           |   |                | 3,049  |                 |  
|Operating expenses:                                                                                   |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Cost   of product revenue                                                                             |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Amortization   of intangible assets                                                                   |  |                 |       |                 |   |               |   |                 |      |                |   |                |   |                |       |                 |  
|Other                                                                                                 |  |                 | 10     |                 |   | 5              |   |                 | 26    |                |   |                |   |                |       |                 |  
|Cost   of service revenue                                                                             |  |                 | 1,907  |                 |   | 2,026          |   |                 | 2,044 |                |   | 1,505           |   |                | 1,537  |                 |  
|Research   and development                                                                            |  |                 | 1,693  |                 |   | 1,687          |   |                 | 1,339 |                |   | 1,410           |   |                | 1,433  |                 |  
|Sales   and marketing                                                                                 |  |                 | 1,023  |                 |   | 1,168          |   |                 | 1,316 |                |   | 1,093           |   |                | 1,197  |                 |  
|General   and administrative                                                                          |  |                 | 853    |                 |   | 804            |   |                 | 690   |                |   | 796             |   |                | 755    |                 |  
|Depreciation                                                                                          |  |                 | 165    |                 |   | 157            |   |                 | 166   |                |   | 124             |   |                | 120    |                 |  
|Stock-based   compensation:                                                                           |  |                 |        |                 |   |                |   |                 |      |                |   |                |   |                |       |                 |  
|Cost   of revenue                                                                                     |  |                 | 15     |                 |   | 7              |   |                 | 6     |                |   | 4               |   |                | 3      |                 |  
|Research   and development                                                                            |  |                 | 35     |                 |   | 19             |   |                 | 17    |                |   | 10              |   |                | 9      |                 |  
|Sales   and marketing                                                                                 |  |                 | 43     |                 |   | 16             |   |                 | 14    |                |   | 9               |   |                | 7      |                 |  
|General   and administrative                                                                          |  |                 | 186    |                 |   | 31             |   |                 | 26    |                |   | 16              |   |                | 14     |                 |  
|Restructuring   costs                                                                                 |  |                 |       |                 |   |               |   |                 | (26   | )              |   | (181            | ) |                | (900   | )               |  
|Write-down   of goodwill, intangible and other assets                                                 |  |                 |       |                 |   |               |   |                 |      |                |   |                |   |                |       |                 |  
|                                                                                                      |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Total   operating expenses                                                                            |  |                 | 5,930  |                 |   | 5,920          |   |                 | 5,618 |                |   | 4,786           |   |                | 4,175  |                 |  
|                                                                                                      |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Loss from operations                                                                                  |  |                 | (1,314 | )               |   | (115           | ) |                 | (98   | )              |   | (1,284          | ) |                | (1,126 | )               |  
|Interest income (expense),   net                                                                      |  |                 | (180   | )               |   | (186           | ) |                 | (210  | )              |   | (183            | ) |                | (19    | )               |  
|Loss on settlement of   liability                                                                     |  |                 |       |                 |   | (165           | ) |                 |      |                |   |                |   |                |       |                 |  
|Gain on sale of investments                                                                           |  |                 |       |                 |   |               |   |                 |      |                |   |                |   |                |       |                 |  
|                                                                                                      |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Loss for the period                                                                                   |  | $               | (1,494 | )               | $ | (466           | ) | $               | (308  | )              | $ | (1,467          | ) | $              | (1,145 | )               | $
|                                                                                                      |  |                 |        |                 |   |                |   |                 |       |                |   |                 |   |                |        |                 |  
|Basic and diluted loss per   share                                                                    |  | $               | (0.25  | )               | $ | (0.08          | ) | $               | (0.05 | )              | $ | (0.25           | ) | $              | (0.19  | )               | $
|Weighted-average number of   shares used in computing basic and diluted loss per share (in thousands) |  |                 | 6,033  |                 |   | 6,027          |   |                 | 5,985 |                |   | 5,983           |   |                | 5,983  |                 |  

42



INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this report which are not historical facts are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as anticipate that, believes, continue to, estimates, expects to, hopes, intends, plans, to be, will be, will continue to be, or similar words. These forward-looking statements include the statements herein regarding: future developments in our markets and the markets in which we expect to compete, including the wireless communications industry; our estimated cost reductions; our future ability to fund our operations and become profitable; our development of new products and relationships; the rate at which consumers will adopt wireless
applications; our ability to increase or retain our customer base; the services that we or our customers will introduce and the benefits that end users will receive from these services; our plans to use or not to use certain types of technologies in the future; our future revenue and cost of revenue, the composition of our future revenues, gross margins and net losses; our future restructuring, research and development, sales and marketing, general and administrative, stock-based compensation, depreciation and amortization expenses; our future interest income and expense; the value of our goodwill and other intangible assets; the collectability of our accounts receivable; our future capital expenditures, cash use and capital requirements; and the anticipated impact of changes in applicable accounting rules.

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

GENERAL INDUSTRY, ECONOMIC AND MARKET CONDITIONS

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

MOBILE NETWORK OPERATOR FOCUS

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

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

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

COMPETITIVE LANDSCAPE

Many of our competitors are significantly larger than us in terms of revenue, marketing and research and development expenditures and numbers of employees in their sales, services and support organizations. The competitors we face on our X-treme Mobility Suite sales opportunities include Nokia, Ericsson, Comverse, Alcatel and Openwave. Our success is dependent on our ability to win our share of these opportunities against these larger competitors and to retain our customers. Many of these competitors are able to bundle other products (including handsets and/or network equipment) into sales of competitive products, which they might argue is more beneficial to their customers.  We do not believe that we can offer similar product bundles, which could prevent us from competing with these competitors, offering similar pricing, retaining key customers or acquiring new customers.

CUSTOMER CONCENTRATION

To date, a significant portion of our revenues in any particular period has been attributable to a limited number of customers. In the three months ended June 30, 2005, 37% of our revenue was derived from Hewlett-Packard (as reseller to Sprint PCS) and 11% was derived from Vodafone.  Most of our revenue from these customers and our other customers depends on their or their customers continued use of our products. If our customers or their customers discontinue or materially reduce their use of our products, or obtain one or more additional suppliers of competing software and services, our revenues will decline (please see above discussion regarding Hewlett-Packard under Product Revenue).

We believe that we may continue to rely upon a limited number of customers for a significant portion of our revenues in the foreseeable future, and any failure by us to capture or retain a significant share of these customers could materially harm our business.

Also, if our customer base consolidates, we will have increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.

INTERNATIONAL MARKETS

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

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

44



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

LIQUIDITY

In order to help ensure that we would have sufficient capital to take advantage of our core business opportunities, we have taken significant actions to reduce our operating expenses and in the first half of 2004, raised $8 million by issuing convertible debt. However, most of our operating expenses, such as employee compensation and lease payments for facilities and equipment, are relatively stable, and these expense levels are based in part on our expectations regarding future revenues. As a result, any sustained shortfall in our revenues relative to our expectations would negatively impact our operating results. Accordingly, if the cost-cutting actions that we have taken are insufficient, we may not have sufficient capital to fund our operations, and additional capital may not be available on acceptable terms, if at all. Any of these outcomes could adversely impact our ability to respond to competitive
pressures or could prevent us from conducting all or a portion of our planned operations. We may need to undertake additional measures to reduce our operating expenses in the future.

INVESTMENTS IN OTHER COMPANIES AND NEW TECHNOLOGIES

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

RECEIVABLES

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

EMPLOYEES

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

GROSS MARGINS

We believe that certain factors in the current market may contribute to the risk that our gross margins will decrease in future fiscal quarters. We may have to lower our prices in order to accommodate our customers. In addition, many of our customers are reluctant to make a commitment to pay large

45



upfront license fees or to guarantee purchases of a minimum number of licenses or licensed capacity, which could also cause our revenues to decrease. Some mobile network operators are also unwilling to pay for installations and customizations to our products, which could negatively impact our operating results.

INTELLECTUAL PROPERTY

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

LITIGATION

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

46



Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

IMPACT OF INTEREST RATE EXPOSURE

As of June 30, 2005, we had approximately $11.5 million in cash, cash equivalents, short-term investments and restricted cash, of which $8.2 million consisted of short-term investments and restricted cash. A significant portion of the cash earns interest at variable rates. In addition, although our short-term investments are fixed-rate instruments, the average term is short. Accordingly, our interest income is effectively sensitive to changes in the level of prevailing interest rates. Our convertible notes payable to related parties bear interest at a fixed rate.

IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE

Our functional currency is the U.S. dollar, as we recognize the majority of our revenues in U.S. dollars.  In the foreseeable future, the majority of our non-US dollar denominated expenses will be incurred in Canadian dollars, Euros, Swiss francs and United Kingdom pounds sterling. Changes in the value of these currencies relative to the U.S. dollar may result in currency gains and losses, which could affect our operating results.  We do not currently hedge against these currency fluctuations. In the three months ended June 30, 2005, we incurred realized and unrealized foreign currency losses relating to the translation of our non-U.S. dollar denominated monetary assets and liabilities of approximately $180,000.

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

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

PART II.          OTHER INFORMATION

Item 1.     Legal Proceedings.

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

47



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

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

In June 2004, an agreement of settlement was submitted to the Court for preliminary approval.  The Court granted the preliminary approval motion on February 15, 2005, subject to certain modifications.  If the modifications are acceptable to the Court, notice will be given to all class members of the settlement, a fairness hearing will be held and, if the Court determines that the settlement is fair to the class members, the settlement will be approved.   There can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all.

If the settlement process fails, 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 settlement approval process is at a preliminary stage, we cannot accurately predict the ultimate outcome IPO Allocation Litigation.

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

None.

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 28, 2005.  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:

| | 1.  Each of the Companys directors   standing for election was elected for a one-year term:
| | --------------------------------------------------------------------------------------------
| |                                                                                             
| |                                                                                             

48



| |                                                                                                                          | (b)  James D. Dixon:  3,219,575 votes for; 10,681 votes   withheld;   
| | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------
| |                                                                                                                          |                                                                       
| |                                                                                                                          | (c)  Barry J. Reiter:  3,219,918 votes for; 10,338 votes   withheld;  
| |                                                                                                                          |                                                                       
| |                                                                                                                          | (d)  Joseph C. Aragona:  3,214,914 votes for; 15,342 votes   withheld;
| |                                                                                                                          |                                                                       
| |                                                                                                                          | (e)  J. Ian Giffen:  3,219,985 votes for; 10,271 votes   withheld; and
| |                                                                                                                          |                                                                       
| |                                                                                                                          | (f)  Benjamin L. Scott:  3,213,997 votes for; 16,259 votes   withheld.
| |                                                                                                                          |                                                                       
| | 2.  The appointment of KPMG LLP as the   Companys independent auditors for fiscal 2005:                                
| |                                                                                                                          |                                                                       
| | 3,224,151 votes for; 3,991 votes against; and 2,114   abstentions.                                                      
| |                                                                                                                          |                                                                       
| | 3.  A resolution renewing and continuing   the shareholder rights plan adopted by the Board of Directors of the Company:
| |                                                                                                                          |                                                                       
| | 1,928,469 votes for; 126,094 votes against; 784   abstentions; and 1,174,909 non-votes.                                 
| |                                                                                                                          |                                                                       
| | 4.  A resolution approving the 2005 Stock   Incentive Plan adopted by the Board of Directors of the Company:            
| |                                                                                                                          |                                                                       
| | 1,832,765 votes for; 220,516 votes against; 1,446   abstentions; and 1,175,529 non-votes.                               

Item 5.     Other Information.

None.

Item 6.     Exhibits.

The following exhibits are filed with this Report:

| | No.  |  | Description                                                                                                                           
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------
| |      |  |                                                                                                                                       
| | 10.1 |  | HP 724 Amendment 8 to Prior Terms and Conditions   Between 724 Solutions (US Inc.) and Hewlett-Packard Company, dated June 28,   2005.
| | 10.2 |  | Form of Indemnification Agreement between 724   Solutions Inc. and directors and executive officers.                                  
| | 31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of the Chief   Executive Officer.                                                              
| | 31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of the Chief   Financial Officer.                                                              
| | 32.1 |  | Section 1350 Certification of the Chief Executive   Officer.                                                                          
| | 32.2 |  | Section 1350 Certification of the Chief Financial   Officer.                                                                          

49



SIGNATURES

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

|Signatures        |  | Titles                                       |  | Date           
|----------------- |  | -------------------------------------------- |  | ---------------
|                  |  |                                              |  |                
|                  |  |                                              |  |                
|/s/ JOHN J. SIMS  |  | Chief Executive Officer                      |  | August 12, 2005
|                  |  | (principal executive officer)                |  |                
|John J. Sims      |  |                                              |  |                
|                  |  |                                              |  |                
|                  |  |                                              |  |                
|/s/ GLENN BARRETT |  | Chief Financial Officer                      |  | August 12, 2005
|                  |  | (principal financial and accounting officer) |  |                
|Glenn Barrett     |  |                                              |  |                

50