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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)[  ]
      REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)  OF THE
      SECURITIES EXCHANGE ACT OF 1934OR[ X ]
      ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005OR[  ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934OR[  ]
      SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934Date of event requiring this
      shell company report...................


Commission
      file number000-24018ZI CORPORATION(Exact name of Registrant as
      specified in its charter)(Translation of Registrant's
      name into English)Alberta, Canada(Jurisdiction of incorporation
      or organization)2100, 840 - 7th
      Avenue S.W., Calgary, Alberta T2P 3G2(Address of principal executive
      offices)


|                                                                                   
|-----------------------------------------------------------------------------------
|Securities registered or to be registered pursuant to
    Section 12(b) of the Act.
|                                                                                   
|Title of each class                                                                
|None                                                                               

Securities registered or to be
registered pursuant to Section 12(g) of the Act.

Common Shares, no par value(Title of Class)


1

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Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.

None(Title of Class)


Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of December 31, 2005.

46,272,568


Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

() Yes                
(X) No

If this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.

() Yes                
(X) No

Note  Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 from their obligations under those Sections.

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.

(X) Yes            
() No

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

|Large accelerated filer _______ | Accelerated filer _______ | Non-accelerated filer X
|------------------------------- | ------------------------- | -----------------------

Indicate by check mark which financial statement item the registrant has
elected to follow.

() Item 17            
(X) Item 18

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

() Yes            
( X) No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

() Yes                
() No

2


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|                                                                   
|-------------------------------------------------------------------
|TABLE OF CONTENTS                                                  
|                                                                   
|PART I                                                             
|Introduction                                                       
|Forward Looking Information                                        
|Item 1. Identity of Directors, Senior
      Management and Advisers
|Item 2. Offer Statistics and Expected Timetable                    
|Item 3. Key Information                                            
|A.Selected financial data.                                         
|Currency and Exchange Rates                                        
|B.Capitalization and indebtedness.                                 
|C.Reasons for the offer and use of proceeds.                       
|D.Risk factors.                                                    
|Item 4
      -Information on the Company                           
|A. History and Development of the Company                          
|Acquisition and Development of Input Technology                    
|Acquisition and Divestiture of Oztime                              
|Acquisition and Divestiture of EnglishPractice
      Inc.          
|Acquisition of Archer Education
      Group Inc.                   
|Acquisition of Assets of Decuma AB                                 
|Intellectual Property Litigation                                   
|Dispositions and Discontinued Operations                           
|Telecom Technology Corporation Limited                             
|The Magic Lantern Group of Companies                               
|Acquisition of Zi Shares by the Lancer Funds                       
|Principal Capital Expenditures and Divestiture                     
|B. Business overview.                                              
|Zi in General                                                      
|Zi Technology Business Unit                                        
|Description of eZiText and eZiTap                                  
|Licensing of eZiText                                               
|Description of Qix                                                 
|Description of Decuma Handwriting Recognition
      Solutions      
|Investment in Archer Education Group Inc.                          
|Geographic Segments                                                
|C. Organizational Structure                                        
|D. Property, plants and equipment.                                 
|Item 4A. Unresolved Staff Comments                                 
|Item 5. Operating and Financial Review and
      Prospects         
|A.Operating results.                                               
|Critical Accounting Policies and Estimates                         
|Software Development Costs                                         
|Revenue Recognition                                                
|Stock-Based Compensation Plan                                      
|Operating Results                                                  
|Net Loss                                                           
|Revenue                                                            

3

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|Cost of Sales & Gross Margin                                                          | 37   
|------------------------------------------------------------------------------------- | -----
|Selling, General and Administrative Expenses                                          | 38   
|Legal                                                                                 | 38   
|Product Research and Development Expense                                              | 38   
|Depreciation and Amortization                                                         | 39   
|Impairment of Note Receivable                                                         | 39   
|Interest and Other Income                                                             | 39   
|Interest Expense                                                                      | 40   
|Income Tax Expense                                                                    | 40   
|Net Loss                                                                              | 41   
|Impact of Inflation and Changing Prices                                               | 41   
|Foreign Currency                                                                      | 41   
|Impact of Governmental Policies and Other
      Factors on Operations and Investments | 42   
|B.Liquidity and
      capital resources.                                              | 42   
|Financial Condition and Liquidity                                                     | 42   
|Cash Requirements Outlook                                                             | 42   
|Operating Activities                                                                  | 42   
|Financing Activities                                                                  | 43   
|Investing Activities                                                                  | 43   
|Commitments and Contractual Obligations                                               | 44   
|Financial Instruments                                                                 | 45   
|Off-Balance Sheet Arrangements                                                        | 45   
|C.Research and
      development, patents and licenses, etc.                          | 45   
|D.Trend
      information.                                                            | 46   
|Revenues and Expenses                                                                 | 46   
|Litigation/Indemnification                                                            | 49   
|E.Off-balance sheet
      arrangements.                                               | 50   
|F.Tabular
      disclosure of contractual obligations.                                | 50   
|G.Safe harbor.                                                                        | 51   
|Item 6. Directors, Senior Management and Employees                                    | 51   
|A.Directors and
      senior management.                                              | 51   
|B.Compensation.                                                                       | 53   
|(a) Compensation of Directors                                                         | 53   
|(b) Compensation of Executive Officers                                                | 53   
|1. Summary Compensation                                                               | 53   
|Summary compensation table                                                            | 53   
|Stock Options                                                                         | 54   
|Aggregated Option/SAR and RSU exercises during
      the most recently completed      |      
|financial year and financial year-end
      option/SAR values                         | 55   
|Long-term Incentive Plans                                                             | 56   
|Stock Appreciation Rights and Restricted Shares                                       | 56   
|Stock Option and SAR Repricing                                                        | 56   
|Pension and Retirement Plans and Payments made
      upon Termination of Employment   | ...56
|Employment Contracts                                                                  | 56   
|(c) Plans and Share Options                                                           | 58   
|(d) Other Compensation                                                                | 58   

4

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|C.Board practices.                                               | 58
|---------------------------------------------------------------- | --
|(a) Board of Directors                                           | 58
|Board Committees                                                 | 58
|Audit Committee                                                  | 58
|Compensation Committee                                           | 59
|Corporate Governance and Nominating Committee                    | 60
|D.Employees.                                                     | 60
|E.Share ownership.                                               | 61
|(a) Share and Option Holdings                                    | 61
|(b) Option Plans                                                 | 62
|Purpose of Plans                                                 | 62
|Eligibility                                                      | 62
|Administration of the Plans                                      | 63
|Amendment of the Plans                                           | 63
|Necessary Approvals                                              | 63
|Adjustment in Shares Subject to the Plan                         | 63
|Item 7. Major Shareholders and Related Party
      Transactions  | 65
|A.Major shareholders.                                            | 65
|B.Related party transactions.                                    | 66
|C.Interests of experts and counsel.                              | 67
|Item 8. Financial Information                                    | 67
|A.Consolidated Statements and Other Financial
      Information. | 67
|Legal Proceedings                                                | 67
|Dividend Policy                                                  | 69
|B.Significant Changes.                                           | 69
|Item 9. The Offer and Listing.                                   | 69
|A.Offer and listing details  Stock Price
      History          | 69
|B.Plan of distribution.                                          | 70
|C.Markets.                                                       | 70
|D.Selling shareholders                                           | 70
|E.Dilution.                                                      | 70
|F.Expenses of the issue.                                         | 70
|Item 10. Additional Information.                                 | 71
|A.Share capital.                                                 | 71
|B.Memorandum and articles of association.                        | 71
|Directors                                                        | 71
|Common Shares                                                    | 72
|Preferred Shares                                                 | 72
|Changing Rights of Shareholders                                  | 72
|Shareholder Meetings                                             | 73
|Limitations on Right to Own Securities                           | 73
|Change of Control                                                | 75
|Disclosure of Ownership                                          | 75
|C.Material contracts.                                            | 75
|D.Exchange controls.                                             | 76
|E.Taxation.                                                      | 76

5

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|Material Canadian Income Tax Consequences                                                    | 76
|-------------------------------------------------------------------------------------------- | --
|Material United States Federal Income Tax
      Consequences                                 | 76
|U.S. Holders                                                                                 | 77
|Distributions on Common Shares                                                               | 77
|Foreign Tax Credit                                                                           | 77
|Disposition of Common Shares                                                                 | 78
|Other Considerations                                                                         | 78
|Foreign Personal Holding Company                                                             | 78
|Foreign Investment Company                                                                   | 78
|Passive Foreign Investment Company                                                           | 79
|Controlled Foreign Corporation                                                               | 79
|F. Dividends and paying agents.                                                              | 79
|G. Statement by experts.                                                                     | 79
|H. Documents on display.                                                                     | 79
|I. Subsidiary Information.                                                                   | 80
|Item 11. Quantitative and Qualitative
      Disclosures About Market Risk.                   | 80
|(A) Quantitative information about market risk                                               | 80
|(B) Qualitative information about market risk                                                | 80
|Interest Rate Risk                                                                           | 80
|Foreign Exchange Rate Risk                                                                   | 81
|Item 12. Description of Securities Other than
      Equity Securities.                       | 81
|PART II                                                                                      | 81
|Item 13. Defaults, Dividend Arrearages and
      Delinquencies.                              | 81
|Item 14. Material Modifications to the Rights
      of Security Holders and Use of Proceeds. | 81
|Item 15. Controls and Procedures.                                                            | 81
|Item 16. [Reserved]                                                                          | 82
|Item 16A. Audit committee financial expert.                                                  | 82
|Item 16B. Code of Ethics.                                                                    | 82
|Item 16C. Principal Accountant Fees and
      Services.                                      | 82
|Audit Fees                                                                                   | 82
|Audit Related Fees                                                                           | 82
|Tax Fees                                                                                     | 82
|All Other Fees                                                                               | 82
|Item 16D. Exemptions from the Listing Standards
      for Audit Committees.                  | 83
|Item 16E. Purchases of Equity Securities by the
      Issuer and Affiliated Purchasers.      | 83
|PART III                                                                                     | 83
|Item 17. Financial Statements.                                                               | 83
|Item 18. Financial Statements.                                                               | 83
|Item 19. Exhibits.                                                                           | 83
|EXHIBIT INDEX                                                                                | 84

6

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PART IIntroduction

Zi Corporation is a corporation incorporated under the laws
of the province of Alberta, Canada and is referred to in this document, together
with its subsidiaries, as "Zi", the "Company" or the "Corporation". Unless the
context otherwise indicates, use of "we", "us", "our" and like terms refers to
the Company.

Trademarks or trade names of Zi used in this document
include, but are not limited to: Zi®, eZiText®, eZiNet,
eZiTap, eZiType, Qix, Decuma® and Zi Services. Each trademark, trade name or
service mark of any other company appearing in this document belongs to its
holder. Zi has obtained registered status on its "eZiText" trademark in the
United States, Canada, Australia, China, in other parts of Asia and in parts of
Europe. The wordmark, "Zi", is registered in Canada, China, Japan, the United
States, Singapore, Taiwan and Korea.

The Company's consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") and are presented in United States dollars unless
otherwise indicated. All references in this Form 20-F to financial information
concerning the Company refer to such information in accordance with U.S. GAAP
and all dollar amounts in this Form 20-F are in United States dollars unless
otherwise indicated. Prior to the preparation of the consolidated financial
statements for the year ended December 31, 2003, the consolidated financial
statements of Zi Corporation were prepared in accordance with Canadian GAAP with
an annual reconciliation of the Company's financial position and results of
operations as calculated using U.S. GAAP. In order to provide information on a
more comparable basis with its industry peers and to better assist with the
understanding of the financial statements to the majority of users, who are in
the United States, effective December 31, 2003, the Company began reporting its
financial position, results of operation and cash flows under U.S. GAAP in its
consolidated financial statements. The effects on net loss arising from
differences in generally accepted accounting principles between the United
States of America and Canada are outlined in note 16 to the consolidated
financial statements. Effective March 31, 2004, the Company initiated reporting
its consolidated financial statements in U.S. dollars, with comparative periods
restated to U.S. dollars. The comparative amounts in this Form 20-F have been
restated to U.S. dollars.

On March 23, 2006, the exchange rate for the United States of
America ("U.S.") dollar was $0.8577 = CDN$1.00. Please see

In this document, we may provide cross-references relevant to
the information being provided. These cross-references are provided for ease of
reference only and are not meant to be exclusionary to other relevant
information in this document that may relate to the disclosure in question.

Forward Looking Information

This Form 20-F annual report contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Shareholders can identify these forward looking statements when they
see us using words such as "expect", "anticipate", "estimate", "believe", "may",
"potential", "intends", "plans" and other similar expressions or statements that
an action, event or result "may", "could" or "should" be taken, occur or be
achieved, or the negative thereof or other similar statements. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by these forward-looking
statements. These factors include, among others, the following: our history of
operating losses and uncertainty of future profitability; risks associated with
a threatened contest for control of the Corporation's Board of Directors by the
receiver for the Lancer group of funds (the "Receiver"), including disruption of
the Corporation's business and diversion of management and financial resources,
financing and market risks associated with the ownership by the Receiver of
approximately 40 percent of the Corporation's outstanding shares; the possible
impact of future financings; uncertainty as to the degree of and continuing
market acceptance of our products and services; uncertainties relating to
product development; risks associated with the number, amount and timing of new
product introductions; uncertainty regarding patents, proprietary rights and
software piracy; variability in customer demand; our dependence on third party
performance under marketing and licensing arrangements; risks associated with
the contingent nature of continued performance under major sales contracts;
rapid technological change and competition; uncertainty regarding the pricing
and collection of accounts; risks associated with dependence on sales in foreign
countries; the potential for adverse developments in pending litigation; risks
associated with the settlement of a U.S. patent infringement lawsuit;
fluctuations in foreign exchange rates; uncertainties associated with changes in
government policy and regulation, particularly in the People's Republic of China
("PRC" or "China"); adverse changes in general business conditions in any of the
countries in which we do business; changes in our size and structure; the
effectiveness of our management and our strategic relationships; risks related
to possible defects in our products; risks associated with our ability to
attract and retain key personnel; uncertainties regarding our need for
additional capital; uncertainty regarding the fluctuations of our quarterly
results; risks related to our acquisitions of companies and technologies;
uncertainties relating to our status as a non-U.S. corporation; risks associated
with our investments and other risks and uncertainties described under "Item
3 - Key Information - Risk Factors" and elsewhere in this report.

7

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Item 1. Identity of Directors, Senior Management and AdvisersNot applicable

Item 2. Offer Statistics and Expected Timetable

Not applicable

Item 3. Key Information

A.

The following table summarizes certain of our selected
financial information (stated in thousands of U.S. dollars) prepared in
accordance with U.S. GAAP. The information in the table was derived from the
more detailed financial statements for the fiscal year ended December 31, 2001
through the fiscal year ended December 31, 2005, inclusive, and the related
notes, and should be read in conjunction with the financial statements and with
the information appearing under the headings "

|                                                        | 2005                                                 | 2004     | 2003     | 2002     | 2001    
|------------------------------------------------------- | ---------------------------------------------------- | -------- | -------- | -------- | --------
|                                                        | (in thousands of U.S. dollars except per share data)
|Revenue from
    continuing operations                  | 11,385                                               | 13,403   | 10,603   | 8,416    | 3,418   
|Operating loss
    from continuing operations (1)       | (4,966)                                              | (2,460)  | (2,336)  | (19,246) | (8,934) 
|Operating loss
    from continuing operations per share | (0.11)                                               | (0.06)   | (0.08)   | (0.52)   | (0.24)  
|Net loss from
    continuing operations (1)             | (5,317)                                              | (2,388)  | (2,931)  | (19,498) | (8,081) 
|Net loss from
    continuing operations per share       | (0.12)                                               | (0.06)   | (0.08)   | (0.52)   | (0.22)  
|Net loss (2)                                            | (5,317)                                              | (2,388)  | (2,931)  | (25,206) | (13,224)
|Basic and diluted
    net loss per share                | (0.12)                                               | (0.06)   | (0.08)   | (0.67)   | (0.36)  
|Total assets                                            | 22,405                                               | 21,699   | 10,686   | 11,870   | 30,167  
|Capital stock and
    additional paid-in capital        | 111,480                                              | 108,139  | 94,559   | 91,165   | 89,966  
|Accumulated
    deficit and accumulated other           |                                                      |          |          |          |         
|comprehensive                                           |                                                      |          |          |          |         
|loss                                                    | (97,822)                                             | (92,391) | (90,278) | (87,510) | (62,462)
|Net assets                                              | 13,658                                               | 15,749   | 4,281    | 3,655    | 27,504  
|Outstanding shares, in thousands                        | 46,273                                               | 45,225   | 39,372   | 37,914   | 37,544  

8

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(1) 2002 operating and net loss from continuing operations
includes litigation and judgment costs of $7.1 million and impairment of
intangible assets of $2.9 million. 2004 operating and net loss from continuing
operations includes a $2.0 million impairment charge relating to a note
receivable.

(2) 2002 net loss includes loss from discontinued operations of $5.7 million
(2001 - $5.1 million)

Currency and Exchange Rates

The following table sets out the exchange rates for the U.S.
dollar expressed in terms of one Canadian dollar in effect at the end of the
following periods, and the average exchange rates (based on the average of the
exchange rates on the last day of each month in such periods):

|                           | U.S. Dollar Per One Canadian
    Dollar
|-------------------------- | ---------------------------------------
|                           | Year Ended December 31                 
|                           | 2005                                   
|End of period              | 0.8598                                 
|Average for the
    period | 0.8255                                 

The following table sets out the high and low exchange rates for the U.S.
dollar expressed in terms of one Canadian dollar in effect at the end of the
following periods:

|                   | U.S. Dollar per One Canadian Dollar
|------------------ | -----------------------------------
|                   | September                          
|                   | 2005                               
|High for the month | 0.8601                             
|Low for the month  | 0.8414                             

Exchange rates are based upon the noon buying rate in New
York City for cable transfers in foreign currencies, as certified for customs
purposes by the Federal Reserve Bank of New York. The noon rate of exchange on
March 23, 2006 as reported by the United States Federal Reserve Bank of New York
for the conversion of United States dollar into Canadian dollars was U.S.$1.00 =
CDN$1.1659.

B.

Not applicable

C.

Not applicable

D.

We operate in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. Shareholders should carefully
consider the risks described below before purchasing our Company's common
shares. The occurrence of any of the following events could harm us. If these
events occur, the trading price of our Company's common shares could decline,
and shareholders may lose all or part of their investment.

We have incurred net losses to date and may not become profitable.

Our Company has a limited history of operating profits. Our
consolidated net losses totalled $5.3 million in our fiscal year ended December
31, 2005, $2.4 million in our fiscal year ended December 31, 2004, and $2.9
million in our fiscal year ended December 31, 2003. As of December 31, 2005, our
accumulated deficit was $97 million.  We face significant and potentially costly challenges in simultaneously
pursuing key research and development goals and attracting customers for our
products and services.

9

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Our shareholders may face dilution due to future financings and our business
may be restricted due to future borrowing arrangements.

Additional future financings may involve the issuance of
additional common shares or other equity and/or debt securities and other forms
of borrowing. Issuances of additional equity securities may dilute the per share
value of common shares held by our existing shareholders. If we issue debt
securities or obtain other forms of borrowings, we may have to accept terms or
borrowing arrangements that limit our ability to incur additional debt, require
us to maintain certain financial ratios or subject us to other covenants that
could restrict our business and growth.

Our operations may have been adversely affected by the Receiver for the
Lancer Funds holding approximately 40% of the Company's shares.

In August 2003 we became aware of information that suggested
a group of funds, including Lancer Partners LP and Lancer Offshore Inc.
(collectively, the "Lancer Funds"), had accumulated a significant percentage of
our outstanding common shares. This information followed the appointment in July
2003 of a receiver for the Lancer Funds who was appointed as a result of an SEC
enforcement proceeding which alleged securities law violations by the management
of the Lancer Funds. In December 2003, we learned through Lancer Funds'
regulatory disclosure that the Lancer Funds' believed their ownership amounted
to approximately 49 percent of our outstanding shares at the time. As of
December 31, 2005, the Lancer Funds have disclosed that their ownership amounted
to approximately 40.5 percent of our outstanding shares. While the enforcement
proceeding did not allege wrongdoing in connection with our common shares or any
of the affairs of the Company, the accumulation was done in apparent violation
of U.S. and Canadian securities laws, and without our knowledge or assistance.
In July 2005, the Receiver for the Lancer Funds stated in a filing with the SEC
that the Receiver was considering requesting a special meeting of shareholders
for the purpose of removing the current members of the Board of Directors (other
than Donald Moore). In August 2005, the Receiver issued such a request and also
a request for a copy of our shareholder list. In response to these actions, we
obtained an interim order from the Court of Queen's Bench of Alberta prohibiting
the Receiver from calling the special meeting, based upon the Lancer Funds'
apparent violations of applicable corporate and securities law. We also
initiated proceedings before the Alberta Securities Commission ("ASC") to
require the Receiver to dispose of its shareholdings or make a proper takeover
bid to all shareholders of the Company. Both the Court of Queen's Bench and ASC
proceedings remain pending. The Receiver has opposed these actions, and sought
relief in a Florida court through a contempt motion against the Company.

The Receiver's actions have or may have adversely affected our operations in
a number of ways:

- The Company is incurring significant legal fees based on the actions of
  the Receiver.
- Promising acquisition candidates and possible financing sources have
  terminated discussions with us based upon uncertainty regarding the future
  composition of our Board of Directors and management of the Company and the
  possible impact of sales of our securities by the Receiver.
- Our customers and potential customers have similarly raised concerns about
  the future management of the Company and our ability to live up to our
  contractual commitments.
- Our efforts to recruit highly qualified members of executive management
  and additional directors from our industry have been hampered by the
  Receiver's actions.
- Scarce management resources have been diverted from Company operations to
  addressing the foregoing concerns raised by our customers, employees,
  shareholders and potential acquisition candidates. Until the issues associated
  with the future control of the Board of Directors and the degree of influence
  of the Receiver on the Company's affairs is settled, our results of operations
  may be adversely affected.

Uncertainties regarding the impact of possible sales of our shares by the
Receiver may negatively impact the market price for our securities.

According to the Receiver's filings with the SEC, as of the date of this
Report, the Receiver holds approximately 40.5 percent of our outstanding shares.
The Receiver has in the past, and may in the future, announce an intention to
sell shares in the open market. These announcements, whether or not they are accompanied by contemporaneous
sales, may have a depressive effect on the market price for our securities.

10

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We operate in a new and developing market and we may not be able to sustain
the rapid development required in our industry to remain competitive.

The development of our input technology market depends upon:

- the growth of third party applications incorporating our products and
  technologies;
- the demand for new applications;
- the ability of our products and technologies to meet and adapt to these
  needs; and
- continuing price and performance improvements in hardware and software
  technology to reduce the cost and increase the performance of products
  incorporating our products and technologies.

These markets may not develop further and the current level of market
acceptance of our products may decrease or may not be sustainable. We must adapt
to rapid changes in technology and customer requirements to remain competitive.

The market for our products has been characterized by:

- rapid technological change;
- frequent product introductions;
- evolving customer requirements; and
- aggressive price competition.

We believe that these trends will continue into the foreseeable future. Our
success will depend, in part, upon our ability to:

- enhance our existing products and gain market share while controlling
  costs;
- successfully develop new products or additional localized versions that
  meet increasingly demanding customer requirements; and
- gain market acceptance.

To achieve these goals, we will need to continue to make
substantial investments in product development and marketing. We may not:

- have sufficient resources to make these investments;
- be successful in developing product enhancements or new
  products on a timely basis, if at all; or
- be able to successfully market these enhancements and new
  products once developed.

Further, our products may be rendered obsolete or
uncompetitive by new industry standards, changing technology or developments by
competitors.

If the market for our products does not develop on a
continuing and sustainable basis, our financial position may be adversely
impacted and could include recording additional impairment charges on the value
of capitalized software development costs.

We operate in an intensely competitive environment and we may
not be able to compete successfully or gain market acceptance.

The software industry is intensely competitive and is
characterized by rapid technological advances, evolving industry standards,
price competition and technological obsolescence. Major Asian and North American
software and technology companies engage in development of input or other
interface software. Our actual or potential input technology competitors
include, but are not limited to: Motorola; America Online Inc. ("AOL"); Nokia;
OpenWave; Microsoft; Research in Motion, Nuance (formerly Scansoft),
Communications Intelligence, PenReader, Vision Objects, TealPoint in Latin
languages, PenPower, HanWang, Senopy, Guobi, Chinastar, Voicesignal, and JumpTap. Many of our competitors have longer operating histories and
have greater financial, technical, sales, marketing and other resources. To a
great extent, our ability to compete will depend on such factors as product
features, technical superiority, ease of use, price, quality, technical support
and services, product development capabilities, marketing, distribution
channels, and ability to meet delivery schedules. There can be no assurance that
our products and services can compete successfully or gain market acceptance.
Other corporations with greater financial and technical resources and larger
marketing organizations could enter the market and pose a potential threat if
they can develop technologies and products that can rival those developed by us
or under license to us.

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Our products may contain defects that could harm our reputation, be costly to
correct, expose us to litigation and harm our operating results and financial
condition.

We develop software products that may contain undetected
errors or failures. Design errors or hidden defects in third party components or
software may be discovered after initial product sampling, resulting in delays
in volume production or recalls of products sold. If defects are discovered, we
may not be able to correct them in a timely manner or at all. Defects and
failures in our products could result in a loss of, or a delay in, market
acceptance of our products. In addition, defects in our products could cause
adverse publicity, damage our reputation and impair our ability to acquire new
customers. In addition, we may need to make significant expenditures to
eliminate defects from our products. As well, defects and failures in our
products could expose us to claims for liability or other claims involving
costly litigation.

We may be unable to develop and to maintain collaborative development and
marketing relationships, which could result in a decline in revenues or slower
than anticipated growth rates.

A key element of our business strategy is the formation of
collaborative relationships with other leading companies. We believe that
success will depend, in part, on our ability to maintain these relationships and
to cultivate additional corporate alliances with such companies. There is no
assurance that our historical collaborative relationships will be commercially
successful, that we will be able to negotiate additional collaborative
relationships, that such additional collaborative relationships will be
available to us on acceptable terms, or that any such relationships, if
established, will be commercially successful. In addition, there is no assurance
that parties with whom we have established, or will establish, collaborative
relationships will not, either directly or in collaboration with others, pursue
alternative technologies or develop alternative products in addition to, or
instead of, our products or experience financial or other difficulties that
lessen their value to us and to our customers. Our financial condition or
results of operations may be adversely affected by either our failure or the
failure of these third parties to establish and maintain collaborative
relationships.

We rely on large and small OEM customers to adopt our technology and our
financial success may be affected if these OEMs either do not implement our
technology or suffer their own financial hardships.

Our royalty and licensing fee-based revenues depend in
substantial part on our ability to successfully integrate and maintain
compatibility of our technology with the applications of our original equipment
manufacturer ("OEM") customers. Because the Zi Technology business relies
heavily on third party integration of our technology into OEM customer products,
lead time to revenue recognition is longer than software products directly
released into consumer channels. Purchase of our products by OEM customers often
requires significant expenditure of time and resources by the OEMs. Accordingly,
the decision to purchase our products typically requires significant
pre-purchase evaluation. We may spend significant time educating and providing
information to prospective customers regarding the use and benefits of our
products and technologies. During this evaluation period, we may expend
substantial sales, marketing and management resources.

Furthermore, our products and technologies sold and
integrated into customer applications are subject to both customer production
schedules and customer success in marketing the products and generating product
sales. Our revenues are thus subject to delays and possible cancellation
resulting from customer integration risks and delays. We may not be successful
in continuing to be selected as the language enabling technology provider for
these OEMs, and the failure to be selected by our OEM customers would have a
material adverse effect on our sales. In addition, the resolution of a patent
infringement claim with a principal competitor restricts the Company and its
affiliates from using and selling certain no-longer distributed earlier versions
of eZiText for Latin-based languages in the United States. Furthermore, due to
our royalty-based revenue model, the failure of our key OEMs to achieve market
acceptance of products incorporating our software could have a material adverse
effect on our business, operating results and financial condition.

12

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As well, the Company has invested money, time and resources
into the acquisition and development of Decuma and Qix technologies, both of
which are recent additions to the Zi portfolio of products. We may not be
successful in persuading OEMs or carriers to license such technologies.
Furthermore, any customers who do license such technology may fail to achieve
market acceptance of products incorporating such technologies. Due to our
license-fee and royalty-based revenue models, any of the above-referenced
potential failures could have a material adverse effect on our business,
operating results and financial condition.
Due to these factors, our sales cycles are long and
unpredictable. As a result, our revenues may fluctuate from quarter to quarter
and we may be unable to adjust our expenses accordingly. This would cause our
operating results and stock price to fluctuate. OEMs and service providers
typically perform numerous tests and extensively evaluate products before
incorporating them into products. In addition, we expect that the delays which
are inherent in our sales cycle could raise additional risks of OEMs and service
providers deciding to cancel or change their product plans. Our business would
be adversely affected if a significant customer reduces or delays orders or
chooses not to deploy products incorporating our technology.
Some of our major customers are not profitable and are
subject to reduced demand for products and services currently affecting the
telecommunications industry. In 2005, 2004 and 2003 we derived 31, 34 and 26
percent respectively, of our total revenue from two customers. We believe that
revenue derived from current and future customers who dominate handset phone
manufacturing will continue to represent a significant portion of our total
revenue for our technologies. Our inability to continue to secure and maintain a
sufficient number of contracts from such dominant OEM players would have a
material adverse effect on our business, financial condition, operating results
and cash flows derived from our technologies. Moreover, our success will depend
in part upon our ability to obtain orders from new customers, as well as the
financial condition and success of our customers and general economic
conditions. Moreover, certain of our key OEM licenses are at, or approaching,
the end of their license terms and it is uncertain whether we will be successful
in negotiating renewals with these customers.

Our overall market breadth for products and services may be constrained by:

- the increasing market share of major handset industry leaders;
- the influence of software integrators and platform suppliers in serving
  new OEMs with pre-packaged solutions; and
- consolidation among the OEM customer base.

Our ability to operate could be hindered by the proprietary rights of others
and our inability to adequately protect our intellectual property rights.

A number of companies and educational institutions have
developed technologies, filed patent applications or received patents on various
technologies that may be related to our business. Some of these technologies,
applications or patents may conflict with our technologies or intellectual
property rights or limit the ability of our customers to integrate our
technologies onto their platforms. Such conflicts could limit the scope of the
patents, if any, that we may be able to obtain or result in the denial of our
patent applications altogether.

If patents that cover our activities are issued to other
persons or companies, we could be made subject to claims of infringement, and,
as described in the section below, we have been affected by such litigation.
Even if we believe that we do not infringe, the costs of defending intellectual
property litigation are substantial. In the event that other parties' patents
cover any portion of our activities, we may be forced to develop alternatives or
negotiate a license for such technology. We may not be successful in either
developing alternative technologies or acquiring licenses upon reasonable terms,
if at all. Any such license could require the expenditure of substantial time
and other resources and could harm our business and decrease our earnings. If we
do not obtain such licenses, we could encounter delays in the introduction of
our products or could find that the development, manufacture or sale of products
requiring such licenses is prohibited.

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Existing copyright, trademark, patent and trade secret laws
only afford limited protection for our proprietary rights. Third parties may
attempt to copy or reverse engineer aspects of our products or proprietary
information. Accordingly, we may not be able to adequately protect our
intellectual property.

Our business may be adversely affected by a settlement agreement with our
principal competitor.

As described in

We need to be able to manage our growth or else our operating results and
financial condition will be materially adversely affected.

We believe that continued growth in the number, breadth and
complexity of our product lines while controlling our operating costs will be
required to establish and maintain our competitive position. Our growth, coupled
with the rapid evolution of our markets, has placed, and is likely to continue
to place, significant strains on our administrative, operational and financial
resources and increased demands on its internal systems and procedures,
particularly as this growth has been, and will likely continue, on a global
basis. In the event that our operations continue to grow, or grow rapidly, there
is a risk that our current administrative infrastructure, systems and procedures
may not be adequate to support our operations, or that management may not be
able to achieve the rapid, effective execution of the product and business
initiatives necessary to successfully penetrate the markets for our products and
services. If we are unable to manage future growth effectively, our business,
operating results and financial condition may be materially adversely affected.

If the Company does not continue to develop new products, future revenues
will be negatively affected.

The Company's existing product portfolio is limited. Our
financial success relies substantially on a limited number of products. Failure
to innovate, develop and integrate new products into our existing product lines,
in addition to enhancing the performance and functionality of existing products,
could result in the Company failing to achieve financial success.

We depend on our key personnel and failure to attract and retain these people
could have a negative impact on our operations.

Our success will be dependent, in part, on the performance of
our personnel who develop our technology and manage our business. While we are
seeking a new chief executive officer to lead the Company in its next phase of
growth, we have personnel that we believe are competent in the development of
our technology, services and software related products and have endeavoured to
hire and retain qualified managerial and technology development services people
for the development and expansion of the Zi Technology business. Nevertheless,
failure to retain their expertise or to attract and retain key personnel with
necessary technological and marketing skills, in addition to Michael Lobsinger,
our Chairman, President and Chief Executive Officer, Milos Djokovic, Chief
Operating Officer and Chief Technical Officer and Dale Kearns, Chief Financial
Officer, could have a materially adverse effect upon our ability to grow and
operate profitably. The Company's insurance coverage does not include key-man
life insurance for either Milos Djokovic or Dale Kearns.

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We operate in diverse geographic markets and face regulatory and political
risks abroad which could negatively impact our operations.

Our products and technologies are sold in a number of
countries throughout the world. The primary markets for our products and
technologies are Asia, North America and Europe. Our international business
operations expose us to difficulties in coordinating our international
activities and dealing with multiple regulatory environments, as well as to
risks of international political and economic conditions.

Our global business may be materially adversely affected by:

- political and economic changes and disruptions in the countries into which
  we sell products or have operations;
- limits on repatriation of earnings;
- changes in various regulatory requirements and the cost of compliance with
  a wide variety of laws;
- difficulties in enforcing contracts;
- difficulties in protecting intellectual property
- governmental currency controls;
- export/import controls;
- tariff regulations and other trade barriers;
- costs and risks of localizing products for foreign countries;
- difficulties in staffing and managing operations in multiple locations in
  many countries;
- greater difficulties in trade accounts receivable collection; or
- possible adverse tax consequences.

In addition, our operations and the market price of our
common stock may also be affected by adverse economic conditions in Asia, North
America and Europe. Our operations and our ability to continue to generate
revenues in these regions may be affected by adverse economic conditions or
political instability in such regions as well as other external business risks.

There can be no assurance that such factors will not
materially adversely affect the revenues from our international business and,
consequently, our results of operations. In addition, revenues and/or earnings
earned abroad may be subject to taxation by more than one jurisdiction, or
certain expenses which we have claimed as a deduction for tax may be disallowed
for various reasons by a domestic or foreign jurisdiction, which could
materially adversely affect our earnings.

We may need additional capital to support our operations and future growth.

We may require capital to finance the continued growth of
operations. To date, we have raised capital primarily through private placements
of common shares. As of March 23, 2006, our cash position was approximately
$9.97 million. Unless our cash flow from operations is sufficient to meet our
operating capital requirements, any shortfall must be covered by our cash
position, the sale of securities or through other forms of third party
financing. We believe our current cash resources will be adequate to support our
existing business activities assuming stable revenue and absent unexpected costs
or expenses. See

Our quarterly results are subject to fluctuations which could negatively
affect our financial results.

We have experienced, and are likely to continue to experience, significant
fluctuations in quarterly operating results caused by many factors. These
factors include:

- 

15

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the
  introduction or enhancement of products and services by us and our competitors
  and market acceptance of those enhancements or products;

delays in the
  introduction of products or enhancements by us or our competitors;

the timing of
  significant orders, delivery and implementation of our products;

the gain or loss
  of any significant customer;

changes in our
  pricing policies or those of our competitors;

the mix of
  distribution channels through which products are sold and the mix of products
  and services sold;

the mix of
  international and North American revenues;

exchange rate
  fluctuations;

the timing of
  any acquisitions and related costs;

foreign currency
  exchange rates and general economic conditions; and

legal and other
  costs associated with defence and resolution of patent infringement claims and
  other litigation the Company is involved in.

In addition, there are several factors that could cause material fluctuations
in our revenues from quarter to quarter, including:

- the size and timing of individual license transactions by our customers;
- the potential for delay or deferral of customer implementation of our
  technology;
- the terms of future licensing arrangements between us and our customers;
- inaccuracies in reporting of royalties and license fees by customers;
- geopolitical events;
- world health factors; and
- credit risks such as bankruptcies or other economic hardships affecting
  any of our customers.

In addition, our new license revenue and results of
operations may fluctuate on a quarterly and annual basis in the future as a
result of a number of factors, many of which are outside of our control. A sale
of a new license generally requires a customer to make a purchase decision that
involves a significant commitment of capital. As a result, the sales cycle
associated with the new license revenue will vary substantially and will be
subject to a number of factors, including customers' budgetary constraints,
timing of budget cycles and concerns about the pricing or introduction of new
products by us or our competitors. If our revenues or operating results fall
below the expectations of financial analysts of investors, the trading price of
our common shares could fall.

The laws and policies restricting foreign alliances, partnerships,
investments, distribution or sale in the software technology industry could
change and adversely affect our operations in these countries.

We may also be materially adversely affected by laws
restricting foreign alliances, partnerships and investment in the technology and
information industries. Some countries have extensive restrictions on foreign
alliances, partnerships and investments in the information industries. For
example, China has substantial limitations on companies that provide content on
the Internet and dissemination of information on the Internet. Internet service
providers are governed under telecommunications laws which substantially
restrict foreign ownership and investment in telecommunications companies in
China. In 1999, the Chinese government requested the termination of certain
Chinese-foreign corporations on the basis that the structure used for these
corporations was no longer permitted. There is no way of predicting whether the
governments in the countries in which we operate will enact any similar
limitations with respect to any of the products or services that we sell or
license, or whether any such law, if enacted, will force us to reduce or
restructure our products and offerings in such countries. The realization of any
of these possibilities may substantially increase our costs of doing business or
delay the commercialization of our products, which may adversely affect our
business and results of operations.

We may be materially adversely affected by foreign laws
restricting the repatriation of earnings. For example, the distribution of
earnings from China to foreign countries is subject to the approval of the
Chinese Central Bank. The procedures are complicated and time consuming. We may
become subject to claims from third parties (including foreign government
agencies) based in foreign jurisdictions for violations of their laws. These
laws may be changed or new laws may be enacted in the future. The administration
and enforcement of law and justice in some jurisdictions that we do business in
may be different and therefore unpredictable relative to U.S. practice.
International litigation is often expensive, distracting and time consuming.
These consequences could be particularly disruptive to us given our relatively
small size of operations and limited resources. Accordingly, any occurrence of the foregoing could have a
material adverse effect on our business.

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We are subject to foreign currency exchange risks,
accordingly, fluctuations in exchange rates could have a material effect on our
results of operations.

A significant portion of our expenses have been, and will
likely continue to be, incurred or generated in currencies other than the U.S.
dollar, principally the Canadian dollar, Hong Kong dollar, Chinese renminbi and
Swedish krona. Our results are reported in U.S. dollars. Accordingly,
fluctuations in exchange rates have a material effect on our results of
operations. In 2005, Chinese authorities re-valued the renminbi and it is no
longer pegged against the U.S. dollar. To date, we have not engaged in foreign
currency exchange rate hedging activities. If we implement hedging techniques in
the future with respect to foreign currency transactions, there can be no
assurance that we will be successful in such hedging activities. Conversion of
the Chinese renminbi to other currencies is subject to approval by the
government of China. Foreign exchange gains or losses for the past three years
have been: a loss of $114,108 a gain of $275,834, and a gain of $162,453, in
each of 2005, 2004 and 2003, respectively.

Acquisitions of companies or technologies may result in
disruptions to our business.

As part of our business strategy, we may acquire assets and
businesses principally relating or complementary to our current operations. Any
acquisitions or mergers by us will be accompanied by the risks commonly
encountered in acquisitions of companies. These risks include, among other
things:

- exposure to unknown liabilities of acquired companies;
- higher than anticipated acquisition costs and expenses;
- effects of costs and expenses of acquiring and integrating
  new businesses on our operating results and financial condition;
- the difficulty and expense of integrating the operations
  and personnel of the target companies, especially where the target company is
  in a geographically distant location;
- disruption of our ongoing business;
- diversion of management's time and attention;
- failure to enhance our financial and strategic position by
  the unsuccessful incorporation of acquired technology;
- the inability to implement uniform standards, controls,
  procedures and policies;
- loss of key employees and customers the incurrence of
  amortization expenses; and
- possible dilution to our shareholders.

We may not be successful in overcoming these risks or any
other problems encountered in connection with any acquisitions.

Further, the per share value of common shares held by our
existing shareholders may be diluted if equity securities are issued by us in
connection with any acquisition. If acquisitions are made for cash
consideration, we may be required to use a substantial portion of our available
cash and cash equivalents. Acquisition financing may not be available on
acceptable terms, if at all.

We may not be able to realize value from our investment in
Archer Education Group Inc.

We have a material investment in Archer Education Group Inc.
("Archer"), a Vancouver based provider of education services and a private
corporation incorporated under the laws of the Province of Alberta. In December
2005, the Company's Oztime and English Practice subsidiaries were acquired by
Archer (

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As a non-U.S. corporation, it may be difficult for shareholders to pursue
claims under U.S. securities laws against us.

The enforcement by investors of civil liabilities under the
federal securities laws of the United States may be affected adversely by the
fact that we are incorporated under the laws of Alberta, Canada, that the
independent registered chartered accountants who have audited our financial
statements and some or all of our directors and officers may be residents of
Canada or elsewhere, and that all or a substantial portion of our assets and
said persons are located outside the United States. As a result, it may be
difficult for holders of the common shares to effect service of process within
the United States upon people who are not residents of the United States or to
realize in the United States upon judgments of courts of the United States
predicated upon civil liabilities under the federal securities laws of the
United States.

As a foreign private issuer, our shareholders may have less complete and
timely data.

The submission of proxy and annual meeting of shareholder
information (prepared in accordance with the requirements of the securities laws
and regulations applicable in Canada) in Form 6-K may result in shareholders
having less complete and timely information in connection with shareholder
actions. The exemption from Section 16 rules regarding reports of beneficial
ownership and purchases and sales of common shares by insiders and restrictions
on insider trading in our securities may result in shareholders having less data
and there being fewer restrictions on insiders' activities in our securities.

Item 4

A. History and Development of the Company

Our head and principal office is located at Suite 2100, 840 -
7th Avenue S.W., Calgary, Alberta, Canada T2P 3G2. Our telephone
number is (403) 233-8875 and our facsimile number is (403) 233-8878. Our common
shares are listed on the Toronto Stock Exchange under the symbol "ZIC" and on
the NASDAQ under the symbol "ZICA".

We were incorporated under the

From 1993 to 1997, we were active in pursuing opportunities
in the telecommunications industry, purchasing and ultimately disposing of
several privately held companies involved in the telecommunications business.
From 1994 to 1998, we provided limited translation services from our office in
Hong Kong for Chinese-to-English and English-to-Chinese using the translation
capability of the Chappell/Yates Translation Technology described below. We
discontinued translation services in 1998.

During 1996 and 1997, we offered consulting services to companies in North
America seeking to use the Internet to market their products and services. This
Internet consulting service ceased operations in 1997.

From March 1997 to February 1998, we provided Internet web development
services in conjunction with carrying on our present business.

Acquisition and Development of Input Technology

Effective November, 1993, we acquired three licenses relating
to certain computer software, word processing software and language translation
technology known as the "Jiejing Input System", the "Zitong Input System" and
the "Chappell/Yates Translation Technology", respectively (collectively,
referred to as the "Jiejing Licenses").

In consideration for the Jiejing Licenses, we issued
5,000,000 common shares to the vendors, all of which were placed in escrow
pursuant to a performance escrow agreement. The escrow agreement stipulated,
among other things, that the common shares would be earned out on the basis of
one common share for each CDN$0.10 of net cash flow in excess of CDN$500,000
whenever earned. In addition to the 5,000,000 common shares, we paid acquisition
fees of $400,000 to the owners of the Jiejing Licenses.

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Effective February, 1998, we acquired the rights to, and ownership, of the
technology underlying the Jiejing Licenses and terminated the Jiejing Licenses.

Consideration given by us for acquiring the technology underlying the Jiejing
Licenses was the accelerated release of 4,525,000 of our common shares,
previously issued and held in escrow. In return for the accelerated release of
these common shares from escrow, the vendors of the technology:

- assigned all rights to and ownership of such technology, subject to the
  exclusion outlined below;
- agreed to the cancellation of 475,000 common shares previously issued and
  outstanding under the escrow terms and conditions;
- forgave outstanding license fees due and payable at December 31, 1997; and
- terminated the Jiejing Licenses.

The acquisition of the rights to the Jiejing Licenses was subject to one
exclusion which permitted the use of the "Jiejing Input System" in a proprietary
language teaching method used only to teach Mandarin Chinese. Winbo Mark Limited
and Chlorine Investments Limited (doing business as Mach Mandarin Limited in
Hong Kong), have an exclusive worldwide license to use the "Jiejing Input
System" technology in a specific proprietary language teaching software product.
Under the terms of the license, this software cannot be commercially sold, but
may only be used for face-to-face personal classroom teaching specifically for
the Mandarin Chinese dialect to non-Chinese speaking persons. These companies
also have a nonexclusive license to use certain components of the "Jiejing Input
System" technology and word processor components.

On December 17, 1997, we acquired full ownership rights to United States
patent number 5,109,352 (the "352 Patent" or the "O'Dell Patent") which is
entitled "System For Encoding A Collection Of Ideographic Characters". The 352
Patent can be generally described as a computer input system for Chinese and
Japanese characters where the different strokes for

On December 25, 2001, Taiwanese patent No. NI139820 was issued to the
Company. In January 2003, Chinese patent ZL99-1-00625.9, "Method and Apparatus
of Chinese Character Text Input," was issued to the Company. These patents
protect the unique implementation of our Chinese language input technology on
cellular phones and other wireless devices and, in particular, protect those
combinations of elements which are of particular help to a user in improving the
speed of text creation. The Company was also granted an equivalent of this
patent in Hong Kong as patent number HK1020216 on August 22, 2003. In addition,
the Company has a number of patent applications pending in the United States,
Europe and Asia based on ideographic language input networks and software
utilities which use text as a key part of their operation.

The following is a partial list of certain U.S. patents which have been
issued to the Company, which further strengthen our competitive position: U.S.
patent No. 6,956,968 - "Database Engines for Processing Ideographic Characters
and Methods Therefor"; U.S. patent No. 6,955,602 - "Text Entry Within a Video
Game"; U.S. patent No. 6,864,809 - "Korean Language Predictive Mechanism for
Text Entry By a User"; and U.S. patent No. 6,801,659 - "Text Input System for
Ideographic and Non-Ideographic Languages".

The Company has received allowances of patents in Europe and China with
respect to technology that enables a user to not only select the stroke category
as described in the O'Dell patent but to also place that stroke in the desired
relative position in a character being created. This was designed to increase
the speed of input and allow inexperienced users to approach the desired
character more quickly without having to search a long list of candidates. The
Company believes that this approach is much simpler than full handwriting
recognition and is compatible with low resource computing environments typical
of the cellular telephone market.

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Acquisition and Divestiture of Oztime

In October 1999, we acquired all of the shares of 845162
Alberta Ltd. ("845") from Oz New Media Inc. ("ONM") in consideration for 100,000
of our common shares issued from treasury. Immediately prior to this
acquisition, ONM caused the sale, assignment and transfer of the five percent
interest in Beijing Oz Education Network System Co. Ltd. ("Beijing Oz") (a
People's Republic of China joint venture company formed under the

Since the purchase of Beijing Oz, we learned that the sale,
assignment and transfer of the five percent interest held by Senmo to ONM was
not properly registered with applicable authorities in China. This resulted in a
dispute with Senmo as to the registration of such sale, assignment and transfer.
Due to this dispute, Beijing Oz was technically registered in China as a PRC
joint venture company, having five percent ownership by Senmo.

On July 31, 2001, the Company caused one of its subsidiaries,
namely Asia Translation & Telecommunications Limited ("AT&T"), to incorporate
Beijing Oztime Education & Network Technology Co., Ltd. ("Oztime"), a Wholly
Foreign Owned Enterprise formed under the laws of the People's Republic of
China. Since this event, all substantive business, including product and
business development, has been carried out through this new entity, which is
intended to mitigate possible consequences of the lack of proper Chinese
registration of the Company's interest in Beijing Oz. Beijing Oz is currently
inactive and carries on no business operations in China. We received
confirmation in 2003 that Beijing Oz has been officially dissolved.

Concurrent with the acquisition, 845 entered into a license
agreement (the "845 License") with ONM under which 845 was appointed as the
exclusive distributor and manufacturer of the following software products in
China, Japan, Korea, Taiwan, Singapore, Malaysia and Thailand (the "Territory"):
(i) Career Options On-Line, an online educational product developed by ONM for
The Alberta Education Career and Technology Studies Curriculum; (ii) English as
a Second Language, an online educational product developed by ONM for the
Chinese market; and (iii) On-Line Webstories for Learning, an online educational
product addressing the language arts grades 3 and 4 literacy curriculum for the
United Kingdom (the foregoing products hereinafter collectively referred to as
the "Products"). Singapore and Thailand are specifically excluded from the
Territory in respect of On-Line Webstories for learning. ONM granted 845, among
other things, the exclusive right to use, market, promote, distribute, sell,
sublicense, manufacture and modify the Products and to use the intellectual
property within the Territory and to bundle the Products with other computer
programs of 845. The 845 License is for a term of 50 years.

We and ONM also entered into an option agreement (the
"Option") under which we were granted an irrevocable option to purchase all of
the assets of ONM for a purchase price of $5,000,000 exercisable at any time on
or before December 13, 1999. The Option expired, unexercised.

Effective as of December 2005, Archer Education Group Inc. ,
acquired Oztime from AT&T, with the purchase price set at 4,800,000 common
voting shares of Archer, of which 4,140,000 shares were issued in the name of
AT&T, and 660,000 shares were issued in the name of certain Oztime employees, as
designated by AT&T. Of the 4,140,000 shares issued to AT&T, 1,000,000 shares
were deposited with an escrow agent (the "Archer Escrow Shares"). Based upon
certain revenue performance criteria, to be measured between the closing of the
said transaction and December 31, 2006, the Archer Escrow Shares are to be
either released to AT&T or returned to Archer for cancellation.

As of December 31, 2005 approximately 53.2 percent of Archer's outstanding
shares were owned by Zi or its subsidiaries. Subsequent to December 31, 2005,
the Company's ownership position in Archer was diluted to 44.8 percent.

Acquisition and Divestiture of EnglishPractice Inc.

On June 15, 2000, we acquired all of the outstanding shares
of EnglishPractice.com Inc., which subsequently changed its name to
EnglishPractice Inc. ("EPI"), an online content and services host for English as
a Second Language ("ESL") training. EPI was acquired primarily to complement
Oztime's education portal business and provide ESL content, with the possibility
of EPI independently earning revenues based upon a dotcom business model. We acquired EPI in exchange for $226,000 cash and 250,000 of
our common shares. We also agreed to commit up to CDN$1.0 million ("EPI Funding
Commitments") in further funding to assist in achieving certain revenue
milestones. Of the shares we issued as consideration, 80,000 Zi shares were
issued to the EPI founders upon closing and the remainder were escrowed pending
achievement of the revenue milestones. Certain of the EPI founders were retained
as employees as part of the acquisition.

20

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EPI owns two proprietary software products: (i) The Lesson
Manager; and (ii) The Content Generator. The Lesson Manager allows teachers to
enter questions and quizzes through a user friendly interface and the Content
Generator converts the content entered into Java applications and corresponding
HTML pages. EPI had over 570,000 users and over 6 million page views per month
at the time of acquisition. EPI's revenue model was based on growing and
leveraging its user base to receive revenues from advertising, sponsorship, pay
per use, subscription and e-commerce opportunities. This revenue model did not
prove to be effective and revenue streams did not develop following the
acquisition. We did not believe that EPI would contribute any material revenues
to us in the future as a stand alone entity. As a result, EPI content and
software products were integrated into Oztime's education portal business.

In December 2000, we and the EPI founders agreed that the EPI
revenue milestones required to release the Zi shares held in escrow would not be
met. As a result, the purchase agreement was amended to cancel the balance of
EPI Funding Commitments, to immediately cancel 85,000 of the escrowed Zi shares,
to amend the milestones for release of escrowed shares and to release 45,000 of
the escrowed Zi shares over the period from May 30, 2001 to May 30, 2002. The
balance of 40,000 escrowed Zi shares (Performance Shares) remaining in escrow
were cancelled following the expiry of the escrow period due to the non-fulfilment
of the milestones for release of the remaining escrowed shares

In late 2001, the EPI operations were moved from Calgary to share offices
with Oztime in Beijing and EPI's technology and business was integrated into
Oztime's business plan. See

Effective as of December 2005, Archer acquired from Zi all of the outstanding
shares of EPI, with the purchase price being set at 2,000,000 common voting
shares of Archer.

As of December 31, 2005 approximately 53.2 percent of Archer's outstanding
shares were owned by Zi or its subsidiaries. Subsequent to December 31, 2005,
the Company's ownership position in Archer was diluted to 44.8 percent.

Acquisition of Archer Education Group Inc.

The Company's ownership of Archer shares resulted primarily from the sale of
its Oztime and EPI subsidiaries to Archer, a related party. At December 31,
2005, the Company held 53.2 percent of the outstanding shares of Archer. As a
result of certain third party Archer share subscription agreements that did not
close until after the end of Zi's financial year end (resulting in 44.8 percent
ownership of Archer by Zi), Zi has accounted for its investment in Archer as a
purchase under the purchase method of accounting, including its results from
December 21, 2005 (the date of acquisition) to December 31, 2005 and its assets
and liabilities, net of minority interest at December 31, 2005. Archer was
incorporated in February 2005 for the purpose of acquiring a number of
educational learning institutions in Canada. Prior to the completion of the
Archer acquisition of Oztime and EPI, Zi held 24.9 percent of Archer's shares,
acquired through share subscription agreements in 2005. Consequently, Zi is a
related party to Archer. Under the sale agreements, Zi received 6,140,000
million shares of Archer, including contingent consideration of 1,000,000 shares
placed in escrow and a $125,000 note receivable related to post closing working
capital adjustments. The release of the escrowed shares is subject to
performance criteria requiring revenues earned through Oztime related
operations, from the date of purchase to December 31, 2006, be $2,950,000 or
more. The Company determined there was uncertainty that Oztime's revenues
related to its operations would achieve the performance criteria and as such the
contingent consideration was not considered as part of the sale proceeds.
Subsequent to year end, Zi's interest in Archer was diluted to 44.8 percent (as
of March 6, 2006). As such, the accounting treatment for Zi's investment in
Archer as at March 31, 2006 will reflect Archer as a significantly influenced
subsidiary. The Company intends to deconsolidate the results of Archer in the
first quarter of 2006 since it no longer absorbs a majority of the entity's
expected losses or residual returns, in the case of a Variable Interest Entity
("VIE"), and no longer has the ability to exert control over this subsidiary.

21

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Acquisition of Assets of Decuma AB

On January 26, 2005, Zi Decuma AB, a company incorporated
under the laws of Sweden and a wholly owned subsidiary of the Company, acquired
substantially all of the assets of handwriting recognition software specialists
Decuma AB of Lund, Sweden. As part of the acquisition, the Company acquired
certain intellectual property and customer agreements of privately held Decuma
AB, as well as assuming certain liabilities of Decuma AB. As part of such
acquisition, Zi Decuma AB offered employment to each employee of Decuma AB, on
the terms and conditions equal to their employment terms and conditions with
Decuma AB. The purchase price was approximately U.S.$1.0 million paid in 146,929
common shares of the Company.

Intellectual Property Litigation

In the course of its operating history, the Company has been
involved in several lawsuits, both as a plaintiff and as a defendant, with its
largest competitor, Tegic Communications, Inc., which is a subsidiary of AOL ("Tegic").
The following is an overview of these proceedings:

(i) Asian
Communications Pty Ltd., and Tegic Communications, Inc. v. Zi Corporation and Zi
Corporation of America, Inc.

As a part of the proceedings, on February 21, 2002, the
District Court granted a summary judgment order which held that the Company's
then current version 4.5 eZiText product for alphabetic languages did not
infringe the Tegic patents in this lawsuit.

On September 4, 2002, the jury in this lawsuit found that
certain versions earlier than version 4.5 of the Company's eZiText product (the
"U.S. Restricted Versions") infringed Tegic's U.S. patents and awarded Tegic $9
million in damages (the "Damages Award"). At a post-trial hearing held on
November 8, 2002, the presiding trial judge in this lawsuit upheld the jury's
damages verdict and denied the Company's motions to invalidate Tegic's U.S.
patents and to set aside the Damages Award.

The Company settled all claims in this lawsuit with AOL by a
written settlement agreement dated December 6, 2002. As part of the settlement,
a Consent Judgement was entered on December 20, 2002. The settlement in relation
to the U.S. Restricted Versions of eZiText prohibits the sale or any use of such
products by the Company in the United States only. The sale, use and licensing
of such versions of the Company's eZiText product by the Company and its
affiliates in countries other than the United States is not affected. The
ability of the Company and its affiliates to sell, license and make use of its
eZiText product (all current versions) in all countries of the world, including
the United States, is not limited or restricted by the settlement.

(ii) Asian Communications Pty. Ltd.
and Tegic Communications, Inc. v. Zi Corporation (Hong Kong) Ltd.

22

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Dispositions and Discontinued Operations

Telecom Technology Corporation Limited

On July 22, 2000, we acquired all of the outstanding shares
of Telecom Technology Centre, Limited ("TTC"), a Hong Kong based engineering and
design services provider in exchange for $3,208,023 in cash. The acquisition
cost was offset in part by TTC's cash position of $1,305,877. As a result of
this acquisition, we added over 30 Hong Kong based telecom technology engineers
with the ability to develop and produce customized solutions for Bluetooth
applications, Wireless Access Protocol (WAP) and VoIP.

TTC was established in 1995 through project funding from the
government of Hong Kong Special Administrative Region and was, at the time of
acquisition, one of Hong Kong's largest telecom technology and engineering
organizations. TTC's original mandate was to provide electronic design solutions
for the local Hong Kong Ministry.

After the acquisition was completed, TTC changed its name to Telecom
Technology Corporation Limited on September 29, 2000.

Subsequent to the acquisition, TTC's activities were
integrated into our wholly-owned subsidiary, Zi Corporation (H.K.) Limited. As
part of this integration, the various business lines of Zi Services (a former
business unit of the Company) were narrowed to focus specifically on developing
Bluetooth and VoIP technologies.

Due to what we perceived as a lack of market demand for the
emerging technologies of Bluetooth and VoIP at that time, the Company closed its
Zi Services business unit in December 2002, terminated all employees and
liquidated all of the assets of this business unit for proceeds of $220,000.

The Magic Lantern Group of Companies

On March 19, 2002, Zi acquired MagicVision Media Inc. ("MagicVision"),
a company formed by the senior management of Magic Lantern Communications Ltd.
("Magic Lantern") and its primary holding, Magic Lantern, together with Magic
Lantern's 100 percent interest in Tutorbuddy Inc. ("Tutorbuddy") and 75 percent
interest in Sonoptic Technologies Inc. ("Sonoptic") (collectively referred to as
the "Lantern Group"). The Government of New Brunswick owns 25 percent of
Sonoptic. Zi acquired MagicVision by issuing 100,000 common shares of Zi (35,000
of these shares which were subject to performance escrow based on revenue
targets being achieved and have since been cancelled) and paying approximately
$1.6 million to subscribe for shares of MagicVision. Of these subscription
proceeds, $1.2 million was used to facilitate the senior management buyout by
MagicVision of Magic Lantern and its subsidiaries from the previous owners. The
remainder of the subscription proceeds were used principally to pay the fees of
an advisor retained by MagicVision and to pay a portion of MagicVision's legal
fees. The founders and key employees of the Lantern Group were retained at that
time.

On November 7, 2002, the Company completed the sale of 55
percent of its interest in the Lantern Group to JKC Group Inc., which at the
time was believed to be an arm's-length party. As part of the transaction, JKC
Group Inc. changed its corporate name to Magic Lantern Group, Inc. ("MLG"). MLG
traded on the AMEX under the ticker symbol "GML". At closing, the Company
received a 45 percent equity interest in MLG consisting of 29,750,000 common
shares and a three year promissory note in the face amount of $3,000,000. The
Company obtained registration rights for its stock in MLG and its stock was
registered with the Securities and Exchange Commission for trading. The
promissory note was subject to adjustment based upon the financial performance
of the Lantern Group for the first year after the sale. As a result of the level
of MLG's financial performance during the year subsequent to closing, the face
amount of the note was reduced to $2,000,000.

Subsequent to the closing, the Company learned that MLG's
then-controlling shareholder, an affiliate of Michael Lauer and several funds
known as the Lancer Group, had acquired and owned on an undisclosed basis, what
was subsequently disclosed to be a 49.3 percent interest in Zi at that time.
See: "

23

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In the fourth quarter of 2004, the Company took an impairment
charge with respect to the MLG note as a result of publicly-available financial
information about MLG (including the going concern qualification to its
financial statements) and, in particular, the failure of MLG to make scheduled
interest payments on its indebtedness to Zi.
We have written off the carrying value of our investment in
MLG. In February 2006, we received notice that MLG had ceased operations in 2005
and has commenced a voluntarily liquidation and wind down. The Company does not
expect to realize any recovery from its investment in MLG.

Acquisition of Zi Shares by the Lancer Funds

In early July of 2003, a U.S. federal judge froze the assets
of certain Lancer Funds and appointed an attorney of the law firm of Hunton &
Williams, LLP as receiver for Lancer Management Inc., and related entities. The
Company reported in its Form 20-F for the year 2001, based on information
provided by Lancer, that Lancer and its affiliated companies held or controlled
directly or beneficially Zi stock totaling 3,675,100 shares, which represented
approximately 9.67 percent ownership in the Company. In the course of preparing
the Form 20-F for the year 2002, management of the Company observed what
appeared to be a concentration of its shares held at a major brokerage firm.
Through its attorneys, Management requested an update from Lancer concerning the
level of Lancer ownership in the Company, but despite several requests did not
receive a response.

Accordingly, the Company reported in its Form 20-F for 2002,
dated May 15, 2003, the same information about Lancer's share ownership in Zi
that was disclosed in its 2001 Form 20-F and disclosed in the 2002 Form 20-F
that it had been unable to obtain current information regarding Lancer's
holdings and that its holdings may be greater or less than reported.

The court appointed receiver (and the party in control with
respect to the Lancer Funds under creditor protection; collectively referred to
herein as the "Receiver") filed an initial report on September 8, 2003 in the
U.S. District Court in Florida, noting, among other things, that numerous
substantial investment position discrepancies had been identified in many of the
Lancer Funds' holdings. The Receiver remained uncertain of the Lancer Funds'
ownership interest in many of those portfolio companies, including the Company.
The initial report also disclosed that the Receiver could apply to the court for
abatement of its obligation to make regulatory filings with the U.S. Securities
and Exchange Commission or other appropriate agencies. The Company offered
assistance to the Receiver to determine the extent of the Lancer Funds' holdings
in the Company, including the provision of copies of its registered shareholder
records and private placement subscription details.

In 2003, a statement of beneficial ownership on Schedule 13D
was filed by the Receiver with the SEC. According to the Schedule 13D, the
Receiver reported that it owned, through four Lancer entities, 19,407,364 common
shares of the Company, or approximately 49 percent of the total issued and
outstanding common shares of the Company.

Under the United States Securities Act of 1933, the Receiver
is deemed to be an affiliate of the Company and its holdings in the Company are
therefore subject to resale restrictions absent registration under the
Securities Act. Under U.S. law, the amount of securities that may be publicly
sold in the United States by an affiliate within any three-month period may not
exceed the greater of one percent of the total number of Company shares
outstanding, or the average weekly reported volume of trading in Company shares
during the four weeks prior to the filing of a notice with the SEC of an
intention to sell. The volume limitation does not apply to sales by the Receiver
on the Toronto Stock Exchange.

On January 11, 2005, the Receiver filed an intention to sell
in the aggregate up to 3,363,396 common shares in the ninety days thereafter
pursuant to Rule 144 under the U.S. Securities Act of 1933. According to
amendments to Schedule 13D, the Receiver sold an aggregate 689,356 shares of Zi
during January and February 2005. On February 10, 2005, the Receiver filed Form
45-102F1 in Canada stating its proposal to sell 2,875,132 shares of Zi. On March
11, 2005, the Receiver filed Form 45-102F1 in Canada stating its proposal to
sell 2,674,040 shares of Zi. No shares were sold in March 2005. On April 8,
2005, the Receiver filed Form 45-102F1 in Canada stating its proposal to sell up
to 2,674,040 shares of Zi. On April 18, 2005 the Receiver filed an intention to
sell in the aggregate up to 2,674,040 common shares in the ninety days
thereafter pursuant to Rule 144. No shares were sold in April 2005. On May 6,
2005, the Receiver filed Form 45-102F1 in Canada stating its proposal to sell up
to 2,674,040 shares of Zi. Notwithstanding the Receiver's stated intentions from
March to May 2005 to sell shares of Zi, to the best of the Company's knowledge,
no shares have been sold by the Receiver since February 2005. As of the most recent filing by the Receiver on July 29,
2005, the Company believes the Receiver currently holds 18,720,508 common
shares, representing approximately 40.5 percent of the Corporation's outstanding
common shares.

24

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In July 2004, Zi completed a private placement for gross
proceeds of CDN $10 million. As a condition of the financing, the Receiver,
among others, agreed to a 150 day lock up of its shares. In return for this
consideration, the Company agreed, among other things, to appoint one director
to the Company's board as a nominee of the Receiver. The Company subsequently
appointed Donald Moore to the Board of Directors as the Receiver's nominee.
In 2005, contrary to earlier 13D filings in the United
States, wherein the Receiver disclosed, among other things, that it had no plans
or proposals that would result in a change to the present Board of Directors or
Management of the Company, the Receiver contacted the Company to request certain
shareholder information with a view to calling a special meeting of the
Company's shareholders, the purpose of which would be to elect a slate of
directors proposed by the Receiver.
The Company sought the advice of legal counsel and concluded,
among other things, that it could not and would not cooperate with the Receiver
in effecting what the Company believed was an unlawful takeover of the Company.
In its filings to the Court of Queen's Bench of Alberta (the "Alberta Court"),
the Company cited Lancer's failure to comply with Alberta laws regarding
takeover bids. The Alberta Court issued an interim order that, among other
things, prohibited the Receiver from requisitioning a shareholders' meeting. The
Receiver brought a motion to contest the Alberta Court's jurisdiction and to
seek to have all related matters dealt with in a Florida Court. The Alberta
Court, in a decision dated January 31, 2006, denied the Receiver's application
to change venue, citing the Alberta Court as the proper forum to consider
matters under theBusiness
Corporations Act (Alberta)("ABCA") and theSecurities
Act (Alberta)and refused
to set aside its interim order against the Receiver. The Receiver has appealed
the January 31, 2006 order and such appeal has not yet been heard.

The Company brought a companion proceeding before the ASC on
December 5, 2005, seeking among other things an order requiring the Receiver to
either dispose of the Lancer Funds' Zi shares or make a lawful takeover bid to
all of Zi's shareholders. On March 16, 2006, the ASC dismissed a motion by the
Receiver to stay or dismiss the ASC proceedings. The ASC set a hearing date of
July 17, 2006 to hear Zi's application for relief against the Receiver.

Separately, the Receiver has instituted a contempt of court
hearing before the U.S. District Court for the Southern District of Florida (the
"Florida Court") claiming that the Company's filing before the Alberta Court
violated a case management order which mandated that all proceedings against the
receiver be brought in the Florida Court. The Company was not a party to any
previous proceeding before the Florida Court and has argued that it is not
subject to the case management order. The judge in the Florida Court has
referred the matter to a magistrate judge for consideration.

Zi had previously agreed to a U.S. venue for resolving
certain contractual issues with the Receiver and the Alberta Court acknowledged
that such agreement does not affect the Alberta Court's ability to rule on
matters under the ABCA and Alberta securities laws.

In February 2006, Donald Moore, a director of the Company
nominated by the Receiver, brought an action against the Company and Michael
Lobsinger, Chairman, President and CEO of the Company, under the ABCA, claiming
that the Corporation had failed to make certain records available to him as
required by the ABCA and had denied him access to other records that he believed
to be entitled to under the ABCA. The Company and Mr. Lobsinger intend to
vigorously defend themselves against Mr. Moore's actions.

Principal Capital Expenditures and Divestiture

During the years ended December 31, 2002, 2003, 2004, 2005, and up to
February 28, 2006 our principal capital expenditures were as follows:

25

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|                                 |   | Amount of Expenditure (Divestiture)
|-------------------------------- | - | -----------------------------------
|                                 |   | To                                 
|                                 |   | February                           
|Description of Expenditure       |   | 28, 2006                           
|Capitalized Software Development |   |                                    
|                                 |   |                                    
|Costs                            | $ | 135,723                            
|Acquisition of
    Archer        | $ | Nil                                
|Acquisition of
    Decuma        | $ | Nil                                
|Acquisition of
    Magic Lantern |   | Nil                                
|Computer & office equipment      | $ | 28,019                             

During the years ended December 31, 2002, 2003, 2004, 2005
and up to March 23, 2006 the Company did not have any significant capital
divestitures other than the disposition in 2002 of the Magic Lantern Group of
Companies as previously described and its accumulated capital investment of
$2,220,687.

In January 2005, the Company acquired the assets of Decuma AB
for approximately U.S.$1.0 million, including fees and expenses. In the
remainder of 2006 the Company's planned principal capital expenditures will be
software development costs. The Company expects these expenditures will be
incurred primarily in Canada and Sweden. See

B. Business overview.

Zi in General

The business of our Company is organized as follows.

The principal business unit of the Company is the Zi
Technology business unit in which our core eZiText and Decuma business is
carried on. Our core technology product, eZiText, and its companion application,
eZiTap, are predictive text input solutions that predict words and/or phrases
for use in messaging and other text applications in 54 languages and dialects.
By offering word candidates as text is being entered, eZiText increases the
ease, speed and accuracy of text input on electronic devices for applications
such as short messaging, e-mail, e-commerce and Web browsing. In January 2005,
we acquired the assets of handwriting recognition software specialists Decuma
AB. In February 2005 we announced a new product, Qix, an application interface
that provides users with a quick and easy method for accessing and discovering a
mobile device's full set of features, applications and services without having
to remember where and how to find them via the device's built-in menu structure. Qix intuitively accesses information directly from the idle screen used for
dialing on the standard keypad. Qix significantly reduces the number of key
presses needed to use a mobile device and eliminates the need to scroll through
complex menu systems.

Zi Technology Business Unit

Description of eZiText and eZiTap

Although eZiText can be used in 54 written languages, it was
initially developed in an effort to resolve the problem of inputting
ideographic-based languages, such as Chinese, into a computer or other
electronic device with an alphanumeric keyboard. The following example
illustrates how eZiText Chinese is applied to resolve this challenge and
illustrates how the principles of eZiText Chinese can also be applied to
alphabet-based languages.

When learning Chinese, students are taught to write each
character manually using a precise stroke order which has been developed over
hundreds of years. eZiText Chinese relies on this knowledge of stroke order and
uses a limited number of keys (for example, 5 keys or 8 keys) to enable a user
to input different strokes to electronically "draw" Chinese characters. For
instance, to call up a specific Chinese character, a user presses the applicable
key for the first stroke used when writing that character. The software then
calls up a list of the most common characters beginning with that stroke and
displays those characters on the screen. If the character the user is writing is
among those displayed on the screen, the user then selects that character by
pressing a key. If the character is not in that list, the user then presses the
key for the next applicable stroke and is supplied with another list of
characters based on that combination and order of strokes.

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Each time a key representing a stroke is pressed, eZiText
Chinese makes an analysis which predicts the character the user is entering. On
the first stroke key press the analysis is based on the frequency of use of
individual characters. But as more strokes are entered and more characters are
selected, the algorithm becomes more sophisticated, giving a user subsequent or
associated characters on the basis of meaning, style and syntax in addition to
frequency of use. The most likely choice appears under the cursor for immediate
selection. While the average number of strokes required to draw a Chinese
character is approximately 14, eZiText Chinese algorithms allow Chinese text to
be entered with generally fewer than 3 key strokes per character. Furthermore,
eZiText Chinese goes beyond single character completion, offering predictive
word completion (as some Chinese words consist of more than one character) and
even phrase completion.

In addition to offering completed characters, eZiText Chinese
also considers partial character structures that could be created with the
entered sequences and displays these as well. Thus when a user is confronted
with having to enter a character that is infrequent, the ability to select the
structural aspect as controlling parameter greatly simplifies use. This
particular aspect is part of Zi's Chinese Patent ZL-99-1-00625.9 and is believed
to be popular with the user community.

Because of the structures of alphabetic languages, eZiText
for Latin-based languages does not attempt to offer candidates to the user at
the first alphabetic key press unless the entered key is a valid single letter
word such as 'a' or 'I' in English. Instead, eZiText waits until a second
keypress is made whereupon candidates are offered which are of significantly
better quality than otherwise seen. This is an implementation more suited to the
way that a typical user interacts with the display of the device.

eZiText can now be used in the following languages:
Afrikaans, Arabic, Bengali, Bulgarian, Chinese (PRC, Hong Kong and Taiwan),
Croatian, Czech, Danish, Dutch, English (British, American and Asian), Estonian,
Farsi, Finnish, French (European and Canadian), German, Greek, Gujarati, Hebrew,
Hindi, Hungarian, Icelandic, Indonesian, Italian, Japanese, Korean, Latvian,
Lithuanian, Malay, Norwegian, Polish, Portuguese (European and Brazilian),
Punjabi, Romanian, Russian, Serbian, Slovak, Slovenian, Spanish (European and
Latin American), Swahili, Swedish, Tagalog, Tamil, Thai, Turkish, Ukrainian,
Urdu and Vietnamese.

eZiTap is a predictive multi-tap solution similar in function
to eZiText, with the key difference being that each character is
deterministically established by the user by tapping the keys, rather than
having the particular characters predicted for the user. Like eZiText, eZiTap
predicts words based upon the characters entered by the user.

Our software technology is incorporated by reference design
and chipset providers, total solution providers, operating system developers,
hardware manufacturers and other businesses into their respective electronic,
wireless and computer devices, providing end users with a device that is
language-enabled for text-entry. eZiText and eZiTap technology are distributed
through licensing agreements.

From time to time, Zi releases new versions of eZiText and
eZiTap to deliver additional benefits to the user, device manufacturer and
network operator. For the user, new features deliver increased text input speed
and more opportunities for personalized text entry. For a device manufacturer,
additional memory efficiencies, software enhancements and new man-machine
interface (MMI) capabilities support learning and prediction with less memory.
For a network operator, improved text entry speed and capabilities promote more
utilization of services such as short messaging, multi-media messaging,
web-browsing and more.

Additional benefits include a new language database
architecture that expands a language database's word list without increasing
overall memory size; reduced memory footprint through new algorithms and
improved compression; improved text entry speed that reduces the number of key
presses and additional features such as phrase prediction, dual (simultaneous)
language messaging, prediction of data from other sources such as the phonebook,
contact list, and web URL's, among others, to provide faster, more natural text
entry. The Company expects that these new releases, together with further
enhancements or developments, will be central to its ability to penetrate
further into the market in the next several years.

27

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Moreover, Zi made significant progress in its integration of
core products and the development of solutions for Smart Phone platforms, a
major growth segment of the wireless device market. The Company has developed
Input Method Editors ("IMEs") for eZiText and eZiTap for the Microsoft Windows
Mobile platform and eZiText and eZiTap Front End Processors ("FEPs") for Symbian
S60 and Palm-based smart phones. These solutions enable OEMs easy access to Zi's
core products on leading smart phone platforms.

In 2002, Zi announced its initial development of a network-based platform
that enables the integration of wireless communication devices with the network
called eZiNet.

We believe the eZiNet product category and related concepts
continue to provide a visionary, forward-looking perspective for new products,
resulting in incremental spin-offs such as Qix and a downloadable version of
eZiTap for the Sony Ericsson P800 and P900 smart phones. Accordingly, the
Company believes that it has the tools to extend its distribution potential for
its text entry products. Distribution of certain versions of Zi's software over
the Internet using reputable third party distributors, such as Handango, allow
end-users of handsets to download Zi products and provide direct payment online.

In 2006, Zi announced its development of a predictive text
solution for keyboards called eZiType. This solution offers the predictive word
capabilities similar to eZiText and eZiTap, with the added benefit of
auto-correction when users misspell or accidentally press the wrong character.
The solution is made for physical and virtual keyboards and currently applies to
alphabetic based languages.

Licensing of eZiText

As of March 23, 2006, Zi has entered into licenses with more
than 100 licensees who are in many cases original equipment manufacturers that
embed eZiText into their respective products. These licensees include among
others, cellular phone manufacturers, set-top box manufacturers and game
manufacturers.

To the best of our knowledge, approximately 57 licensees have
completed implementation of eZiText to date on at least one of their respective
products. The majority of our revenues are derived from licensing agreements. In
addition to licensing of our technology, we have also entered into various
strategic alliances to expand the reach of our technology. In 2005, we derived
approximately 94 percent of our total revenue from eZiText licensing fees and
royalties. The majority of our eZiText customers are OEMs for cellular
telephones. The majority of licensees pay us, among other fees, a royalty fee.
The royalty amount varies from customer to customer and may vary in accordance
with unit volumes produced by the licensee. Since cellular phones are consumer
products, our revenues are subject to seasonality associated with cellular phone
sales and are highly dependent on the market presence, marketing prowess,
manufacturing and distribution capabilities of the OEMs, and consumer acceptance
and demand for our licensees' finished cellular telephone product. In the year
ended December 31, 2005, two customers, Kyocera Corporation and Nokia
Corporation, accounted for 31 percent of our total revenue.

Description of Qix

In February 2005 at the annual 3GSM conference in Cannes,
France, the Company launched its new Qix application interface that sits on top
of user-platform environments and operating systems. Qix provides a quick and
easy method for accessing a phone's full set of features, applications and
services without having to remember where and how to find them via a phone's
built-in menu structure. Qix intuitively accesses a phone's features directly
from the idle/dialing screen using the standard keypad. As part of its
go-to-market program, Virgin Mobile UK has been involved in market trials of Qix,
with a view to determining the carrier's incremental average revenue per user ("ARPU")
as it relates to those subscribers utilizing Qix. Preliminary results were
encouraging in 2005 and the market trials have been extended. Zi believes that
mobile operators are the target customer for Qix and is in discussions with
several mobile operators regarding the use of Qix.

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Description of Decuma Handwriting Recognition Solutions

In January 2005 we acquired the assets of Decuma AB of Lund, Sweden. Decuma's
handwriting recognition solutions consist of Decuma Alphabetic, Decuma Japanese
and Decuma Chinese.

Decuma Alphabetic is modeled closely to actual writing with
pen on paper. A single input area is used for writing and presenting recognized
letters and for editing the text. This makes input natural and fast, and allows
the user to focus on the content rather than the writing. Users do not have to
learn or adjust to a certain writing style or learn a special alphabet.
Uppercase and lowercase characters, digits, punctuation marks and special
symbols, as well as accented characters, can be mixed in the same input mode.

Editing is done directly in the input area using intuitive gestures to delete
or insert one or several characters. Shortcuts can be added with personal
symbols and characters for convenient input for frequently written phrases and
commands.

Decuma Alphabetic currently supports Afrikaans, Albanian,
Croatian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German,
Hungarian, Icelandic, Indonesian, Irish, Italian, Latvian, Lithuanian,
Luxembourgish, Norwegian, Polish, Portuguese, Romanian, Serbian, Slovak,
Slovenian, Spanish, Swahili, Swedish, Tagalog, and Turkish.

The Decuma Japanese handwriting recognition application
allows for input of both Kanji and Kana characters. It also supports input of
handwritten Latin letters, numerics, and punctuation. The input method is
compliant with standard conversion applications.

Decuma's Chinese handwriting recognition software handles
natural variations in Chinese writing: printed, semi-cursive and common cursive
styles. The Company believes that the recognition engine has the smallest memory
footprint on the market, requiring 30 percent less memory compared to others.
The Decuma Chinese input method supports word-by-word input and mimics the
natural writing process. In mainland China and Singapore, a simplified form of
the traditional Chinese characters is employed, where nearly 7,000 characters
are used instead of the traditional Chinese character set which contains around
13,000 characters. Traditional characters are used in Taiwan and Hong Kong and
there are also some Hong Kong- and Shanghai-specific characters. Decuma's
recognition software includes databases for both simplified and traditional
Chinese, as well as the region-specific characters.

In Chinese writing, numbers and Latin alphabetic characters
are regularly used. Using the Decuma Chinese input method, Chinese and Latin
characters, as well as numbers, are conveniently written in the same input
boxes. Punctuation symbols can also be written without switching to any special
input mode. This greatly facilitates the writing process and mimics the natural
Chinese writing style.

The software is compatible both with most Palm OS 5 devices
with a high resolution display, and all Pocket PC devices. It has been tested on
several of them including Compaq iPaq 3600/3700/3800, HP Jornada,
Fujitsu-Siemens Pocket Loox and Toshiba Genio 5500. In March 2005 the general
availability of Decuma Alphabetic software was announced for the Sony Ericsson
P800/900/910 series of smartphones. In October, 2005, the Company announced that
it has signed a licensing agreement with Nintendo Co., Ltd. Under the agreement,
Nintendo DS developers can employ Zi's Decuma® Handwriting
Recognition technology while creating software for the Nintendo DS handheld
video game system.

In February of 2006, the Company announced the fusion of the
Decuma Handwriting Recognition technology and predictive text. This combines the
word prediction capabilities of eZiText / eZiTap in conjunction with handwriting
recognition.

Investment in Archer Education Group Inc.

As of the date of this Report, the Company is a 44.8 percent
owner of Archer Education Group Inc., an international education company.
Through a combination of electronically delivered instruction, the interactive
nature of the Inter/Intranet, and traditional classroom "bricks and mortar"
learning, Archer Education Group intends to provide a blended form of personal
and organizational teaching and learning to those parts of the world where there
is greatest need and demand for education and training.

29

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Archer Education and Oztime currently consist of online learning, and five
bricks and mortar schools.
Capitalizing on the synergies between the bricks and mortar
schools and Oztime, Archer Education Group believes it has the capabilities to:
develop and localize course content; deliver via the Internet already developed
courseware for students from kindergarten through to the twelfth grade; deliver
a complete course curriculum and grant diplomas in both Canada and China
electronically and through bricks and mortar classroom; provide blended,
customized leadership and management training to the corporate world and
governments, delivered both within the classroom and via corporate Intranets;
offer ESL to corporate, government, and educational clients; and sell or license
its Learning Management System, which consists of sophisticated software that
automates the learning process via the Internet (course delivery, discussion
groups, administrative tasks, testing).
Oztime sells and supports two suites of products:
Enterprise software used by corporations and academic institutions for
  tracking and managing e-Learning (Learning Management System); and
  Courseware in both customized and standard format.Customized courseware is the building of e-Learning courses
that have been adapted from a client's existing training material (usually
offline). Standard courseware is e-Learning courses that have been built for a
general audience and cover a subject area with a strong demand that is not or
cannot be met by traditional classrooms, such as ESL.Geographic SegmentsThe table below summarizes the Company's revenues by activity and geographic
market for the last three fiscal years:

|     |            |                | Revenue     
|---- | ---------- | -------------- | ------------
|     |            |                | License and 
|     |            | implementation | Software and
|     |            |                | fees        
|2005 | Canada(1)  |                | 4,175,334   
|     | China(2    |                | 5,019,599   
|     | USA(3)     |                | 1,021,769   
|     | Sweden(4 ) |                | 397,341     
|     | Total      |                | 10,614,043  
|     |            |                |             
|2004 | Canada(1)  | $              | 5,884,396   
|     | China(2)   |                | 5,207,579   
|     | USA(3)     |                | 1,806,863   
|     | Total      | $              | 12,898,838  
|     |            |                |             
|2003 | Canada(1)  | $              | 3,731,859   
|     | China(2)   |                | 3,378,770   
|     | USA(3)     |                | 2,808,369   
|     | Total      | $              | 9,918,998   



> (1)

(2)

(3)

(4)

30

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C. Organizational StructureUnless otherwise indicated, Zi, or one or more of its subsidiaries, owns 100
percent of the outstanding shares of the subsidiary.

|Name of Subsidiary                                                          | Country of Incorporation
|--------------------------------------------------------------------------- | ------------------------
|Multi-Corp International Ltd.                                               | Barbados                
|Zi Corporation of
    Canada, Inc.                                          | Canada                  
|Zi Corporation of
    America, Inc.                                         | USA                     
|Asia Translation
    & Telecommunications Limited                           | Hong Kong               
|Zi Corporation (H.K.)
    Limited                                           | Hong Kong               
|Huayu Zi Software
    Technology Limited.(1)                                | Hong Kong               
|Huayu Zi Software
    Technology (Beijing) Co., Ltd.(2)                     | China                   
|845162 Alberta
    Ltd.                                                     | Canada                  
|Zi Oztime
    Corporation Ltd.                                              | Bermuda                 
|Zi (Bermuda)
    Corporation Ltd.                                           | Bermuda                 
|Zi Technology
    Corporation Ltd.                                          | Bermuda                 
|Telecom
    Technology Corporation Limited                                  | Hong Kong               
|Magic Lantern
    Group, Inc.(3)                                            | USA                     
|Zi Decuma AB                                                                | Sweden                  
|Archer Education
    Group, Inc.(4)                                         | Canada                  
|Zi Software
    Technology (Beijing) Co., Ltd.                              | China                   
|Beijing Oztime
    Education & Network Technology Co. Ltd.(5)               | China                   
|English Practice
    Inc.
    (5)                                           | Canada                  
|Diamond Institute
    of Business and Computer Technology Inc.(5)           | Canada                  
|Toronto College
    of Diamond Institute of Business and Technology Inc.(5) | Canada                  
|Canadian
    International College of Business and English Inc.(5)          | Canada                  
|Languages
    International (Toronto) Inc.(5)                               | Canada                  
|The Language
    Circle Inc.
    (5)                                        | Canada                  
|Winfield College
    Inc.
    (5)                                           | Canada                  
|Toronto Learning
    Academy Inc.
    (5)                                   | Canada                  
|TMBJ Holdings
    Ltd.
    (5)                                              | Canada                  
|Winfield Holdings
    International Ltd.
    (5)                            | Canada                  
|Winfield College - Czech s.r.o.(5)                                          | Czech Republic          

Notes:

> (1) Zi
>   Corporation (H.K.) Limited holds eighty-five percent (85%) of Huayu Zi
>   Software Technology Limited. The balance of fifteen percent (15%) is held by
>   China Huayu (Hong Kong) Limited, a third party investor.
>   (2) Huayu Zi
>   Software Technology (Beijing) Co., Ltd., is wholly owned by Huayu Zi Software
>   Technology Limited.
>   (3) Zi
>   Corporation holds forty percent (40%) of Magic Lantern Group, Inc.
>   (4) Asia
>   Translation and Telecommunications Limited holds twenty-two point nine percent
>   (22.9%) of Archer Education Inc. and Zi Corporation (Alberta-Canada) holds
>   twenty-one point nine percent (21.9%) of Archer Education Inc.
>   (5) Wholly owned
>   subsidiary of Archer Education Group Inc.

D. Property, plants and equipment.

Our current facilities include administrative and sales
offices, and engineering offices. The table below describes our material
properties:

31

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|                            |                                                             |                                 | Approximate square
|--------------------------- | ----------------------------------------------------------- | ------------------------------- | ------------------
|Location                    | Purpose                                                     | Owned or leased                 | footage           
|Calgary, Alberta            | Corporate head office and engineering office                | Lease expires June 30, 2007     | 13,348 sq ft      
|Walnut Creek, California(1) | North American sales office                                 | Rental license                  | 300 sq ft         
|Hong Kong, SAR              | Asia Pacific sales and engineering office                   | Lease expires December 31, 2006 | 1,835 sq ft       
|Beijing, PRC                | PRC sales and engineering office                            | Lease expires February 28, 2008 | 4,252 sq ft       
|Beijing, PRC                | Oztime office                                               | Lease expires October 14, 2006  | 8,138 sq ft       
|Lund, Sweden                | Corporate head office and engineering office
    for Decuma | Lease expires June 30, 2007     | 4,237 sq ft       
|Toronto, Ontario            | Toronto Learning Academy                                    | Lease expires June 30, 2007     | 7,600 sq ft       
|Toronto, Ontario            | Languages International (Toronto) Inc.                      | Lease expires May 31, 2007      | 5,726 sq ft       
|Hamilton, Ontario           | The Language Circle                                         | Lease expires June 30, 2010     | 4,340 sq ft       
|Vancouver, British Columbia | Winfield College                                            | Lease expires July 31, 2007     | 8,832 sq ft       



> (1) License entered into as of
>   January 1, 2004 and renews automatically every three months.

We believe our facilities are adequate for our operations and have no plans
to add facilities during the remainder of 2006.

Item 4A. Unresolved Staff Comments

Not applicable

Item 5. Operating and Financial Review and Prospects

The following table summarizes certain of our selected financial information
(stated in thousands of U.S. dollars) prepared in accordance with U.S. GAAP. The
information in the table was derived from the more detailed financial statements
for the fiscal year ended December 31, 2003 through the fiscal year ended
December 31, 2005, inclusive, and the related notes, and should be read in
conjunction with the financial statements and with the information appearing
under the headings

|For the years ended December 31
    (thousands except per share amounts) |   | 2005    |   | 2004         |   | 2003   
|------------------------------------------------------------------------ | - | ------- | - | ------------ | - | -------
|Revenue                                                                  | $ | 11,385  | $ | 13,403       | $ | 10,603 
|                                                                         |   |         |   |              |   |        
|Gross margin                                                             | $ | 10,780  | $ | 12,931       | $ | 10,168 
|                                                                         |   |         |   |              |   |        
|Net loss                                                                 | $ | (5,317) | $ | (2,388
    ) | $ | (2,931)
|                                                                         |   |         |   |              |   |        
|Total assets                                                             | $ | 22,405  | $ | 21,699       | $ | 10,686 

|                                           |   |        |   |           |   |       
|------------------------------------------ | - | ------ | - | --------- | - | ------
|Net loss per
    share - basic and diluted | $ | (0.12) | $ | (0.06 ) $ | $ | (0.08)
|                                           |   |        |   |           |   |       
|Outstanding
    shares, weighted average   |   | 46,153 |   | 41,373    | $ | 38,720
|                                           |   |        |   |           |   |       
|Outstanding
    shares, end of period      |   | 46,273 |   | 45,225    | $ | 39,372

32

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A.
Operating results.

All dollar amounts are in U.S. dollars and in conformity with
U.S. GAAP. This information should be read in conjunction with the Company's
financial statements and notes.

Zi Corporation is a global technology company that delivers
intelligent interface solutions to enhance the user experience of wireless and
consumer technologies. Zi's product innovations are available on mobile phones,
PDA's, gaming devices and set-top boxes. Zi solutions are designed to improve
the usability of these devices and the content and applications on them.

The Company provides device manufacturers and network
operators with a range of intuitive and easy-to-use solutions that include: its
new eZiType predictive keyboard with auto-correction; eZiText® for one-touch
predictive text entry, eZiTap for intelligent multi-tap entry; Decuma® for
natural handwriting, which now includes prediction technology, and; Qix a
content and application search solution designed to enhance the user experience
and drive client and network service usage and adoption. Zi's product portfolio
now includes 54 language databases, representing languages spoken and written by
two thirds of the world's population.

Zi's customer and alliance base is extensive and continually
growing with cellular handset manufacturing and gaming console customers from
around the world, including: Nokia, Sony, Sony Ericsson, Nintendo, Motorola, LG
Electronics, Samsung, and Kyocera.

With an expanded portfolio of products, Zi is capable of
making mobile devices smarter and easier to use with software products that
simplify data entry and interaction on a communications device.

Zi entered into important licensing arrangements in 2005,
including Sony Ericsson for its smartphone offering and Motorola for the
Company's Decuma product on Japanese handsets. The Company's newly developed Qix
is currently expanding into the second phase of its first market trial project
with Virgin Mobile U.K. Zi has also expanded into the gaming market through a
licensing agreement with Nintendo.

Zi's core product, eZiText, is now pre-integrated on all
major mobile operating systems and platform providers for smart phones
including: S60, Symbian, Microsoft, Palm and Brew. Qix is integrated with S60
and UIQ platforms.

The buyers of handsets continue to exert pressure on the
manufacturers of handsets to produce lower cost products. In response to this
market factor, the handset manufacturing industry has, among other things,
undergone consolidation and attrition and gains in market share have generally
moved in favor of the largest manufacturers. Zi has continued to increase its
penetration into the largest manufacturers.

The financial results presented by the Company for 2005
reflect many of the market factors discussed herein.

Critical Accounting Policies and Estimates

The preparation of the Company's consolidated financial
statements requires the use of estimates and judgments that affect its reported
amount of assets, liabilities, revenues and expenses. On an ongoing basis, the
Company evaluates its estimates, including those related to asset impairment,
revenue recognition, contingencies and litigation. These estimates are based on
information that is currently available to the Company and on various other
assumptions that it believed to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions and
conditions.

33

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The Company has identified the following critical accounting policies that
affect the more significant estimates and judgments used in preparation of its
consolidated financial statements.Software Development Costs

All research and development costs are expensed as incurred
except those that qualify under the Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed". Research and development costs incurred prior to
the establishment of the technological feasibility of a particular software
project are expensed as incurred. Software development costs, including costs
associated with coding and testing of project related software, are capitalized
subsequent to when the technological feasibility of a project is established.

Capitalized costs are amortized commencing in the period of
the product's commercial release. The determination of whether a project is
technically feasible involves establishing, at a minimum, that the Company has a
detailed, documented and consistent product and program design, including high
risk development issues related to the project, with the necessary resources to
complete the project. If a detailed program design is not used, technological
feasibility will be established when a product design or working model of the
software model, consistent with the product design, is complete and tested.

Revenue Recognition

The Company recognizes revenue when it is earned and realized
in a manner consistent with interpretations in Staff Accounting Bulletin No. 104
of the U.S. Securities and Exchange Commission as further described in note 2 to
the audited consolidated financial statements. Revenue from licensed software is
recognized in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition".

Under software licensing arrangements, the Company recognizes
revenues provided that: a license agreement has been signed and fees are
non-refundable; the software and related documentation have been delivered;
there are no uncertainties regarding customer acceptance; collection of the
resulting receivable is deemed probable; the fees are fixed and determinable;
and no other significant vendor obligations exist. Any revenue associated with
contracts having multiple elements is deferred and recognized ratably over the
period of the contract unless clear evidence exists with respect to the fair
value of each separate element of the contract. Fair value for each separate
element is evidenced by existing customer contract which stipulate rates
associated with separate yet similar services or deliverables. In addition,
contracts involving significant modifications or customization of the software
sold are accounted for under the guidelines of contract accounting.

Customer support revenues consist of revenue derived from contracts to
provide post contract support, such as maintenance and service support, to
license holders. The revenues are recognized ratably over the term of the
contract.

Revenues from software licensing royalties related to the sale of the product
in which the Company's technologies have been embedded are recorded as earned.
Software licensing royalties are included in fees from licensing and
implementation.

Revenues from Oztime product contracts and consulting and
engineering services are recorded in other product revenue are recognized using
the percentage of completion method, whereby revenue is recorded at the
estimated realizable value of work completed to date and costs incurred to date
are compared to total estimated contract costs to determine whether a loss will
be realized. Amounts received in advance are recorded as deferred revenue.
Estimated losses on contracts are recognized when they become known. Other
product revenue recorded by the Company is mainly comprised of revenue for the
e-Learning business segment and this revenue is recognized through the
percentage of completion method as previously described.

Revenues from Archer consist primarily of tuition and fees
derived from courses taught in Archer's colleges, schools, and training centers.
Revenues from tuition fees are recognized pro-rata (on a straight-line basis) on
a monthly basis over the relevant period attended by the student of the
applicable course or program. If a student withdraws from a course or program,
the paid but unearned portion of the student's tuition is refunded. Refunds are
calculated and paid in accordance with applicable provincial law and accrediting
agency standards for refund policies. Textbook sales and other revenues are
recognized as sales occur or services are performed and represent less than 10
percent of total revenues. Prepaid tuition is the portion of payments received but not
earned and is reflected as a current liability in the accompanying consolidated
balance sheets, as such, amounts are expected to be earned within the next year.

34

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Stock-Based Compensation Plan

As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", regarding the accounting for the grant of employee and director
stock options, the Company has elected to use the intrinsic value method,
following Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. Under APB No. 25,
companies are not required to record any compensation expense relating to the
grant of options to employees or directors where the awards are granted upon
fixed terms with an exercise price equal to fair value at the date of grant and
the only condition of exercise is continued employment. The Company accounts for
restricted stock units ("RSU's") in accordance with SFAS No. 123, whereby the
intrinsic value method is used and the related compensation expense is
recognized over the vesting period.

The Company has a stock-based compensation plan, which is
further described in note 9 to the Company's audited consolidated financial
statements. The Company has elected to account for stock options by measuring
compensation expense as the excess, if any, of the quoted market value of the
stock at the date of grant over the exercise price. Any consideration paid by
employees on exercise of stock options or purchase of stock is credited to share
capital. If stock or stock options are repurchased from employees, the excess of
the consideration paid over the carrying amount of the stock or stock option
cancelled is charged to retained earnings.

Operating Results

Net Loss

In 2005, the Company's net loss widened to $5.3 million or $0.12 per share
compared to $2.4 million or $0.06 per share in the previous year.

Total revenue for 2005 was $11.4 million, a decrease of 15 percent or $2.0
million over 2004. The Company believes that significant shifts are occurring
within the mobile phone market. Consolidation of OEM's and ODM's, together with
certain participants exiting the industry altogether, are resulting in the major
OEM's gaining greater global market share, largely at the expense of other
industry participants. Historically, Zi's customers have been predominantly
smaller, Asia-based OEM's.

Revenue from Zi Technology and its text input applications
was $10.6 million compared to $12.9 million for 2004. The decline in revenue is
due principally to the decline in revenue from mid-sized accounts and
non-recurring professional services revenue. Other product revenue from
e-Learning was $0.8 million for 2005 compared to $0.5 million a year ago. In
2005, Zi earned royalties from 72 eZiText licensees compared to 57 in the same
period a year earlier.

Included in the 2005 reported loss is a $1.4 million gain on
settlement of litigation against former legal counsel and $250,000 related to
the impairment of a note receivable from MLG, a 40 percent owned affiliate of
the company which ceased operations in July 2005. The 2005 net loss also
reflects higher legal fees and research and development costs, as discussed in
this

In 2004, the net loss was $2.4 million or $0.06 per share
compared to $2.9 million or $0.08 per share in the previous year. Included in
the 2004 reported loss is $2.0 million related to the impairment of a note
receivable from MLG, and $1.4 million related to non-cash compensation expense
pertaining to the issuance of RSU's to a senior officer and non-employee stock
options. Excluding the $2.0 million impairment of the MLG note receivable as
described in note 3, "Acquisitions and Dispositions" to the Company's
consolidated financial statements for the year ended December 31, 2004 and the
$1.4 million non-cash compensation expense, the Company would have recorded a
profit for 2004 of approximately $1 million. This is a non-GAAP measure which
management believes is a useful measure of performance because the impairment
charge is a non-recurring item and non-cash compensation expense was
significantly affected by a large and relatively infrequent grant of RSU's,
rather than reflective of the operations of the Company.

35

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The increase in net loss of $7.5 million in 2005 over 2004,
on a similar non-GAAP basis, was due to: lower revenue of $2.0 million and a
lower gross margin of $2.2 million; increase in product research & development
expense of $1.9 million (as a result of an acquired business and lower levels of
capitalization of product development costs); increased legal and litigation of
$0.8 million, much of which is related to, as discussed later, the University of
Texas action against manufacturers of cell phones, and a major shareholder's
activism; increased depreciation and amortization of $0.2 million; a tax
provision related to a Chinese subsidiary of $0.7 million; and an increase in
selling, general & administration costs ("SG&A") of $1.9 million (reflecting the
RSU and non-employee compensation expense discussed above) offset by an increase
in interest income and other items of $0.3 million.
During 2004, the continued growth of Zi's customer base and
the increase in licensees' products delivered to market has resulted in an
increase in revenue from our core technology business of 30 percent to $12.9
million over 2003 revenue of $9.9 million. Revenue from all segments increased
26 percent to $13.4 million from $10.6 million in 2003. The increase is
primarily due to Zi's growing customer base with 81 customers contributing to
revenue compared to 69 in 2003 and 57 of these customers paying royalties in
2004 compared to 45 in 2003.
Included in the 2004 reported loss is $2.0 million related to
the impairment of a note receivable from MLG and $1.4 million related to
non-cash compensation expense pertaining to the issuance of RSU's to a senior
officer and non-employee stock options. Excluding the $2.0 million impairment of
the MLG note receivable as described in note 3, "Acquisitions and Dispositions",
to the Company's consolidated financial statements for the year ended December
31, 2004 and the $1.4 million non-cash compensation expense, the Company would
have recorded a profit for 2004 of approximately $1 million, a $3.4 million
improvement compared to 2003 on a similar basis. This is a non-GAAP measure
which management believes is a useful measure of performance because the
impairment charge is a non-recurring item and non-cash compensation expense was
significantly affected by a large and infrequent grant of RSU's, rather than
reflective of the operations of the Company. The results of 2003 include
$516,000 of non-cash compensation expense.
The reduced net loss of $3.4 million (non-GAAP as discussed
above) in 2004 from 2003 was accomplished by the continued focus on the
Company's core Zi Technology business segment with added emphasis on increasing
our sales focus on markets outside of Asia, increasing our investment in new
language software databases and controlling SG&A. Other contributing factors to
the year over year decrease in the net loss were decreased amortization from
lower remaining unamortized capital assets costs and decreased interest expense
as a result of the repayment of all outstanding debt in July of 2004. For 2004,
the loss by segment and principal item was: $4.3 million operating profit from
the Zi Technology business segment; $2.7 million operating loss from the
e-Learning business segment, and; a $4.0 million in operating loss for other
corporate costs.
In 2003, the Company significantly reduced its net loss to
$2.9 million from $25.2 million in 2002. This was accomplished by the continued
focus on the Company's core Zi Technology business segment with added emphasis
on reducing SG&A and research and development costs. During 2003, continued
growth of Zi's customer base and the increase in licensees' models delivered to
market resulted in an increase in revenue from our core technology business of
53 percent to $9.9 million over 2002 revenue of $6.5 million. Revenue from all
segments increased 26 percent to $10.6 million from $8.4 million in 2002.
Excluding 2002 revenue from Magic Lantern of $1.6 million, which was sold in
November 2002, the year over year increase is $3.8 million or 56 percent. The
increase is primarily due to Zi's growing customer base with 69 customers
contributing to revenue compared to 47 in 2002 and 45 of these customers paying
royalties in 2003 compared to 30 in 2002.
Other contributing factors to the year over year decrease in
the net loss were the absence of discontinued business segments and write offs
associated with impairment of intangible assets and reducing litigation and
judgment settlement costs as experienced in 2002. For 2003, the loss by segment
and principal item was: $1.9 million operating profit from the Zi Technology
business segment; $0.8 million operating loss from the e-Learning business
segment, and; a $3.4 million in operating loss for other corporate costs.RevenueTotal revenue for 2005 was $11.4 million, a decrease of 15 percent or $2.0
million over 2004. Revenue from Zi Technology and its text input applications
was $10.6 million compared to $12.9 million for 2004. The decline in revenue is
due principally to year over year declines in license revenue from mid-sized
accounts and non-recurring professional services revenue. Other product revenue from e-Learning was $0.8 million for 2005 compared to
$0.5 million a year ago.

36

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In 2005, Zi earned royalties from 72 eZiText licensees
compared to 57 in the same period a year earlier. During 2005, 196 new handset
models embedded with eZiText were released into the market, bringing the total
at December 31, 2005 to 1,000 compared to 804 a year earlier. The Company has
increased its market penetration and is reducing its concentration in the Asian
market through new devices introduced by Zi's customers into the North American
and European markets.
During 2004, the continued growth of Zi's customer base and
the increase in licensees' products delivered to market resulted in an increase
in revenue from our core technology business of 30 percent to $12.9 million over
2003 revenue of $9.9 million. Revenue from all segments increased 26 percent to
$13.4 million from $10.6 million in 2003. The increase was primarily due to Zi's
growing customer base with 81 customers contributing to revenue compared to 69
in 2003 and 57 of these customers paying royalties in 2004 compared to 45 in
2003.
License and implementation fees reflect royalties earned from
57 eZiText licensees in 2004, compared to 45 licensees in the same period a year
earlier. During 2004, 406 new handset models embedded with eZiText were released
into the market, bringing the total at December 31, 2004 to 804 compared to 398
a year earlier. The Company increased its market penetration and reduced its
concentration in the Asian market through new devices introduced by Zi's
customers into the North American and European markets.
During 2003, continued growth of Zi's customer base and the
increase in licensees' models delivered to market resulted in an increase in
revenue from our core technology business of 53 percent to $9.9 million over
2002 revenue of $6.5 million. Revenue from all segments increased 26 percent to
$10.6 million from $8.4 million in 2002. Excluding 2002 revenue from Magic
Lantern of $1.6 million, which was sold in November 2002, the year over year
increase is $3.8 million or 56 percent. The increase was primarily due to Zi's
growing customer base with 69 customers contributing to revenue compared to 47
in 2002 and 45 of these customers paying royalties in 2003 compared to 30 in
2002.
In 2003, revenue rose $2.2 million to $10.6 million or 26
percent over 2002. License and implementation fees increased $3.4 million to
$9.9 million in 2003, or 53 percent over 2002. Other product revenue of $0.7
million relates to our e-Learning business segment and decreased by $1.3 million
compared to 2002 due primarily to the sale of Magic Lantern in November 2002.
Adjusting 2002 other product revenue to exclude $1.6 million related to Magic
Lantern, other product revenue rose $0.4 million or 118 percent to $0.7 million
in 2003. This increase is attributable to an increase in Oztime revenue.
License and implementation fees reflect royalties earned from
45 eZiText licensees in 2003, compared to 30 licensees in the same period a year
earlier. During 2003, 182 new handset models embedded with eZiText were released
into the market, bringing the total at December 31, 2003 to 398 compared to 216
a year earlier.Cost of Sales & Gross MarginGross margin on revenue was $10.8 million for 2005, a
decrease of 17 percent from last year's level of $12.9 million. Cost of sales
includes the allocation of engineering expenditures associated with projects
carried out to modify existing products to meet specific customer requirements.
As a percentage of revenue, gross margin for 2005 decreased slightly to 95
percent of revenue compared to 97 percent in the same period of the prior year.
Gross margin from license and implementations fees in 2005 remained constant at
97 percent of revenue as compared to 2004.
In 2004, gross margin increased $2.8 million to $12.9
million, or 27 percent over the 2003 level. As a percentage of revenue gross
margin increased to 97 percent from 96 percent in 2003. Gross margin from
license and implementations fees in 2004 increased to 97 percent of revenue as
compared to 96 percent for 2003. This is due to the fact that in both years more
of the revenue was royalty based than services based.
In 2003, gross margin increased $2.8 million to $10.2
million, or 38 percent over the 2002 level. As a percentage of revenue, gross
margin increased to 96 percent from 87 percent in 2002. Gross margin from
license and implementations fees in 2003 remained unchanged at 96 percent of
revenue from 2002.

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Selling, General and Administrative ExpensesSG&A increased $0.6 million or six percent to $9.9 million in
2005 over 2004. SG&A includes costs associated with operations of the recently
acquired Decuma Handwriting Recognition technology, costs associated with
Sarbanes-Oxley Act ("SOX") and other compliance work and realized foreign
exchange losses. Offsetting these increases over 2004 was the absence of $1.4
million of RSU and non-employee stock option costs incurred in 2004.
SG&A increased $1.1 million or 14 percent to $9.3 million in 2004 over 2003.
The primary reason for the increase was non-cash compensation expense related to
the issuance RSU's and non-employee stock options of $1.4 million.
SG&A decreased $3.2 million or 28 percent to $8.2 million in
2003 over 2002. The decrease is principally attributable to the reduction of
$2.1 million as a result of the sale of Magic Lantern operations in November
2002. As well, SG&A decreased due to the continued efforts by management to
rationalize operations to effect a more competitive and profitable structure and
by concentrating resources in the Company's core technology business.LegalLegal costs for 2005 increased $0.8 million to $1.7 million compared to 2004.
Legal costs increased, in part, due to defense costs related to the University
of Texas action against certain of the Company's clients and a major
shareholder's activism. As discussed later, the Board of Regents of the
University of Texas System filed proceedings against numerous manufacturers of
cell phones (of whom two of the remaining defendants are or were customers of Zi
in the United States) alleging that use of their products infringed a now
expired U.S. patent. As well, during 2005 a significant shareholder of the
Company commenced actions to appoint its nominees to the Board of Directors of
the Company, using shares that were allegedly illegally acquired and not in
accordance with Alberta law or regulatory rules. Legal costs for 2004 decreased
$0.1 million to $0.8 million compared to 2003. The Company continued to incur
costs related to ongoing patent related work and costs related to corporate
securities continuous reporting requirements.
Legal costs for 2003 decreased $6.6 million to $0.9 million
compared to 2002. The decrease in legal fees is related primarily to the
settlement in 2002 of the patent litigation as discussed in note 13, "Contingent
Liabilities" to the Company's December 31, 2002 audited consolidated financial
statements.Product Research and Development ExpenseIn 2005, product research and development expense increased
$1.9 million to $4.2 million, compared to 2004. Gross expenditures on product
development (expenditures before capitalization of costs related to new product
development) increased by $1.2 million to $5.2 million, reflecting investment in
new product features and enhancements to software language databases, and costs
associated with the newly acquired Decuma Handwriting Recognition technology. In
2005, the Company capitalized $0.9 million of software development costs
compared to $1.7 million for the same period in 2004. The costs capitalized
during these periods were related principally to software development to develop
new and improved language database software.
Product research and development expense increased to $2.4
million in 2004 from $2.1 million in 2003. Product research and development
costs relate to, among other things, the development of new but not yet
commercialized products and the ongoing cost of development and enhancement of
products that are already in the market and available for sale. In the year,
gross expenditures on product development increased by $1.7 million to $4.0
million reflecting the Company's focused efforts on developing language database
software. In 2004, the Company capitalized $1.7 million in software development
costs as compared to $0.2 million in 2003.
Product research and development expense decreased to $2.1
million in 2003 from $2.8 million in 2002. Product research and development
costs relate to the development of new, but not yet commercialized products and
the ongoing cost of development and enhancement of products that are already in
the market and available for sale. In the year, gross expenditures on product
development decreased by $0.9 million to $2.3 million. In 2003, the Company
capitalized $0.2 million in software development costs as compared to $0.5
million in 2002.

38

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Depreciation and Amortization

Depreciation and amortization increased in 2005 by $0.2
million to $1.1 million, compared to $0.9 million in 2004. The increase in
depreciation and amortization was due to increased levels of unamortized
software development costs. Depreciation related to capital assets decreased due
to lower levels of undepreciated capital assets.

Depreciation and amortization decreased in 2004 by $0.5
million to $0.9 million from $1.4 million in 2003. The decrease is due to the
decrease in remaining unamortized eZiText related deferred software development
costs and decreased depreciation related to unamortized leasehold improvements.

Depreciation and amortization decreased in 2003 by $0.8
million to $1.4 million from $2.2 million in 2002. The decrease is due to the
lower remaining unamortized eZiText related deferred software development costs
and decreased depreciation related to unamortized leasehold improvements.

Impairment of Note Receivable

In April 2005, upon representation by MLG that it was
pursuing strategic alternatives to address its difficulties, the Company
advanced $250,000 to MLG under a secured loan agreement. The terms of the
agreement require repayment on demand and provide the Company with a security
interest in the assets of MLG. At June 30, 2005, the Company evaluated the note
receivable for impairment and determined that subject to SFAS No. 114,
"Accounting by Creditors for Impairment of Loan", using a projected discounted
cash flow model at the loan's effective interest rate, the full amount of the
note receivable including accrued interest was impaired and was therefore
provided for. At the time of the impairment, MLG was under a going concern
qualification and subject to ongoing operating cash requirements, continued
operating losses and other debt to which the Company is subordinate. Due to
these factors and the decision of Zi's Board of Directors to not provide further
funding to MLG, it was probable that MLG would not have the necessary funds
available to meet the requirements under the note, including accrued interest.
Interest due on the note has not been accrued but will be recognized only upon
payment by MLG of such interest.

MLG ceased operations in July 2005, later citing a
substantial slowdown in operations, an inability to raise sufficient capital and
successfully market the company's product line. MLG has commenced voluntary
liquidation and wind down procedures. The Company does not expect to recover any
funds from this process and had previously provided for impairment of amounts
due from MLG.

At December 31, 2004, the Company evaluated the $2.0 million
note receivable for impairment and determined that subject to SFAS No. 114,
"Accounting by Creditors for Impairment of Loan", using a projected discounted
cash flow model at the loan's effective interest rate, the full amount of the
note receivable including accrued interest was impaired and was provided for. At
the time of the impairment, MLG was under a going concern qualification and
subject to ongoing operating cash requirements, continued operating losses and
other debt to which the Company is subordinate. Due to those factors and the
absence of private placements originally anticipated by MLG to occur in the
fourth quarter of 2004, it was probable that MLG would not have the necessary
funds available to meet the requirements under the note, including accrued
interest. Interest due on the note has not been accrued but will be recognized
only upon payment by MLG of such interest.

Interest and Other Income

Interest and other income increased to $0.4 million in 2005
from $0.1 million in 2004 as the Company maintained its cash position throughout
2005 and ended the year with $12.2 million as compared to a cash position of
$12.9 million at December 31, 2004. The Company completed a CDN$10 million
private placement in July 2004 and previous to that held minimal cash. The
Company used cash in the amount of $1.1 million in 2005.

39

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Interest and other income increased to $0.1 million in 2004
from $23,483 in 2003 as the Company's cash position improved from minimal cash
and periods of indebtedness throughout most of 2003 to a cash position of $12.9
million at December 31, 2004. The Company completed a CDN$10 million private
placement in July 2004 and generated positive cash inflow for the year of $0.9
million.
The reduction in interest income to $23,483 in 2003 from $0.2
million in 2002 is due to the Company's overall indebtedness throughout most of
2003. Cash resources were used to meet ongoing operating cash usage requirements
and to repay outstanding debt obligations.Interest ExpenseOther interest expense and interest on long-term debt for
2005 remained relatively unchanged compared to 2005. Interest on long-term debt
relates to interest on capital lease obligations. These obligations relate to
the purchase of computer and communications equipment.
Other interest expense decreased $0.6 million to $30,839
reflecting repayment of the $1.0 million demand credit facility in July 2004
from the proceeds of a private placement. In 2003, other interest expense
included interest paid and financing fees amortized on a note payable of $3.3
million until its refinancing on May 7, 2003 and on $1.9 million until June 20,
2003 after which it was repaid. Interest on long-term debt in 2004 represents
interest on capital lease obligations. Other interest expense increased $0.5
million to $0.6 million reflecting interest paid and financing fees amortized on
a note payable of $3.3 million until its refinancing on May 7, 2003 and on $1.9
million until June 20, 2003 after which it was repaid. Interest on long-term
debt in 2003 represents interest on capital lease obligations.

Income Tax Expense

As an international company subject to income tax rates in
different countries, Zi's consolidated effective tax rate is the blend of
varying rates on pre-tax profits and losses in several tax jurisdictions.
Utilization of previous years' tax loss carryforwards, changes in income sources
and applicable rates result in fluctuations in the effective tax rate. In 2005,
2004 and 2003, Zi incurred losses for tax purposes, except as discussed below
for a Chinese subsidiary, the benefit of which has not been reflected in these
financial statements. A valuation allowance equivalent to the full value of the
deferred tax assets of $18.3 million is reflected in the consolidated financial
statements.

Zi has aggregate tax loss carryforwards of approximately
$72.0 million, which can be applied against future years' taxable income in
their respective jurisdictions. Taxable income earned by Zi's foreign
subsidiaries is subject to the Canadian foreign affiliate rules. For Canadian
companies, there is no additional Canadian income tax on repatriated profits
from active business operations in countries with which Canada has a tax treaty.

According to PRC tax law, those Foreign Investment Entities
("FIE") established in China that are involved in "productive" activities are
entitled to tax holidays and tax reductions. These FIE tax benefits include a
two-year tax holiday followed by a 50 percent reduction of the otherwise
applicable tax rate for the following 3 years. Our Zi Technology subsidiary
Huayu Zi Software Technology (Beijing) Co. Ltd. ("Huayu Zi") has been
categorized as a productive-type FIE in all its PRC statutory filings, including
in its routine filings to tax authorities. As a result, the Company had not
accrued income tax related to 2004 and the first quarter of 2005 even though tax
losses from previous tax years had expired.

Recently, PRC tax authorities tightened the scope of FIE tax
incentives and narrowed the tax-free/reduction entitlement to only those who are
engaged in productive activities or are engaged in "encouraged" industries.
Recent changes to the operations of Huayu Zi have resulted in decreases in its
current research and development spending and revenues generated from productive
activities (as defined under the FIE guidelines) are below the stipulated levels
now required to qualify as a FIE eligible for the tax holidays and reductions.
As confirmed in December 2005 by the PRC tax authorities, Huayu Zi no longer
qualifies as a productive type FIE and is not eligible for the tax holidays and
tax reductions. In 2005, Huayu Zi made provision for income taxes payable as a
result of no longer having prior years' tax losses available and the uncertainty
associated with qualifying for statutory tax relief. The Company has included in
the current periods income tax expense $131,113 related to the 2004 tax year and
$556,402 related to the 2005 tax year and is seeking a resolution to the matter
for the future.

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Net LossZi's net loss increased to $5.3 million in 2005 from $2.4 million in 2004.
The increase in the net loss of $2.9 million was due to:
$0.2 million increase in depreciation and amortization;
  $2.2 million decrease in gross margin;
  $0.6 million increase in SG&A;
  $0.8 million increase in legal;
  $1.9 million increase in product research and development expense, and;
  $0.7 million increase in income taxes, offset by;
  $0.1 million decrease in interest expense;
  $1.8 million decrease in impairment of note receivable;
  $1.4 million of gain on settlement of litigation, and;
  $0.2 million increase in interest and other income.Zi's net loss decreased to $2.4 million in 2004 from $2.9 million in 2003.
The decrease in the net loss of $0.5 million was due to:
$0.5 million decrease in depreciation and amortization;
  $0.5 million decrease in interest expense;
  $0.1 million increase in interest and other income, and;
  $2.8 million increase in gross margin, offset by;
  $1.1 million increase in SG&A;
  $0.3 million increase in product research and development expense, and;
  $2.0 million impairment of note receivable.Zi's net loss decreased to $2.9 million in 2003 from $19.5 million in 2002.
The decrease in loss of $16.6 million was due to:
$3.2 million increase in SG&A costs;
  $0.7 million increase in product research and development expense;
  $6.6 million decrease related to legal expenditures;
  $0.9 million increase in depreciation and amortization;
  $1.3 million decrease due to no impairment of goodwill charge;
  $1.5 million decrease due to no impairment of intangible assets charge;
  $0.2 million decrease due to no loss from equity of significantly
  influenced company, and;
  $2.8 million increase in gross margin, offset by;
  $0.4 million increase in interest expense, and;
  $0.2 million decrease in interest income.Impact of Inflation and Changing PricesInflation is not a major factor affecting operations.Foreign CurrencyAll non-U.S. operations of the Company are translated into
U.S. dollars for financial statement presentation. Consequently, movements in
exchange rates may have a significant impact on financial results. Substantially
all of the Company's product revenues are denominated in U.S. dollars while
expenses are denominated in Canadian dollars, Hong Kong dollars, U.S. dollars,
Swedish Kronor and Chinese Renminbis. Based on the 2005 distribution of revenues
and cash flows, a one percent change in the U.S. dollar relative to all other
named currencies is estimated to affect revenues by nil and expenses by
$118,853.

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Impact of Governmental Policies and Other Factors on Operations and
InvestmentsZi Corporation operates primarily in Canada, the United
States of America, China, Sweden and Hong Kong. The market for the Company's
products includes all of the developed and many of the less developed countries
in the world. Accordingly changes in governmental trade, fiscal and other
policies could have an impact on sales and on the ability of the Company to
transfer funds and/or manage foreign operations.B.
Liquidity and capital resources.

Financial Condition and Liquidity

At December 31, 2005 Zi had cash and cash equivalents of $12.2 million. The
objective of Zi's investment policy for funds is to preserve capital and
maintain short-term liquidity while earning reasonable investment returns.

At December 31, 2004 Zi had cash and cash equivalents of $12.9 million. At
December 31, 2003 Zi had cash and cash equivalents of $2.4 million.

Cash Requirements Outlook

During the past three years, the Company's cash requirements
have been met through revenues from operations, proceeds from issuance of common
shares, through private placements and the exercise of common share purchase
warrants and options.

Net cash utilized by the Company in 2005 was $1.1 million.
The principal uses of funds were to invest in new product development, invest in
Decuma operations in Sweden, fund the e-Learning business segment, and fund
ongoing litigation related to a shareholder's activism.

Net cash generated by the Company in 2004 was $0.9 million.
Cash generated from operations was a result of increasing sales revenue while
maintaining SG&A levels offset by investing in new product development and
repayment of all outstanding debt.

Net cash utilized by the Company in 2003 was $1.3 million. The principal uses
of funds were to pay installments due under a litigation settlement and fund the
e-Learning business segment.

Capital requirements in 2006 include funding of continued new
product development and enhancements to existing products. At current revenue
and expense levels, the Company is able to fund its continued operations and
meet its current obligations.

On December 19, 2003, the Company borrowed $1,000,000 through
the issuance of a demand loan payable. The note payable bore interest at the
prime rate plus one percent payable monthly. The facility was secured by a first
security interest in 5,000,000 shares of MLG, held by the Company. On July 20,
2004, the Company repaid this loan.

On December 6, 2002, the Company settled a judgment in favour
of AOL, as discussed in note 13, "Contingent Liabilities" to the Company's
December 31, 2002 audited consolidated financial statements. Under the terms of
the settlement agreement, the Company paid, among other things, a remaining
$0.75 million on January 2, 2004.

Operating Activities

Cash applied to operations in 2005 was $1.1 million as
compared to cash generated from operations of $0.9 million in 2004. The $2.0
million year over year decrease in cash flow from operations was due to an
increase in net loss of $2.9 million, adjusted for a decrease in non-cash items
of $2.9 million and a decrease of $3.8 million in non-cash working capital.

In 2005, non-cash working capital generated $2.8 million in
cash. This was due to an increase in accounts payable and accrued liabilities at
December 31, 2005 of $0.1 million, a decrease in accounts receivable by $1.7
million and an increase in deferred revenue of $1.0 million. The increase in
accounts payable and accrued liabilities relates to an increase in income taxes payable in PRC, the decrease in accounts receivable
relates to the collection of a significant customer receivable that was
outstanding at December 31, 2004, and the increase in deferred revenue relates
to the same significant customer that at December 31, 2005 had a larger amount
of revenue that was unrecognized.

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Cash generated from operations in 2004 was $0.9 million as
compared to cash applied to operations of $1.3 million in 2003. The $2.2 million
year over year increase in cash flow from operations was due to a decrease in
net loss of $0.5 million, adjusted for an increase in non-cash items of $2.3
million offset by an increase of $0.6 million in non-cash working capital.
In 2004, non-cash working capital used $1.0 million in cash.
This was due to the decrease in accounts payable at December 31, 2004 of $1.0
million and the increase in accounts receivable by $1.6 million partially offset
by an increase in deferred revenue of $1.6 million. The decrease in accounts
payable relates to payment of an accrued settlement. The increase in accounts
receivable relates to the signing of a significant customer contract in the
fourth quarter of 2004 while other license and implementation revenue remained
constant year over year.
Cash applied to operations in 2003 decreased to $1.3 million
from $13.0 million in 2002. The $11.7 million year over year decrease in cash
applied to operations was due to a decrease in net loss of $16.6 million,
adjusted for a decrease in non-cash items of $3.3 million offset by an increase
of $1.6 million in non-cash working capital.
In 2003, non-cash working capital used $0.4 million in cash.
This was due to the decrease in accounts payable at December 31, 2003 of $0.2
million and an increase in accounts receivable by $1.2 partially offset by an
increase in deferred revenue of $0.6 million and a decrease in work in process
and prepaid expenses of $0.3 million. The decrease in accounts payable relates
to accrued settlement and representation costs. The increase in accounts
receivable relates to a higher volume of revenue in the fourth quarter of 2003
over the same quarter of the prior year.Financing ActivitiesThe Company has financed its operating and investing activities during the
last three years principally as follows:

|Year | Method of financing                                                                                                                                                         | Amount                                                     
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------
|2005 | Issuance of common shares pursuant
        to exercise of stock options and warrants
        Bank indebtedness                                                              | $ 2.3 million
        $ 0.1 million                        
|2004 | Issuance of common shares pursuant
        to a private placement and exercise of stock options
        Settlement of notes payable                                         | $ 12.2 million
        $ (1.0) million                     
|2003 | Issuance of common shares pursuant
        to a private placement and exercise of stock options
        Issuance of demand note payable
        Settlement of notes payable | $ 2.9 million
        $ 1.0 million
        $ (3.3) million

Investing Activities

Cash used in investment activities in 2005 and 2004 was $1.9
million. The changes in cash used in investing activities in 2005 from 2004 are
from the Company's purchase of Archer and the assets related to the Decuma
Handwriting Recognition technology of $0.4 million, increased costs to update
the Company's capital assets of $0.1 million and a $250,000 advance to MLG,
offset by a decrease in capitalized software development costs of $0.7 million.
The Company continues to invest in new products, new product features, new
software language data bases and enhancements to existing software language
databases. In 2005, the Company capitalized $0.9 million in software development
costs as compared to $1.7 million in 2004.

On January 26, 2005, the Company purchased the assets of
Decuma AB ("Decuma"), a Swedish company specializing in developing and marketing
handwriting recognition software. The Decuma purchase is part of Zi's long term
expansion strategy of developing software to further simplify and enhance the
use of wireless devices. Decuma's Handwriting Recognition technology is an
important complement to Zi's eZiText and eZiTap solutions. The combination of
the technologies is intended to further bolster the Company's competitive
advantage and increase Zi's market share by enabling us to deliver an expanded
suite of innovative products to customers. The Company has accounted for the
purchase under the purchase method of accounting, and accordingly, included
the results of operations of Decuma in the consolidated operating result of the
Company from the date of acquisition. As part of the acquisition, the Company
acquired Decuma's intellectual property and customer agreements. Amounts
assigned to intangible assets were supported through discounted cash flow
analyses. Patents and trademarks are amortized over 11 years. Customer
agreements are amortized over the remaining life of the agreement (up to 55
months). The purchase price consideration included 146,929 common shares of the
Company with a value of $1.0 million, cash consideration of $175,254 to settle
certain working capital related adjustments and other costs and fees related to
the purchase in the amount of $281,348 for a total acquisition cost of
$1,456,602.

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The Company's ownership of Archer shares resulted primarily
from the sale of its Oztime and EPI subsidiaries to Archer, a related party. At
December 31, 2005, the Company held 53.2 percent of the outstanding shares of
Archer. As a result of certain third party Archer share subscription agreements
that did not close until after the end of Zi's financial year end (resulting in
44.8 percent ownership of Archer by Zi), Zi has accounted for its investment in
Archer as a purchase under the purchase method of accounting, including its
results from December 21, 2005 (the date of acquisition) to December 31, 2005
and its assets and liabilities, net of minority interest at December 31, 2005.
Archer was incorporated in February 2005 for the purpose of
acquiring a number of educational learning institutions in Canada. Prior to the
completion of the Archer acquisition of Oztime and EPI, Zi held 24.9 percent of
Archer's shares, acquired through share subscription agreements in 2005.
Consequently, Zi is a related party to Archer.
Under the sale agreements, Zi received 6,140,000 million
shares of Archer, including contingent consideration of 1,000,000 shares placed
in escrow and a $125,000 note receivable related to post closing working capital
adjustments. The release of the escrowed shares is subject to performance
criteria requiring revenues earned through Oztime related operations, from the
date of purchase to December 31, 2006, be $2,950,000 or more. The Company
determined there was uncertainty that Oztime's revenues related to its
operations would achieve the performance criteria and as such the contingent
consideration was not considered as part of the sale proceeds.
Subsequent to year end, Zi's interest in Archer was diluted
to 44.8 percent (as of March 6, 2006). As such, the accounting treatment for
Zi's investment in Archer as at March 31, 2006 will reflect Archer as a
significantly influenced subsidiary. The Company intends to deconsolidate the
results of Archer in the first quarter of 2006 since it no longer absorbs a
majority of the entity's expected losses or residual returns, in the case of a
VIE, and no longer has the ability to exert control over this subsidiary.
In 2004, cash used in investing activities was $1.9 million,
as compared to $0.4 million in 2003. The increase of $1.5 million in 2004 over
2003 of cash used in investing activities is due to the Company's focused
efforts on developing new and improved language database software in 2004. In
2004, the Company capitalized $1.7 million in software development costs as
compared to $0.2 million in 2003.
In 2003, cash used in investing activities was $0.4 million,
as compared to $2.7 million of cash generated from investing activities in 2002.
Adjusted for short-term investments, this balance decreased $5.4 million to 2.7
million of cash used in investing activities in 2002. The decrease of $2.3
million in 2003 over 2002 cash used in investing activities, after adjusting for
short-term investments, is due to no acquisitions or dispositions of
subsidiaries related activity in 2003 and decreased investment in software
development and capital assets as compared to 2002 activity.Commitments and Contractual ObligationsAs at December 31, 2005, Zi has long-term debt, capital lease
obligations and deferred inducements received upon entering into new office
leases in 2002. As part of the consideration for the acquisition of Archer,
long-term liabilities include two loans payable to former shareholders of two
subsidiaries of Archer in the amount of $81,255 and $66,423, respectively. These
loans will be paid when Archer achieves net profits calculated on a quarterly
basis for the consolidated Archer group of companies. The loans do not bear
interest and have no specific repayment terms other than the aforementioned.

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Under the Private Vocational Schools Act for the Province of
Ontario, Section 9 of Regulation 939, all institutions conducting or operating a
private vocational school must be accompanied by a bond. Such bond can be
obtained from a guarantee company approved under the Guarantee Companies
Securities Act and it is non-negotiable and non-transferable. Two schools owned
by Archer operate under this regulation and have bonds totaling $55,890 with a
recognized guarantee company.
During 2004 and 2003, we entered into leases for computer
equipment with payment terms over three years. The obligation, including the
current portion, totaled $9,378 at December 31, 2005. The future minimum lease
payments under the capital leases are as follows:

2006
        $ 8,3182007
        1,874Total minimum lease payments
        10,192Amount representing interest
        814Amount included in current liabilities
        7,541$ 1,837




2006
        $ 1,161,1652007
        638,2022008
        119,4712009
        74,7552010
        37,377Total
        $2,030,970


Financial Instruments

At December 31, 2005, Zi had cash and cash equivalents of
$12.2 million. Surplus funds are held primarily in U.S. dollars and Chinese
renmimbis and are converted into Canadian dollars, Hong Kong dollars and Swedish
kronor as agreed between the head office and operating divisions in those
countries. The Controller, in consultation with the Chief Financial Officer and
within the objectives of the Company's investment guidelines, is responsible for
the day-to-day management of surplus funds. The objectives of Zi's investment
policy for surplus funds are to preserve capital and maintain short-term
liquidity while earning reasonable investment returns.

Zi has not entered into any arrangements to hedge its foreign exchange
requirements or its foreign assets.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that are required to be
disclosed.

C.

The Company's intellectual property may be grouped into the
following product areas: eZiText, eZiTap, eZiType, Decuma, Qix, educational
products and corporate materials. It includes patents, copyrights, trademarks,
domain names and trade secrets (people, technical know-how and documents).
Historically, most of Zi's research and development activity was dedicated to
text input technology.

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Research costs are expensed as incurred. Development costs
incurred prior to the establishment of the technological and financial
feasibility of a project are expensed as incurred. Software development costs,
including costs associated with coding and testing of project related software,
are capitalized subsequent to when the technological feasibility of a project is
established. Capitalized costs are amortized commencing in the period of the
products' commercial release using the straight-line method over the related
product's estimated economic life.
Expenditures for research and development costs, including deferred software
development costs, research and development expenses and for acquired IP during
the past three years are as follows:

R& D ($000's)2005
        $ 5,1732004
        $ 4,0122003
        $ 2,336


Research and development expenditures will depend upon our
available capital resources during the year ending December 31, 2006, and will
primarily relate to our research and development efforts on our eZiText, Decuma
Handwriting Recognition, eZiTap, eZiType and Qix technologies.

D.

Revenues and Expenses

For the years ended December 31, 2005, 2004 and 2003 our revenue by
geographical market and category consisted of:

RevenueLicense and implementation
          fees
          Other product revenue
          Total2005
        Canada(1)
        4,175,334
        $ 45,717
        $ 4,221,051China
        5,019,599
        724,753
        5,744,352USA(2)
        1,021,769
        -
        1,021,769Sweden(3)
        397,341
        -
        397,341Total
        $ 10,614,043
        $ 770,470
        $ 11,384,5132004
        Canada(1)
        $ 5,884,396
        $ 8,120
        $ 5,892,516China
        5,207,579
        496,093
        5,703,672USA(2)
        1,806,863
        -
        1,806,863Total
        $ 12,898,838
        $ 504,213
        $ 13,403,0512003
        Canada(1)
        $ 3,731,859
        $ 13,982
        $ 3,745,841China
        3,378,770
        670,088
        4,048,858USA(2)
        2,808,369
        -
        2,808,369Total
        $ 9,918,998
        $ 684,070
        $ 10,603,068


Notes:

> (1) The actual geographic markets for the products
>   licensed under licensing agreements between OEM's and Zi Corporation of
>   Canada, Inc. are in Asia and Europe.
>   (2) The actual geographic markets for products licensed under licensing
>   agreements between OEM's and Zi Corporation of America, Inc. are in Asia and
>   the United States.
>   (3) The actual geographic markets for products licensed under licensing
>   agreements between OEM's and Zi Decuma AB are in Asia and Europe.

46

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Total revenue for 2005 was $11.4 million, a decrease of 15 percent or $2.0
million over 2004. The Company believes that significant shifts are occurring
within the mobile phone market. Consolidation of OEM's and ODM's, together with
certain participants exiting the industry altogether, are resulting in the major
OEM's gaining greater global market share, largely at the expense of other
industry participants. Historically, Zi's customers have been predominantly
smaller, Asia-based OEM's.
Revenue from Zi Technology and its text input applications was $10.6 million
compared to $12.9 million for 2004. The decline in revenue is due principally to
the decline in revenue from mid-sized accounts and non-recurring professional
services revenue. Other product revenue from e-Learning was $0.8 million for
2005 compared to $0.5 million a year ago. In 2005, Zi earned royalties from 72
eZiText licensees compared to 57 in the same period a year earlier. In 2005, Zi
earned royalties from 72 eZiText licensees compared to 57 in the same period a
year earlier.
During 2004, the continued growth of Zi's customer base and
the increase in licensees' models delivered to market has resulted in an
increase in revenue from our core technology business of 30 percent to $12.9
million over 2003 revenue of $9.9 million. Revenue from all segments increased
26 percent to $13.4 million from $10.6 million in 2003. The increase is
primarily due to Zi's growing customer base with 81 customers contributing to
revenue compared to 69 in 2003 and 57 of these customers paying royalties in
2004 compared to 45 in 2003.
For 2003, the growth in commercialization of Zi's technology
in its core eZiText® related business generated a 53 percent increase in revenue
over that in 2002. License and implementation fees increased $3.4 million to
$9.9 million in 2003. The increase is primarily due to Zi's growing customer
base with 69 customers contributing to revenue compared to 47 in 2002 and 45 of
these customers paying royalties in 2003 compared to 30 in 2002.
The majority of our OEM customers' products, which have
implemented our eZiText product resulting in royalty-bearing eZiText enabled
products, have been sold in Asia and Europe. Many of our new OEM customers' and
existing OEM customers' products are now being sold outside of Asia including
being sold into the North American market. As more of our customers' products
enter the marketplace, we anticipate this trend to continue with respect to our eZiText product line. The Company's revenues are expected to grow as a result of
the acquisition of Decuma Handwriting Recognition software and the launch of
Zi's Qix user application interface product. The growth in revenues related to
these new product lines is dependant on their integration with existing products
and market acceptance.
In 2005, gross margin on revenue was $10.8 million, a
decrease of 17 percent from last year's level of $12.9 million. Cost of sales
includes the allocation of engineering expenditures associated with projects
carried out to modify existing products to meet specific customer requirements.
As a percentage of revenue, gross margin for 2005 decreased slightly to 95
percent of revenue compared to 97 percent in the same period of the prior year.
Gross margin from license and implementations fees in 2005 remained constant at
97 percent of revenue as compared to 2004.
In 2004, gross margin increased $2.8 million to $12.9
million, or 27 percent over the 2003 level. As a percentage of revenue, gross
margin increased to 97 percent from 96 percent in 2003. Gross margin from
license and implementations fees in 2004 increased to 97 percent of revenue as
compared to 96 percent for 2003. The high gross margin percentage is due to the
fact that in all three years more of the revenue was royalty based as opposed to
services based. This reflects the increased royalty-generating eZiText and
Decuma implementations on handset models now penetrating the market and the fact
that implementations have a higher cost of sales than royalties generated
through our licensees. The Company anticipates this trend to continue with
respect to our eZiText and Decuma product lines. As the new products, most
significantly Qix, will also be royalty based, we expect the trend of a high
gross margin related to sales to continue.
SG&A increased $0.6 million or six percent to $9.9 million in 2005 over 2004.
SG&A includes costs associated with operations of the recently acquired Decuma
Handwriting Recognition technology, costs associated with SOX and other
compliance work and realized foreign exchange losses. Offsetting these
increases over 2004 was the absence of $1.4 million of RSU and non-employee
stock option costs incurred in 2004.

47

---

SG&A increased $1.1 million or 14 percent to $9.3 million in
2004 over 2003. Adjusting for non-cash compensation expense related to the
issuance of RSU's and non-employee stock options of $1.4 million, SG&A increased
$0.3 million. This small increase is due to the continued efforts by management
to rationalize operations to effect a more competitive and profitable structure
and by concentrating resources in the Company's core technology business.
SG&A decreased $3.2 million or 28 percent to $8.1 million in
2003 over 2002. The decrease is partially attributable to the reduction of $2.2
million realized through the disposal of Magic Lantern operations in November
2002. As well, SG&A decreased due to the continued efforts by management to
rationalize operations to affect a more competitive and profitable structure and
by concentrating resources in the Company's core technology business.
With the addition of Decuma Handwriting Recognition
technology and the continuing compliance related costs associated with SOX, we
anticipate that the Company will continue to keep SG&A costs at or near current
year levels. Zi now has an SG&A cost base that will support further revenue
growth without significant expense increases. This means that even though we may
need to invest additional resources at times to meet specific revenue
opportunities, as we generate incremental revenue it will have an increasing
positive impact on future operating results. The acquisition of Decuma
Handwriting Recognition technology and the associated operating costs of running
a Swedish subsidiary added to SG&A costs in 2005. As this product's acceptance
in the market and its integration into Zi's other product lines are completed,
we expect revenue growth from new and existing customers.
Legal costs for 2005 increased $0.8 million to $1.7 million
compared to 2004. Legal costs increased, in part, due to defense costs related
to the University of Texas action against certain of the Company's clients, a
major shareholder's activism, costs from ongoing patent related work and costs
related to continuous reporting requirements. Legal costs for 2004 decreased
$0.1 million to $0.8 million compared to 2003. The Company continued to incur
costs related to ongoing patent related work and costs related to continuous
reporting requirements. Legal costs for 2003 decreased $6.6 million to $0.9
million compared to 2002. The decrease in legal fees is related primarily to the
settlement in 2002 of the patent litigation as discussed in note 13 "Contingent
Liabilities" to the Company's December 31, 2002 audited consolidated financial
statements. The Company anticipates that legal costs will remain constant at the
current year's level due to the continuation of legal proceedings related to a
major shareholder's activism, ongoing patent related work and securities related
continuous reporting requirements.
In 2005, product research and development expense increased
$1.9 million to $4.2 million, compared to 2004. Gross expenditures on product
development (expenditures before capitalization of costs related to new product
development) increased by $1.2 million to $5.2 million, reflecting investment in
new product features and enhancements to software language databases and costs
associated with newly acquired Decuma Handwriting Recognition technology. In
2005, the Company capitalized $0.9 million of software development costs
compared to $1.7 million for the same period in 2004. The costs capitalized
during these periods were related principally to software development to develop
language database software.
Product research and development expense increased to $2.4
million in 2004 from $2.1 million in 2003. In the year, gross expenditures on
new product development before capitalization increased $1.7 million reflecting
the Company's focused efforts on developing language database software. In 2004,
the Company capitalized $1.7 million in software development costs as compared
to $0.2 million in 2003.
Product research and development expense decreased to $2.1
million in 2003 from $2.8 million in 2002. Prior to 2003, our product research
and development expenses had increased over the prior three years. As eZiText
matures, we anticipate continued investment into developing enhanced and related
new technologies, and new language database software given the availability of
capital required to further finance those product research and development
activities. We will continue to invest in our new products, including
handwriting recognition and Qix. We anticipate that our research and development
spending will moderately increase over the 2005 level depending on the
availability of capital and resources required by specific revenue generating
opportunities.

48

---

Depreciation and amortization increased in 2005 by $0.2
million or 22 percent to $1.1 million, compared to $0.9 million in 2004. The
increase in depreciation and amortization was due to increased levels of
unamortized software development costs. Depreciation related to capital assets
decreased due to lower levels of undepreciated capital assets.
Depreciation and amortization decreased in 2004 by $0.5
million to $0.9 million from $1.4 million in 2003. The decrease is due to the
decrease in remaining unamortized eZiText related deferred software development
costs and decreased depreciation related to unamortized leasehold improvements.
Depreciation and amortization decreased in 2003 by $0.8
million to $1.4 million from $2.2 million in 2002. The decrease is due to lower
remaining unamortized eZiText related deferred software development costs and
decreased depreciation related to decrease unamortized leasehold improvements.
Given the increase in deferred software development costs and capital assets, we
anticipate that our depreciation and amortization expense will increase
moderately in 2006.
In 2005, the net loss was $5.3 million or $0.12 per share
compared to $2.4 million or $0.06 per share in the previous year. The increase
in net loss was due to lower revenue and a lower gross margin, an increase in
product research & development expense (as a result of an acquired business and
lower levels of capitalization of product development costs), increased legal
and litigation, much of which is related to a major shareholder's activism,
increased depreciation and amortization, a tax provision related to a Chinese
subsidiary and an increase in SG&A offset by an increase in interest income and
other items. For 2005, the loss by segment and principal item was: $2.5 million
operating loss from the Zi Technology business segment; $0.8 million loss from
the e-Learning business segment; a $1.6 million operating loss for other
corporate costs (which includes a gain of $1.4 million realized on settlement of
litigation) and income tax expense of $0.7 million associated with a Chinese
subsidiary.
In 2004, the Company significantly reduced its net loss to
$0.4 million, after adjusting for the $2.0 million impairment of the MLG note
receivable, from $2.9 million in 2003. This was accomplished by the continued
focus on the Company's core Zi Technology business segment with added emphasis
on increasing our sales focus on markets outside of Asia, increasing our
investment in new language software databases and holding SG&A near the prior
year level. Other contributing factors to the year over year decrease in the net
loss were decreased amortization from lower remaining unamortized capital assets
costs and decreased interest expense as a result of the repayment of all
outstanding debt in July of 2004. In 2003, the Company significantly reduced its
net loss to $2.9 million from $25.2 million in 2002. This was accomplished by
the continued focus on the Company's core Zi Technology business segment with
added emphasis on reducing SG&A and research and development costs. For the
three years prior to 2003, our net loss had increased year over year.
We anticipate that in 2006, the Company will approach our
goal of becoming profitable. We anticipate that an increase in sales combined
with relatively level SG&A expenditures, and moderate increases in depreciation
and in product research and development costs will assist in the achievement of
this trend in 2006.Litigation/IndemnificationCommencing on March 11, 2005, the Board of Regents of the
University of Texas System ("UT") filed federal lawsuits against numerous
alleged infringers of U.S. Patent No. 4,674,112 in the U.S. District Court for
the Western District of Texas, Austin Division, including certain of the
Company's licensees. The Company is not named in any of the actions. Zi has not
assumed any liability for indemnity pursuant to its customer license agreements,
or at all. The Company has, however, assumed the defense of this claim on behalf
of certain of its customers. The action is ongoing and will result in the
Company incurring defense costs.
On November 18, 2005, Mike Donnell (the "Plaintiff") filed a
wrongful termination lawsuit against the Company in the Court of Queen's Bench
of Alberta, Judicial District of Calgary. The Plaintiff was the President and
Chief Executive Officer of Zi for the period from July 23, 2003 to May 26, 2005,
when he submitted his resignation. On December 9, 2005, the Company filed its
Statement of Defense and Counterclaim, denying the Plaintiff's claims. The
Company expects to conclude a settlement arrangement with Mr. Donnell,
consistent with the terms of his employment contract. The Company had accrued
sufficient settlement costs related to this lawsuit as of December 31, 2005.

49

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We have also undertaken considerable expense in actively
protecting our intellectual property and defending against alleged infringement
claims. We have incurred substantial costs related to patent infringement
litigation in the sum of $540,000 for 2005 (2004 - $60,000; 2003 - $289,000) for
defense and settlement of such claims.
On December 4, 2003, the Company commenced a legal action
against former counsel in respect of, among other things, their representation
of the Company in a lawsuit, the outcome of which was unfavorable to the
Company. As part of its defense, prior counsel filed a cross complaint against
the Company for $1.1 million in unpaid legal fees and costs, which has been
accrued by the Company in its financial statements. On April 6, 2005, the
Company settled this litigation. The Company recorded a gain of $1,415,616 in
2005.
From time to time, the Company is involved in other claims in
the normal course of business. Management assesses such claims and where
considered likely to result in a material exposure and where the amount of the
claim is quantifiable, provisions for loss are made based on management's
assessment of the probable outcome. The Company does not provide for claims that
are not probable to result in a significant loss, claims for which the outcome
is not determinable or claims where the amount of the loss cannot be reasonably
estimated. Any settlements or awards under such claims are provided for when
reasonably determinable.

Although we do not anticipate or foresee at this time any new
intellectual property proceedings being instigated by other parties against us
or by us against other parties, there is no assurance that our legal costs or
legal actions will significantly diminish in the future. We do not view the
legal expenses on the current legal actions and indemnities as being of a
recurring nature and anticipate that these legal matters will eventually come to
a resolution; however, our legal costs in respect of these actions may increase
or maintain current levels if any judgment or determination is appealed or
otherwise progresses though the legal process. Moreover, given the extremely
competitive nature of our eZiText business and the wide scope of intellectual
property covering the text input space, there can be no assurance that in the
future, we, or any of our licensees, will not be continually subject to
allegations concerning the status or validity of our intellectual property.

E.

The Company did not have any offbalance sheet arrangements at December 31,
2005.

F.

As at December 31, 2005, Zi has long-term debt, capital lease
obligations and deferred inducements received upon entering into new office
leases in 2002. As part of the consideration for the acquisition of Archer,
long-term liabilities include two loans payable to former shareholders of two
subsidiaries of Archer in the amount of $81,255 and $66,423. These loans will be
paid when Archer achieves net profits calculated on a quarterly basis for the
consolidated Archer group of companies. The loans do not bear interest and have
no specific repayment terms other than the aforementioned.

During 2004 and 2003, we entered into leases for computer
equipment with payment terms over three years. The obligation, including the
current portion, totaled $9,378 at December 31, 2005. The future minimum lease
payments under the capital leases are as follows:

2006
      $
      8,3182007
      
      1,874Total minimum lease payments
      
      10,192Amount representing interest
      
      814Amount included in current
      liabilities
      
      7,541$
      1,837


See Item 6 for contractual obligation disclosure related to employees.

50

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The Company rents premises and equipment under operating leases, which expire
at various dates up to June 2010. Annual rentals under these leases for each of
the next five years are as follows:

2006
      $
      1,161,1652007
      
      638,2022008
      
      119,4712009
      
      74,7552010
      
      37,377Total
      $
      2,030,970


From time to time the Company enters into certain types of
contracts that require it to indemnify parties against possible third party
claims particularly when these contracts relate to licensing agreements. On
occasion the Company may provide indemnities. The terms of such obligations vary
and a maximum liability may not be explicitly stated. Because the financial
obligations in these agreements are often not explicitly stated, the overall
maximum amount of the obligations cannot be reasonably estimated. Historically,
the Company has not been obligated to make significant payments for these
indemnification obligations. The Company's management actively monitors the
Company's exposure to the above risks and obtains insurance coverage to satisfy
potential or future claims as necessary.

G.

Not applicable.

Item 6. Directors, Senior Management and Employees

A.

Each director is generally elected by a vote at the annual
meeting of shareholders in service for a term of one year. Each executive
officer will serve until his/her successor is elected or appointed by the Board
of Directors or his/her earlier removal or resignation from office. There are no
family relationships between any of our executive officers and our directors.
The following table lists the directors and senior management of the Company
together with their respective positions as of March 23, 2006:

|**Name**                                                                         |  | **Position or office within
      Corporation**                               
|-------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|Michael E. Lobsinger
      Calgary, Alberta,
      Canada                        |  | Chairman of the Board and Director
      President and Chief Executive Officer
|Derrick R. Armstrong(5)Calgary, Alberta,
      Canada                            |  | Director and 
      Corporate Secretary                                       
|Thompson MacDonald(1)(3)Calgary, Alberta,
      Canada                           |  | Director                                                                      
|Angus Michael Roderick
      Mackenzie(1)(2)Englefield Green,
      Surrey, U.K. |  | Director                                                                      
|Howard R. Balloch(3)Beijing, China                                               |  | Director                                                                      
|H. Donald Hyde(1)(2)Calgary, Alberta,
      Canada                               |  | Director                                                                      
|Donald P. Moore(4)Miami, Florida, U.S.A.                                         |  | Director                                                                      
|Richard D. Tingle(6)Calgary, Alberta,
      Canada                               |  | Director                                                                      
|Milos Djokovic
      Denver, Colorado,
      U.S.A.                              |  | Chief Operating Officer and Chief Technology
      Officer                    
|Dale Kearns
      Bragg Creek, Alberta,
      Canada                             |  | Chief Financial Officer                                                       

51

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**Notes:**

(1) Member of the Audit
  Committee during 2005.

(2) Member of the
  Compensation Committee during 2005.

(3) Member of the
  Corporate Governance Committee during 2005.

(4) Appointed as member of
  the Compensation Committee March 9, 2005.

(5) Resigned as member of
  the Corporate Governance Committee March 9, 2005.

(6) Appointed as member of
  the Corporate Governance Committee March 9, 2005.

MICHAEL E. LOBSINGER is the President and Chief Executive
Officer of the Company and Chairman of the Board. Mr. Lobsinger has been
Chairman of the Board since 1987, the Chief Executive Officer of the Company
from 1993 to November, 2003 and President of the Company from 1993 to 2000. Mr.
Lobsinger has been a director of the Company since 1987. Effective November 19,
2003, Mr. Lobsinger and the Company agreed that the positions of Chairman of the
Board and Chief Executive Officer would be separated, such that Mr. Lobsinger
would no longer be Chief Executive Officer of the Company but would remain
Chairman of the Board. In May of 2005, Mr. Lobsinger assumed the position of
President and Chief Executive Officer as a result of the resignation of Michael
D. Donnell, who had served as the Company's Chief Executive Officer from
November 2003 to May 2005.

DERRICK R. ARMSTRONG has been a director and secretary of the
Company since 1992. Mr. Armstrong is a lawyer and partner with Borden Ladner
Gervais LLP, Barristers & Solicitors, practicing primarily in securities and
corporate commercial law. Mr. Armstrong is also a director of Cygam Energy Inc.,
and Centurion Energy International Inc., both publicly traded resource
companies.

THOMPSON MACDONALD has been a director of the Company since
1993. Mr. MacDonald is a Communications Consultant and has run his own
consulting practice since 1988. Mr. MacDonald is Chairman of ENMAX Corporation,
a Calgary based provider of energy.

ANGUS MICHAEL R. MACKENZIE was elected as a director at the
Company's annual general meeting held in June, 2001. Mr. Mackenzie has been the
Director General and Managing Partner of Champagne Jacquesson & Fils, Dizy,
France since 1998 and a Director of Lindsell Train Investment Trust PLC since
2000.

HOWARD R. BALLOCH was elected as a director on August 4,
2001. Mr. Balloch served as Canada's Ambassador to China for more than five
years, retiring from the Canadian Foreign Service in August, 2001. Mr. Balloch
is also a director of Methanex Corporation., Ivanhoe Mines Ltd., Ivanhoe Energy
Inc., Tiens Biotech Group (USA), Inc. and Gobi Gold Inc., each a publicly traded
company. As well, Mr. Balloch has been the President of the Balloch Group since
2001.

H. DONALD HYDE was elected as a director at the Company's
annual general meeting held in June 2003 and is currently the chair of the Audit
Committee and serves on the Compensation Committee. Mr. Hyde is a chartered
accountant and has had his own practice since 1991. Prior to setting up his own
practice, Mr. Hyde was the vice president of finance and administration for an
international oil and gas drilling and service company.

DONALD P. MOORE was elected to the Board in August 2004,
pursuant to an agreement between the Company and the receiver for the Lancer
group of funds dated July 15, 2004. The Agreement was entered into in
consideration for the Lancer Group of Funds entering into an undertaking that
restricted their ability to trade shares of the Company for a period of time
(that has since expired), given to an agent under an offering of securities by
the Company that closed in July, 2004. Mr. Moore is a lawyer in the Miami office
of Holland & Knight LLP. Mr. Moore is also a principal and director of
Fundamental Management Corporation, an investment fund advisor.

RICHARD D. TINGLE, Q.C. was elected to the Board in December
2004. Since 1992 Mr. Tingle is a lawyer with Tingle Merrett LLP (formerly Tingle
& Associates). Mr. Tingle is a director of Intermap Technologies Inc., Venpath
Investments Ltd. and Emerald Bay Energy Inc., each a publicly traded company.

DALE KEARNS has been the Chief Financial Officer of the Company since April
2, 2001. Mr. Kearns is responsible for all financial, treasury, administration,
legal and human resources functions within the Company. Mr. Kearns has over 20
years of professional experience with publicly traded North American companies. Previously, Mr. Kearns was Chief Financial Officer of O&Y
Properties Corporation. Mr. Kearns is a director of Rapid Solutions Corporation,
a publicly traded company.

52

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MILOS DJOKOVIC was appointed as the Company's Chief Operating
Officer and Chief Technical Officer in October, 2004. Mr. Djokovic was the
founder in 1992 of Cygnus Corporation, an Ontario based developer of customer
relationship management software, which he sold in 1998 to TeleTech Holdings
Inc., and continued to serve as its chief technical officer until March 2003.
Mr. Djokovic also served as CEO of TeleTech's Enhansiv division from 2000-2002.
From August 2003 until October 2004, Mr. Djokovic was employed with Accenture,
an international management consulting firm, where he was responsible for that
firm's customer relationship technology strategy.

B.

(a) Compensation of Directors

On September 26, 2001, the Board approved director
compensation, effective January 1, 2002, of $10,000 per annum, payable in
bi-annual instalments on the 1st day of January and July of each
year. In light of increased responsibilities required to be undertaken by
directors of public companies, on May 25, 2005, the Board adopted the following
recommendations made by the Compensation Committee to take effect retroactive to
January 1, 2005: An annual director fee of U.S.$10,000 per director; a fee of
U.S.$2,500 per board meeting attended in person and U.S.$1,250 per Board meeting
attended by phone per director; no fees for attendance at committee meetings;
maximum fee per annum is U.S.$20,000 per director, provided however that if a
fifth "in person" meeting of directors in a fiscal year is held then an
additional U.S.$2,500 would be paid to directors that attend such fifth meeting
over and above this maximum amount; payments are made quarterly; in addition,
each director would receive 50,000 options on the date of the Annual General
Meeting.

The Corporation reimburses all travel and other expenses of directors while
conducting business on behalf of the Corporation.

Executive officers of the Corporation, who also act as
directors of Zi Corporation, do not receive any additional compensation for
services rendered in such capacity, other than as paid by the Corporation to
such executive officers in their capacity as executive officers. (See
"Compensation of Executive Officers".)

During the fiscal period ended December 31, 2005, stock
options to purchase 400,000 common shares were granted to directors of the
Corporation, not including options granted to Michael E. Lobsinger in his
capacity as an Executive Officer of the Corporation. See "Compensation of
Executive Officers" for details on stock options granted.

(b) Compensation of Executive Officers

1. Summary Compensation

The following table sets forth all annual and long-term
compensation for services in all capacities to the Corporation for the period
ended December 31, 2005, in respect of individual(s) who were acting in a
capacity of chief executive officer, chief financial officer, and the three
other most highly compensated executive officers who earned in excess of CDN
$150,000 in total salary and bonus during the fiscal year ended December 31,
2005 (the "

53

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Summary compensation table

|                                    |      |                         |                              |              |            |            |         |             
|----------------------------------- | ---- | ----------------------- | ---------------------------- | ------------ | ---------- | ---------- | ------- | ------------
|                                    |      |                         |                              |              |            |            |         |             
|                                    |      | Annual Compensation (6) | Long-Term
      Compensation |             
|                                    |      |                         |                              |              | Awards     | Payouts    |        
|                                    |      |                         |                              |              |            | Restricted |         |             
|                                    |      |                         |                              |              | Securities | shares or  |         |             
|                                    |      |                         |                              |              | under      | restricted |         |             
|                                    |      |                         |                              |              | options/   | stock      |         |             
|                                    |      |                         |                              | Other annual | SARs       | units      | LTIP    | All other   
|                                    |      | Salary                  | Bonus                        | compensation | granted    | ("RSU's")  | payouts | compensation
|Name and
      principal position   | Year | ($U.S.)                 | ($U.S.)                      | ($U.S.)      | (#)        | (#)        | ($U.S.) | ($U.S.)     
|Michael E.
      Lobsinger(1)       | 2005 | 293,648                 | Nil                          | Note(5)      | 200,000    | Nil        | nil     | Nil         
|Chairman,
      President and Chief | 2004 | 159,478                 | 180,427                      | Note(5)      | 450,000    | 250,000    | Nil     | Nil         
|Executive
      Officer             | 2003 | 354,821                 | 23,145                       | Note(5)      | 250,000    | 128,571    | Nil     | Nil         
|Michael D.
      Donnell(2)         | 2005 | 197,308                 | Nil                          | Note(5)      | Nil        | Nil        | Nil     | Nil         
|Chief Executive
      Officer       | 2004 | 296,875                 | 100,000                      | Note(5)      | Nil        | Nil        | Nil     | Nil         
|                                    | 2003 | 99,808                  | Nil                          | Note(5)      | 740,000    | Nil        | Nil     | Nil         
|Milos Djokovic
      (3)            | 2005 | 230,000                 | Nil                          | Note(5)      | 90,000     | Nil        | Nil     | Nil         
|Chief
      Technology Officer and  | 2004 | 42,756                  | Nil                          | Note(5)      | 230,000    | Nil        | Nil     | Nil         
|Chief Operating
      Officer       |      |                         |                              |              |            |            |         |             
|Dale Kearns(4)                      | 2005 | 103,745                 | 30,337                       | 49,333(8)    | 60,000     | Nil        | Nil     | Nil         
|Chief Financial
      Officer       | 2004 | 87,388                  | 57,644                       | 46,067(8)    | 100,000    | Nil        | Nil     | Nil         
|                                    | 2003 | 81,190                  | 19,215                       | 26,136(8)    | 100,000    | 3,906      | Nil     | Nil         
|Glen Morgan(7)                      | 2005 | 125,308                 | 17,350                       | Nil          | Nil        | Nil        | Nil     | Nil         
|Senior Vice
      President, Global | 2004 | 105,692                 | Nil                          | Nil          | 100,000    | Nil        | Nil     | Nil         
|Sales and
      Marketing           |      |                         |                              |              |            |            |         |             
|                                    |      |                         |                              |              |            |            |         |             
|Notes:                              |      |                         |                              |              |            |            |         |             

> (1) On January 1,
>   2000 Mr. Lobsinger was re-appointed Chairman and Chief Executive Officer of
>   the Corporation. On November 19, 2003, Mr Lobsinger resigned as Chief
>   Executive Officer. In 2003, Mr. Lobsinger voluntarily deferred CDN$220,407 of
>   his 2003 salary.Under an amended employment contract, among other things, the
>   deferred compensation was payable to him on December 31, 2006, unless the
>   directors determined to pay it earlier. In 2003, Mr. Lobsinger was awarded a
>   cash bonus of $25,000 for which payment was voluntarily deferred. In 2004, Mr.
>   Lobsinger was paid all amounts that had previously been deferred. On May 26,
>   2005, Mr Lobsinger was re-appointed President and Chief Executive Officer.

(2) Mr. Donnell was appointed
  President and Chief Operating Officer on July 23, 2003 and Chief Executive
  Officer on November 19, 2003. Mr. Donnell left the Corporation on May 26,
  2005.

(3) Mr. Djolovic was appointed
  Chief Operating Officer and Chief Technology Officer on October 25, 2004.

(4) Dale Kearns was appointed
  Chief Financial Officer of the Corporation on April 2, 2001. Mr. Kearns was
  awarded a bonus of $19,215 in respect of 2003 for which payment was
  voluntarily deferred until 2004.

(5) Other annual compensation is
  less than CDN$50,000 and less than 10 percent of the salary and bonus of the
  respective Named Executive Officer.

(6) For 2005 compensation, all
  Canadian dollar denominated compensation was converted to U.S. dollars at
  0.8255, being the average conversion rate for 2005.

(7) Glen Morgan was appointed
  Senior Vice President, Global Sales and Marketing on May 31, 2004 and left the
  Corporation on May 20, 2005.

(8) Mr. Kearns provided services
  during 2003, 2004 and 2005 to certain subsidiaries of the Corporation for
  which he was compensated directly by those subsidiaries.

Stock Options

The following table sets forth information in respect of all stock options
granted to the Named Executive Officers of the Corporation during the fiscal
year ended December 31, 2005.

54

---



|                         |              | Percent of   |              | Market value      |           
|------------------------ | ------------ | ------------ | ------------ | ----------------- | ----------
|                         |              | total        |              | of
    Securities |           
|                         | Securities   | Options/SARs |              | underlying        |           
|                         | under        | granted to   |              | Options/SARs/     |           
|                         | Options/SARs | employees in | Exercise or  | RSU's on the      |           
|                         | granted      | financial    | base price   | date of grant     | Expiration
|Name                     | (#)          | year(1)      | ($/Security) | ($/Security)      | date      
|Michael E. Lobsinger (2) | 200,000      | 21.3 %       | Note(2)      | Note(2)           | Note(2)   
|Milos Djokovic (3)       | 90,000       | 9.6 %        | Note(3)      | Note(3)           | Note(3)   
|Michael D. Donnell(4)    | Nil          | Nil          | Note(4)      | Note(4)           | Note(4)   
|Dale Kearns(5)           | 60,000       | 6.4 %        | Note(5)      | Note(5)           | Note(5)   
|Glen Morgan(6)           | Nil          | Nil          | Note(6)      | Note(6)           | Note(6)   

Notes:

> (1) During the year, stock
>   options and RSU's exercisable into a total of 940,375 common shares were
>   granted to directors, officers, and employees of the Company.

(2) During the
  year, the Corporation issued the following stock options to Mr. Lobsinger:
  options to acquire 50,000 common shares at CDN$3.64 expiring May 26, 2010
  (these options were cancelled June 30, 2005) and 150,000 to acquire common
  shares at CDN$3.22 expiring July 21, 2010.The market value of the common
  shares at the date of the grant was the same as the exercise price for the
  options granted to Mr. Lobsinger in 2005.

(3) During the
  year, the Corporation issued the following stock options to Mr. Djokovic:
  options to acquire 90,000 common shares at CDN$3.22 expiring July 21,2010. The
  market value of the common shares at the date of the grant was the same as the
  exercise price for the options granted to Mr. Djokovic in 2005.

(4) During the year, the
  Corporation issued no stock options to Mr. Donnell.

(5) During the
  year, the Corporation issued the following stock options to Mr. Kearns:
  options to acquire 60,000 common shares at CDN$3.22 expiring July 21, 2010.
  The market value of the common shares at the date of the grant was the same as
  the exercise price for the options granted to Mr. Kearns in 2005.

(6) During the year, the
  Corporation issued no stock options to Mr. Morgan.

The following table sets forth information in respect of all stock options
and RSU's which were either exercised or not exercised by the Named Executive
Officers during the Corporation's fiscal year ended December 31, 2005.

Aggregated Option/SAR and RSU exercises during the most recently completed
financial year and financial yearend option/SAR values

|                     |            |             |                          | Value of unexercised 
|-------------------- | ---------- | ----------- | ------------------------ | ---------------------
|                     |            |             | Unexercised              | in-the-Money         
|                     | Securities |             | Options/SARS/RSU's       | Options/SARs/RSU's   
|                     | acquired   | Aggregate   | as                       | at                   
|                     | on         | value       | at
    December 31, 2005 | December 31, 2005(2) 
|                     | exercise   | realized(1) | exercisable/             | exercisable/         
|Name                 | (#)        | ($U.S.)     | unexercisable(#)         | unexercisable ($U.S.)
|                     |            |             | Exercisable              | Exercisable          
|                     |            |             | 1,328,571                | 546,861              
|Michael E. Lobsinger | Nil        | Nil         | Unexercisable Nil        | Unexercisable Nil    
|                     |            |             | Exercisable Nil          | Exercisable Nil      
|Michael D. Donnell   | 33,400     | 2,338       | Unexercisable Nil        | Unexercisable Nil    
|                     |            |             | Exercisable              |                      
|                     |            |             | 243,334                  |                      
|                     |            |             | Unexercisable            | Exercisable Nil      
|Milos Djokovic       | Nil        | Nil         | 76,666                   | Unexercisable Nil    
|                     |            |             | Exercisable              | Exercisable Nil      
|                     | Nil        | Nil         | 260,000                  | Unexercisable Nil    
|Dale Kearns          |            |             | Unexercisable Nil        |                      
|                     |            |             | Exercisable Nil          | Exercisable Nil      
|Glen Morgan          | Nil        | Nil         | Unexercisable Nil        | Unexercisable Nil    

55

---

Notes:

> (1) The aggregate of the
>   difference between the market value of the underlying securities at the time
>   of exercise and the exercise price.

(2)
  "In-the-money" options refer to those options in respect of which the market
  value of the underlying security as at the financial year-end, exceeds the
  exercise or base price of the option, being the aggregate of the difference
  between the market value of the securities as at December 31, 2005 and the
  exercise price.

Long-term Incentive Plans

The Corporation currently has no long-term incentive plans,
other than stock options granted from time to time by the Board under the
provisions of the Corporation's Incentive Stock Option Plans described herein.

Stock Appreciation Rights and Restricted Shares

No stock appreciation rights were granted by the Company to
the Named Executive Officers of the Company during the last fiscal year ended
December 31, 2005 or since incorporation. In 2004, 250,000 RSU's were granted
and issued, in respect of compensation, without performance criteria attached
and at no cost to the grantee.

Stock Option and SAR Repricing

No repricing took place during the fiscal year ended December
31, 2005 with respect to stock options held by the Named Executive Officers.

Pension and Retirement Plans and Payments made upon
Termination of Employment

The Corporation does not have any pension or retirement plan
which is applicable to the Named Executive Officers other than as described
below. The Corporation has not provided compensation, monetary or otherwise,
during the preceding fiscal year, to any person who now acts or has previously
acted as a Named Executive Officer of the Corporation, in connection with or
related to the retirement, termination or resignation of such person other than
as described in the succeeding paragraph and the Corporation has provided no
compensation to such persons as a result of a change of control of the
Corporation, its subsidiaries or affiliates. The Corporation is not party to any
compensation plan or arrangement with any person who now acts as a Named
Executive Officer resulting from the resignation, retirement or the termination
of employment of such person other than as described herein

Employment Contracts

The Corporation entered into an employment agreement with
Michael E. Lobsinger dated December 31, 1999 for a term that commenced on
January 1, 2000 and ended on December 31, 2002. The agreement provided for an
automatic renewal for a further three years on the same terms and conditions
except for remuneration which was to be renegotiated. Mr. Lobsinger was
appointed Chairman of the Board of the Corporation and Chief Executive Officer.
The terms of the agreement provided that Mr. Lobsinger be paid an amount equal
to U.S.$300,000 per annum plus transportation and travel allowances. Effective
May 1, 2003, Mr. Lobsinger agreed to defer two-thirds of his remuneration until
a later date, and the Corporation ceased paying Mr. Lobsinger the full amount of
his salary. Effective November 20, 2003 Mr. Lobsinger and the Corporation agreed
that the positions of Chairman of the Board and Chief Executive Officer would be
separated, such that Mr. Lobsinger would no longer be Chief Executive Officer of
the Corporation but would remain as Chairman of the Board. The Corporation and
Mr. Lobsinger entered into an Amending Agreement in March, 2004 that amended the
terms of his employment agreement effective November 20, 2003 (the "Amending
Agreement") (Mr. Donnell became Chief Executive Officer of the Corporation on
that date). Mr. Lobsinger agreed to amend the terms of his employment to reduce
his salary to an annual compensation of CDN$225,000 per year effective November
20, 2003. In addition, as of November 20, 2003, Mr. Lobsinger had deferred
CDN$240,340 in salary payable to him under his employment agreement, which he
agreed to further defer until December 31, 2006, unless the directors determined
to pay it earlier. This amount was paid to Mr. Lobsinger on September 17, 2004.
Mr. Lobsinger agreed to forego any additional options that he would have been
entitled to under his 1999 employment agreement, and instead the Corporation
agreed to issue to him 400,000 options and 250,000 RSU's. Under the Amending
Agreement, following a change of control Mr. Lobsinger has the right,
exercisable within 60 days of a change of control, to consider his employment to
have been terminated. In the event the Corporation terminates Mr. Lobsinger's
employment (or Mr. Lobsinger elects to treat his employment as terminated on a
change of control) the Corporation is required to pay him an amount equal to
three times his current annual salary and at Mr. Lobsinger's discretion, an
amount equal to the difference between the fair market value of all options,
whether vested or not, and the exercise price. In addition, any salary amounts
deferred by Mr. Lobsinger as of the date of his termination become payable upon
such termination. On May 26, 2005, Mr. Lobsinger was appointed President and
Chief Executive Officer of the Company. Effective May 26, 2005 and as approved
by the Board of Directors on July 21, 2005, Mr. Lobsinger's annual cash
compensation has been temporarily adjusted to CDN$396,000 to reflect his
increased responsibilities and until such time that the Company fills the Chief
Executive Officer position. Mr. Lobsinger was required to execute a
Confidentiality and Non-Competition agreement.

56

---

The Corporation entered into an employment agreement with
Michael D. Donnell on July 23, 2003 pursuant to which Mr. Donnell was appointed
President and Chief Operating Officer of the Corporation. The terms of the
agreement provided for Mr. Donnell to be paid a base salary of U.S.$225,000 per
annum. The Corporation agreed, subject to regulatory approvals, to grant Mr.
Donnell stock options to purchase 250,000 common shares in the capital of the
Corporation. On November 20, 2003 Mr. Donnell was appointed Chief Executive
Officer at which time he was awarded 490,000 options to purchase common shares
of the Corporation and his base salary increased to U.S.$300,000 per annum.
Pursuant to Mr. Donnell's employment contract, in the event of a change of
control of the Corporation, all of his options would vest immediately. Mr.
Donnell was required to execute a Confidentiality and Non-Competition agreement.
Mr. Donnell left the Corporation on May 26, 2005. Pursuant to his employment
contract, based on his length of service to the Corporation, Mr. Donnell had an
entitlement to 12 months pay. The Company expects to conclude a settlement
arrangement with Mr. Donnell, consistent with the terms of his employment
contract.

The Corporation entered into an employment agreement with
Dale Kearns on April 2, 2001 pursuant to which Mr. Kearns was appointed Chief
Financial Officer of the Corporation. The terms of the agreement provided for
Mr. Kearns to be paid a base salary of CDN$180,000 per annum. Effective May 26,
2005, as approved on July 21, 2005 by the Board of Directors, Mr. Kearns annual
compensation was increased to CDN$200,000. Pursuant to a 2004 amendment to the
employment agreement, the Corporation may terminate Mr. Kearns' employment upon
payment of twelve months' base salary plus an allowance to replace group
insurance benefits post-termination of employment. Pursuant to Mr. Kearns'
employment contract, in the event of a change of control of the Corporation, all
of his options vest immediately. Mr. Kearns was required to execute a
Confidentiality and Non-Competition agreement.

The Corporation entered into an employment agreement with
Milos Djokovic on October 25, 2004 (as amended) pursuant to which Mr. Djokovic
was appointed Chief Technology Officer and Chief Operating Officer of the
Corporation. The terms of the agreement provide for Mr. Djokovic to be paid a
base salary of U.S.$230,000 per annum. The Corporation may terminate Mr.
Djokovic's employment upon payment of twenty-four months' base salary plus an
allowance for a bonus and forgone benefits. The Corporation agreed, subject to
regulatory approvals, to grant Mr. Djokovic stock options to purchase 230,000
common shares in the capital of the Corporation. Pursuant to Mr. Djokovic's
employment contract, in the event of a change of control of the Corporation, all
of his options vest immediately. Mr. Djokovic was required to execute a
Confidentiality and Non-Competition agreement.

The Corporation entered into an employment agreement with
Glen Morgan on May 31, 2004 pursuant to which Mr. Morgan was appointed Senior
Vice President, Global Sales and Marketing. The terms of the agreement provided
for Mr. Morgan to be paid a base salary of U.S.$180,000 per annum. The
Corporation agreed, subject to regulatory approvals, to grant Mr. Morgan stock
options to purchase 100,000 common shares in the capital of the Corporation.
Pursuant to Mr. Morgan's' employment contract, in the event of a change of
control of the Corporation, all of his options would vest immediately. Mr.
Morgan was required to execute a Confidentiality and Non-Competition agreement.
On May 20, 2005, Mr. Morgan resigned from his position with the Corporation.
There remains a dispute on bonus entitlement that is being resolved through
legal action.

57

---

(c) Plans and Share Options

The Company currently has in effect, 1993, 1995, 1996, 1998
and 1999 Incentive Share Option Plans for its directors, officers, employees and
consultants pursuant to which 11,615,000 common shares were reserved for
issuance and an additional 1,300,000 common shares which were reserved for
issuance pursuant to shareholder approval obtained at the June 5, 2002
shareholder meeting.

The following summarizes aggregate stock option plan activity during the
fiscal years ending December 31, 2003, 2004 and 2005:

|                                           | 2005        | 2004        | 2003       
|------------------------------------------ | ----------- | ----------- | -----------
|Options outstanding, beginning of
    year | 4,911,972   | 5,474,904   | 5,135,700  
|Granted                                    | 940,375     | 2,105,500   | 2,342,532  
|Cancelled                                  | (1,454,893) | (1,524,666) | (1,667,701)
|Exercised                                  | (290,967)   | (1,143,766) | (335,627)  
|Options outstanding, end of year           | 4,106,487   | 4,911,972   | 5,474,904  

(d) Other Compensation

During the Corporation's fiscal year ended December 31, 2005, the Corporation
accrued and/or paid legal fees to a law firm of which one of the directors of
the Corporation was a partner amounting, in the aggregate, to $227,883.

A consulting fee was paid by the Corporation to a consulting firm owned by an
officer amounting to $49,333 during the fiscal year ended December 31, 2005.

The Corporation has set forth herein all required disclosure
of additional compensation to the executive officers or directors (including
personal benefits and securities or properties paid or distributed which
compensation was not offered on the same terms to all full time employees)
during the last completed fiscal year.

C.

(a) Board of Directors

The Board currently consists of eight members. Each director
elected will hold office until the next annual meeting of shareholders or until
his successor is duly elected, unless his office is earlier vacated in
accordance with the Bylaws of the Company.

Board Committees

Our Board of Directors has three standing committees: an Audit Committee, a
Compensation Committee and a Corporate Governance and Nominating Committee.

Audit Committee

The Audit Committee consists of three members. Mr. Donald
Hyde, who is a chartered accountant in private practice, joined the Board in
June, 2003 and was appointed Chairman of the Audit Committee. Mr. Hyde was
specifically recruited to the Corporation's Board of Directors for his financial
and accounting skills. Other members of the Audit Committee are Thompson
MacDonald and Michael Mackenzie who are both financially literate and possess an
understanding of the accounting principles, internal controls and procedures
used by the Company. Messrs. MacDonald and Mackenzie are presently and have
served as directors or senior officers of companies who prepare financial
statements similar to those of the Company and have experience supervising one
or more persons engaged in the preparation of financial statements. All members
of the Audit Committee are outside and unrelated directors and independent from
any interest in the Corporation. The Committee met five times in 2005 and all
members attended all of the meetings.

58

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The Corporation adopted an Audit Committee Charter in June
2000 which was recently amended to conform with applicable requirements. A copy
of the Audit Committee Charter is filed as an exhibit to this Report. The stated
purpose of the Audit Committee is to serve as an independent and objective party
to monitor the integrity of the Corporation's financial reporting process and
system of internal controls, to review, appraise and monitor the independence
and performance of the Corporation's independent auditors and to provide an
avenue for open communication among the independent auditors, management and the
Board of Directors. All members of the Audit Committee are financially literate
and possess an understanding of the accounting principles, internal controls and
procedures used by the Company. In addition, the Audit Committee approves the
fees and other significant compensation to be paid to the independent auditors.
The Audit Committee has direct access to the independent auditors at all times
and has the ability to retain, at the Corporation's expense, special legal,
accounting or other consultants or experts it deems necessary in the performance
of its duties.

Compensation Committee

The Compensation Committee consists of Michael Mackenzie, as
Chairman, Donald Hyde and Donald Moore, the latter of which was appointed in
March 2005. Under its charter, the Compensation Committee is responsible for
reviewing management prepared policies and recommending to the Board of
Directors the compensation policies and guidelines for senior officers and
management personnel, corporate benefits, incentive plans, evaluation of the
performance and compensation of the Chief Executive Officer and other senior
management, compensation level for members of the Board of Directors and
committee members, a succession plan for the Chief Executive Officer and key
employees of the Corporation and any material changes in human resources policy,
procedure, remuneration and benefits.

The Compensation Committee advises the board on the
administration of the Company's Stock Option Plans, and reviews and approves the
recommendations of senior management relating to the annual salaries, bonuses
and stock option grants of the executive officers of the Company. The
Compensation Committee consists of outside directors who report to the Board,
which in turn gives final approval to compensation matters.

Under the direction of the Compensation Committee, the
Company is committed to the fundamental principles of pay for performance,
improved shareholder returns and external competitiveness in the design,
development and administration of its compensation programs. The Compensation
Committee recognizes the need to attract and retain a stable and focused
leadership with the capability to manage the operations, finances and assets of
the Company. As appropriate, the Compensation Committee recognizes and rewards
exceptional individual contributions with highly competitive compensation. The
major elements of the Company's executive compensation program are salary,
annual cash incentives and long-term incentives, through the granting of stock
options and RSU's.

In connection with determining base salaries, the Company
maintains an administrative framework of job levels into which positions are
assigned based on internal comparability and external market data. Because of
the Company's lean organizational structure and growth in the international
arena, the Compensation Committee's goal is to provide base salaries, for its
top performing employees, that are competitive with the Company's peers and
which also recognizes the differentials from such peers. The Committee
references outside data consisting of management compensation surveys and
reports compiled by such organizations as Korn-Ferry International Consultants,
The Wynford Group Management Consulting, Haygroup Ltd., Watson Wyatt, Western
Compensation and Benefits Consultants and KPMG LLP and compare the base salaries
of the Company's executive officers with compensation data for comparable
organizations available from such surveys and reports.

Annual cash incentive awards are given pursuant to an
Incentive Compensation Plan, approved by the Board. Participation is determined
according to job level and is intended to reward those individuals who have had,
and will have a significant impact on business results. The total amount of cash
available for annual incentive awards is determined by the Compensation
Committee by evaluating some or all of financial and non-financial criteria,
including revenue, net income/operating profit, cash flow, net asset value
growth and achievement of specific strategic goals. Individual target award
levels increase in relation to job responsibilities so that the ratio of at-risk
versus fixed compensation is greater for higher levels of management. Individual
awards are intended to reflect a combination of personal, business unit and
total company performance. In 2005, the Board approved up to a combined total of
$250,000 in cash bonuses to be paid to three executives in respect of 2005. In
determining bonuses, the Committee considers profitability, as well as
development growth, sales and customer growth, implementation of Zi product to
its customers and individual effort in overall corporate development.

59

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The Board believes
that employees should have a stake in the future of the Corporation and that
their interests should be aligned with the interest of the Corporation's
stockholders. To this end, the Committee selects those executives and key
employees whose decisions and actions can most directly impact business results
to participate in the Stock Option Plans. Under the Stock Option Plans, officers
and key employees who are selected to participate are eligible to receive stock
options that may be granted subject to a vesting period determined by the
Corporation and approved by the Board to create a long-term incentive to
increase shareholder value. Awards of stock options and RSU's are supplementary
to the cash incentive plan and are intended to increase the pay-at-risk
component for officers and key employees. No RSU's have been issued as at the
March 23, 2006 in respect of 2005 incentive compensation.

We have employment agreements or remuneration arrangements
with all of our executive officers. Each agreement or arrangement provides for
salary, benefits, bonuses and incentive stock option grants for the executive
officer, and for compensation if his or her employment is terminated. For
employment agreements of Named Executive Officers, see

Corporate Governance and Nominating Committee

During 2005, this Committee had three members; Howard Balloch,
who was the Chairman of the Committee, Thompson MacDonald and Richard Tingle,
the latter of which was appointed to the committee in March of 2005. The
Corporation has adopted a charter for this committee. Pursuant to its charter,
the Corporate Governance and Nominating Committee takes responsibility for
preparing the disclosure in the Information Circular concerning corporate
governance, and for developing and monitoring the Corporation's general approach
to corporate governance issues as they arise. It also assumes responsibility for
assessing current members and nominating new members to the Board of Directors
and ensuring that all board members are informed of and are aware of their
duties and responsibilities as a director of the Corporation. The Corporate
Governance and Nominating Committee takes responsibility for the adoption of
adequate policies and procedures to allow the Corporation to meet its continuous
disclosure requirements, manage the principal risks of the Corporation, review
the strategic plan on a timely basis, develop and monitor corporate policies
relating to trading in securities, ensuring the Board annually reviews
organizational structure and succession planning, reviews areas of potential
personal liability of directors and ensures reasonable protective measures are
in place and causes the Board to annually review its definition of an unrelated
director. The Committee met formally five times in 2005 and, in view of its
size, communicated informally from time to time

D.

As of March 23, 2006, we had 78 regular, full-time employees:

|ZI TECHNOLOGY      
|-------------------
|                   
|                   
|Sales & Marketing  
|Technical          
|Admin/Corp         
|ZI TECHNOLOGY TOTAL

We believe that our future success will depend on our
continued ability to attract and retain highly skilled and qualified employees.
None of our employees are represented by a collective bargaining agreement. At
December 31, 2004 we had 109 regular, full time employees; at December 31, 2003,
we had 104 regular, full-time employees; and at December 31, 2002, we had 103
regular, full-time employees. We believe we enjoy good relationships with our
employees.

60

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E.
Share ownership.

(a) Share and Option Holdings

The following table sets forth the direct and indirect actual common share
ownership and option holdings of our directors and previously Named Executive
Officers at March 23, 2006.

|                                 | Number of    |              
|-------------------------------- | ------------ | -------------
|                                 | Shares       |              
|                                 | Beneficially | Percentage of
|Name                             | Owned*       | Class**      
|Michael E. Lobsinger             | 5,669,613(1) | 11.9%        
|Derrick R. Armstrong             | 324,900(2)   | 0.7%         
|Howard R. Balloch                | 375,350(3)   | 0.8%         
|H. Donald Hyde                   | 150,000(4)   | 0.3%         
|Thompson MacDonald               | 130,000(5)   | 0.3%         
|Angus Michael Roderick Mackenzie | 575,000(6)   | 1.1%         
|Donald P. Moore                  | 100,200(7)   | 0.2%         
|Richard D. Tingle                | 100,000(8)   | 0.2%         
|Dale Kearns                      | 260,006(9)   | 0.7%         
|Milos Djokovic                   | 320,000(10)  | 0.7%         

Notes:

> *

**

(1) In the case of
Mr. Lobsinger, this comprises 1,143,700 common shares held directly or
beneficially by Mr. Lobsinger, 3,297,342 common shares held by Quarry Bay
Investments Inc., a private Alberta corporation wholly-owned by Mr. Lobsinger,
and 1,228,571 share options and RSU's. The share options and RSU's include:
50,000 options granted December 3, 2001 at a grant price of $7.96 and expire
December 3, 2006; 100,000 options granted April 17, 2003 at a grant price of
$2.56 and expire on April 17, 2008; and 28,571 RSU's at a grant price of nil and
expire on April 17, 2008; 100,000 options granted on June 11, 2003 at a grant
price of $3.43 and expire on June 11, 2008; 100,000 RSU's on June 11, 2003 at a
grant price of nil and expire on June 11, 2008; 400,000 options granted March
25, 2004 at a grant price of $3.60 and expire March 25, 2009; 250,000 RSU's
granted March 25, 2004 at a grant price of nil and expire on March 25, 2009,
50,000 options granted September 16, 2004 at a grant price of $2.60 and expire
September 16, 2009, and:; 150,000 options granted July 21, 2005 at a grant price
of $3.22 and expire on July 21, 2010.

(2) In the case of
Mr. Armstrong, this comprises 194,900 common shares held directly or
beneficially by Mr. Armstrong and 130,000 share options. This does not include
10,000 common shares held pursuant to a spousal registered retirement savings
plan. The share options include: 30,000 options granted June 11, 2003 at a grant
price of $3.43 and expire on June 11, 2008, 50,000 options granted September 16,
2004 at a grant price of $2.60 and expire on September 16, 2009, and; 50,000
options granted May 26, 2005 at a grant price of $3.64 and expire May 26, 2010.

(3) In the case of
Mr. Balloch, this comprises 350 common shares held directly or beneficially by
Mr. Balloch and 375,000 share options granted August 4, 2001 at a grant price of
$11.66 and expire July 31, 2006; 50,000 options granted June 11, 2003 at a grant
price of $3.43 and expire on June 11, 2008, 50,000 options granted September 16,
2004 at a grant price of $2.60 and expire on September 16, 2009, and; 50,000
options granted May 26, 2005 at a grant price of $3.64 and expire on May 26,
2010

61

---

(4) In the case of
Mr. Hyde, this comprises 150,000 share options: 50,000 options granted June 11,
2003 at a grant price of $3.43 and expire on June 11, 2008, 50,000 options at a
grant price of $2.60 and expire on September 16, 2009, and; 50,000 options
granted May 26, 2005 at a grant price of $3.64 and expire on May 26, 2010.
(5) In the case of
Mr. MacDonald, this comprises 80,000 share options which include: 30,000 options
granted June 11, 2003 at a grant price of $3.43 and expire on June 11, 2008,
and; 50,000 options granted September 16, 2004 at a grant price of $2.60 and
expire on May 26, 2010.

(6) In the case of
Mr. Mackenzie, this comprises 200,000 common shares held directly or
beneficially by Mr. Mackenzie and 130,000 share options. The share options
include: 30,000 options granted June 11, 2003 at a grant price of $3.43 and
expire June 11, 2008; 50,000 options granted September 16, 2004 at a grant price
of $2.60 and expire on September 16, 2009, and; 50,000 options granted May 26,
2005 at a grant price of $3.64 and expire on May 26, 2010.

(7) In the case of
Mr. Moore, this comprises 200 common shares held directly or beneficiary by Mr.
Moore and 100,000 share options. The share options include: 50,000 options
granted September 16, 2004 at a grant price of $2.60 and expire on September 16,
2009, and; 50,000 options granted May 26, 2005 at a grant price of $3.64 and
expire on May 26, 2010.

(8) In the case of
Mr. Tingle, this comprises 100,000 share options which include: 50,000 options
granted January 5, 2005 at a grant price of $7.79 and expire on January 5, 2010
and; 50,000 options granted May 26, 2005 at a grant price of $3.64 and expire on
May 26, 2010.

(9) In the case of
Mr. Kearns, this comprises six common shares held directly or beneficially by
Mr. Kearns and 260,000 share options which include: 60,000 share options granted
April 2, 2001 at a grant price of $10.71 and expire April 2, 2006; 60,000
options granted December 6, 2001 at a grant price of $8.25 and expire December
6, 2006; 80,000 options granted March 25, 2004 at a grant price of $3.60 and
expire March 25, 2009,and; 60,000 options granted July 21, 2005 at a grant price
of $3.22 and expire on July 21, 2010.

(10) In the case of
Mr. Djokovic, this comprises 243,334 share options which include: 153,334
options granted October 26, 2004 at a grant price of U.S.$3.40 and expire
October 26, 2009, and; 90,000 options granted July 21, 2005 at a grant price of
$3.22 and expire July 21, 2010.

(b)

Purpose of Plans

The purpose of the Plans is to advance the interests of the
Corporation or any of its subsidiaries or affiliates by encouraging the
directors, officers, employees and consultants to acquire shares in the
Corporation, thereby increasing their proprietary interest in the Corporation,
encouraging them to remain associated with the Corporation or any of its
subsidiaries or affiliates and furnishing them with additional incentive in
their efforts on behalf of the Corporation or any of its subsidiaries or
affiliates.

Eligibility

The Plans provide for the issuance of options ("Options") and
RSU's exercisable to acquire common shares of the Corporation to directors,
officers, employees and consultants, including a personal holding Corporation
controlled by one of the aforementioned participants, a participant's spouse,
children and/or grandchildren and a consulting corporation engaged to provide
ongoing consulting services for the Corporation or any of its subsidiaries or
affiliates. Options and/or RSU's may be granted, either alone or in addition to,
in tandem with or in substitution for any other Options or RSU's previously
granted. The specific terms of each Option are provided in a separate Option
Agreement ("Option Agreement"), and the specific terms of each RSU are provided
in a separate Restricted Stock Unit Agreement ("RSU Agreement").

RSU's are notional credits maintained on the books of the Corporation; the
value of each RSU reflects the value of one common share and entitles the holder
to receive one common share from the treasury of the Corporation. Each RSU
granted to participants will be subject to individual terms specified by the
Committee in the RSU Agreement, including the time or times at which the RSU may
be exercised.

62

---

The number of common shares that may be issued under the Plans is subject to
appropriate adjustment in the event of certain corporate transactions or events.

Administration of the Plans

The Plans are administered by the Board, or if appointed, a
special committee of directors appointed by the Board (such a special committee
or the Board, if no special committee is appointed, is referred to herein as the
"Committee"), whose members have responsibility for designating participants
under the Plans and, subject to the terms of the Plans, for setting the terms of
Options and RSU's. Unless otherwise expressly provided in the Plans, all
designations, determinations, interpretations and other decisions under or with
respect to the Plans or any Option or RSU shall be within the sole discretion of
the Committee, may be made at any time and shall be final, conclusive and
binding upon any participant, any holder or beneficiary of any Option or RSU. In
determining which eligible persons shall receive an Option or RSU and the terms
of any Option or RSU, the Committee may take into account the nature of the
services rendered by the respective person, his or her present and potential
contributions to the success of the Corporation or such other factors as the
Committee, in its discretion, deems relevant. If the Board appoints a special
committee to serve as the Committee, the Board may from time to time increase
and thereafter decrease the size of such special committee and may fill any
vacancies however created.

Amendment of the Plans

Subject to any required approval of any stock exchange on
which the Corporation's securities are listed, the Board reserves the right to
amend, suspend or terminate the Plans at any time if and when it is advisable in
the absolute discretion of the Board or Committee; provided however, no such
amendment or revision shall alter the terms of any Options or RSU's theretofore
granted under the Plans.

Necessary Approvals

The ability of the Options or RSU's to be exercised and the
obligation of the Corporation to issue and deliver shares in accordance with the
Plans is subject to any approvals that may be required from the shareholders of
the Corporation, or any regulatory authority or stock exchange having
jurisdiction over the securities of the Corporation.

Adjustment in Shares Subject to the Plan

Other than dividends declared in the normal course,
appropriate adjustments in the number of common shares optioned, in the option
price per share, as regards Options granted or to be granted, and in the RSU's
granted or to be granted, may be made by the Committee in its discretion to give
effect to adjustments in the number of common shares of the Corporation
resulting subsequent to the approval of the Plans by the Committee from
subdivisions, consolidations or reclassification of the common shares of the
Corporation, the payment of stock dividends by the Corporation or other relevant
changes in the capital of the Corporation.

The number of common shares that may be issued under the Plans is subject to
appropriate adjustment in the event of certain corporate transactions or events.

Options provide the holder with the right to purchase common
shares at a stated exercise price before a specified date in the future. The
exercise price for Options shall not be less than the price permitted by any
stock exchange on which the Shares are then listed or other regulatory body
having jurisdiction. The exercise price of Options granted under the Plans must
be equal to not less than 100 percent of the fair market value of the common
shares on the date of grant, which shall be determined based on the closing
price for board lots of common shares listed on The Toronto Stock Exchange on
the last day of the trading immediately preceding the date of the grant.

63

---

A comparative chart highlighting the significant terms of each of the Plans
is as follows:

|                         | 1993                    | 1995                   | 1996                   | 1998                   | 1999                  
|------------------------ | ----------------------- | ---------------------- | ---------------------- | ---------------------- | ----------------------
|                         | Plan                    | Plan                   | Plan                   | Plan                   | Plan                  
|                         |                         |                        |                        |                        | (as amended in        
|                         |                         |                        |                        |                        | 2000 and 2002)        
|Eligible                 | Directors, officers,    | Directors, officers,   | Directors, officers,   | Directors, officers,   | Directors, officers,  
|participants             | employees,              | employees,             | employees,             | employees,             | employees,            
|                         | consultants and         | consultants and        | consultants and        | consultants and        | consultants and       
|                         | their associates.       | their associates.      | their associates.      | their associates.      | their associates.     
|                         |                         |                        |                        |                        |                       
|Number of                | Not to exceed the       | Not to exceed          | Not to exceed          | Not to exceed          | Not to exceed         
|securities               | maximum number          | 1,430,000              | 2,600,000              | 1,300,000              | 4,960,000             
|issued/issuable          | of shares
    permitted | common shares.         | common shares.         | common shares.         | common shares         
|                         | under the rules
    of  |                        |                        |                        | and 500,000           
|                         | any regulatory          |                        |                        |                        | RSU's.                
|                         | body having             |                        |                        |                        |                       
|                         | jurisdiction.           |                        |                        |                        |                       
|                         |                         |                        |                        |                        |                       
|Maximum                  | Not to exceed the       | Not to exceed 10%      | Not to exceed 10%      | Not to exceed 10%      | Not to exceed 10%     
|percentage               | maximum number          | of the
    outstanding | of the
    outstanding | of the
    outstanding | of the
    outstanding
|available to             | of shares
    permitted | issue.                 | issue.                 | issue.                 | issue.                
|insiders                 | under the rules
    of  |                        |                        |                        |                       
|                         | any regulatory          |                        |                        |                        |                       
|                         | body having             |                        |                        |                        |                       
|                         | jurisdiction.           |                        |                        |                        |                       
|                         |                         |                        |                        |                        |                       
|Maximum number           | Not to exceed the       | Not to exceed 5%       | Not to exceed 5%       | Not to exceed 5%       | Not to exceed 5%      
|of securities to
    any | maximum number          | of the
    outstanding | of the
    outstanding | of the
    outstanding | of the
    outstanding
|one entity               | of shares
    permitted | issue.                 | issue.                 | issue.                 | issue.                
|                         | under the rules
    of  |                        |                        |                        |                       
|                         | any regulatory          |                        |                        |                        |                       
|                         | body having             |                        |                        |                        |                       
|                         | jurisdiction.           |                        |                        |                        |                       
|                         |                         |                        |                        |                        |                       
|Method for               | Determined by the       | Determined by the      | Determined by the      | Determined by the      | Determined by the     
|determining the          | Board or                | Board or               | Board or               | Board or               | Board or              
|exercise price           | Committee, but          | Committee, but         | Committee, but         | Committee, but         | Committee, but        
|                         | shall not be less       | shall not be less      | shall not be less      | shall not be less      | shall not be less     
|                         | than the price          | than the price         | than the price         | than the price         | than the price        
|                         | permitted by any        | permitted by any       | permitted by any       | permitted by any       | permitted by any      
|                         | regulatory body.        | regulatory body.       | regulatory body.       | regulatory body.       | regulatory body.      
|                         |                         |                        |                        |                        |                       
|Method for               | Determined by the       | Determined by the      | Determined by the      | Determined by the      | Determined by the     
|determining the          | Board or                | Board or               | Board or               | Board or               | Board or              
|purchase price           | Committee at the        | Committee at the       | Committee at the       | Committee at the       | Committee at the      
|                         | time any option
    is  | time any option
    is | time any option
    is | time any option
    is | time any option
    is
|                         | granted but shall       | granted but shall      | granted but shall      | granted but shall      | granted but shall     
|                         | not be lower than       | not be lower than      | not be lower than      | not be lower than      | not be lower than     
|                         | the Market Price.       | the Market Price.      | the Market Price.      | the Market Price.      | the Market Price.     
|                         |                         |                        |                        |                        |                       
|Vesting of stock         | Determined by the       | Determined by the      | Determined by the      | Determined by the      | Determined by the     
|options                  | Board or                | Board or               | Board or               | Board or               | Board or              
|                         | Committee.              | Committee.             | Committee.             | Committee.             | Committee.            

64

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|                        |                     |                     |                     |                     |                    
|----------------------- | ------------------- | ------------------- | ------------------- | ------------------- | -------------------
|Term of stock           | Fixed by the        | Fixed by the        | Fixed by the        | Fixed by the        | Fixed by the       
|options                 | Board or            | Board or            | Board or            | Board or            | Board or           
|                        | Committee.          | Committee,          | Committee,          | Committee,          | Committee,         
|                        |                     | subject to a 10     | subject to a 10     | subject to a 10     | subject to a 10    
|                        |                     | year maximum.       | year maximum.       | year maximum.       | year maximum.      
|                        |                     |                     |                     |                     |                    
|Causes of
    cessation | Resignation of      | Resignation of      | Resignation of      | Resignation of      | Resignation of     
|of entitlement          | Participant status  | Participant status  | Participant status  | Participant status  | Participant status 
|                        | or death.           | or death.           | or death.           | or death.           | or death.          
|                        |                     |                     |                     |                     |                    
|Assignability           | Not transferable or | Not transferable or | Not transferable or | Not transferable or | Not transferable or
|                        | assignable.         | assignable.         | assignable.         | assignable.         | assignable.        
|                        |                     |                     |                     |                     |                    
|Procedure for           | Subject to          | Subject to          | Subject to          | Subject to          | Subject to         
|amending                | regulatory          | regulatory          | regulatory          | regulatory          | regulatory         
|                        | approval, the       | approval, the       | approval, the       | approval, the       | approval, the      
|                        | Committee or        | Committee or        | Committee or        | Committee or        | Committee or       
|                        | Board may           | Board may           | Board may           | Board may           | Board may          
|                        | suspend,            | suspend,            | suspend,            | suspend,            | suspend,           
|                        | terminate, amend    | terminate, amend    | terminate, amend    | terminate, amend    | terminate, amend   
|                        | or revise the Plan. | or revise the Plan  | or revise the Plan. | or revise the Plan. | or revise the Plan.

Item 7. Major Shareholders and Related Party Transactions

A.

To the knowledge of the Company, the following table sets
forth the names of each of the persons or entities who beneficially hold,
directly or indirectly, or exercise control or direction over more than five
percent (5%) of the voting rights attached to the issued and outstanding shares
of the Company entitled to vote at the shareholder meetings of the Company as at
March 23, 2005.

|                             | Beneficial number | Percentage of total
|---------------------------- | ----------------- | -------------------
|Name and municipality        | of shares held    | voting rights      
|Marty Steinberg, Receiver(1) |                   |                    
|Miami, Florida               | 18,720,508        | 40.5(3)            
|Michael E. Lobsinger(2)      |                   |                    
|Calgary, Alberta             | 4,441,042         | 9.6(3)             

Notes:

> (1)

65

---

(2)Of which 1,143,700 common
  shares are held directly or beneficially by Mr. Lobsinger and 3,297,342 are
  held by Quarry Bay Investments Inc., a private Alberta corporation
  wholly-owned by Mr. Lobsinger.

(3)

Based on a report from Olympia Trust Company, as at December 31, 2005, there
were 186 registered shareholders in the United States that held 25,855,882
common shares or 55.9 percent of the common shares outstanding.

To the extent known to the Company, the Company is not directly or indirectly
owned or controlled by any foreign government, or by any other natural or legal
persons, severally or jointly.

B.

Except as set forth below and other than employment
agreements with executive officers, stock option grants described elsewhere in
this report or as otherwise disclosed in this report, the Company is not aware
of any related party transactions occurring or being made, or any loans made by
the Company or any of its subsidiaries to related parties, from January 1, 2005
to March 23, 2006, other than the following:

January 1, 2006 to March 23, 2006

During the Corporation's period from January 1, 2006 to March 23, 2006, the
Corporation accrued and/or paid legal fees to a law firm of which one of the
directors of the Corporation was a partner amounting, in the aggregate, to
$23,240.

A consulting fee was paid by the Corporation to a consulting firm owned by an
officer amounting to $10,834 during the period from January 1, 2006 to March 23,
2006.

In February 2006, Donald P. Moore, a director of the
Corporation nominated by the Receiver, brought an action against the Corporation
and Michael Lobsinger, Chairman and President and CEO of the Corporation, under
the

January 1, 2005 to December 31, 2005

During the Corporation's fiscal year ended December 31, 2005, the Corporation
accrued and/or paid legal fees to a law firm of which one of the directors of
the Corporation was a partner amounting, in the aggregate, to $227,883.

A consulting fee was paid by the Corporation to a consulting firm owned by an
officer amounting to $49,333 during the fiscal year ended December 31, 2005.

In April 2005, the Company advanced $250,000 under a secured
loan agreement to MLG. At June 30, 2005, the full amount of the note receivable
including accrued interest was impaired and hence provided for.

During the Corporation's fiscal year ended December 31, 2005,
the Corporation transferred its interest in Oztime and English Practice to
Archer Education Group Inc. Michael Lobsinger and Don Hyde, directors of the
Corporation, serve as directors of Archer.

66

---

On December 30, 2005, an entity that is a related party to a director of the
Company, who is also an officer, subscribed to 180,000 shares of Archer
representing 1.6 percent of its outstanding shares at December 31, 2005.
The Corporation is a party to legal proceedings with the Receiver in both
Alberta and Florida. The Receiver is the holder of approximately 40.5 percent of
the Corporation's outstanding shares. See Item 8A- Legal Proceedings.C.
Interests of experts and counsel.

Not applicable.

Item 8. Financial Information

A.

See

Legal Proceedings

To our knowledge, the material legal proceedings related to the Company are
as follows:

Certain of our customers have been subject to a patent
infringement claim in the People's Republic of China as described below

> (i)

(ii) Dalian Hanpu Applied Technology Co., Ltd., Hu Xianhua & Hu Bin v. Ericsson
  (China) Co., Ltd. and Nanjing Ericsson Panda Mobile Terminals Co., Ltd., (the
  "Second Dalian Ericsson (Panda) Action").The Second Dalian Ericsson
  (Panda) Action is in the Second Intermediate People's Court (the "Lower
  Court") in Beijing, China. This is a lower court than the High Court in which
  the First Dalian Ericsson Action is being tried. The plaintiffs' complaint was
  filed with the Lower Court on February 22, 2001. This complaint alleges that
  Ericsson (China) Co., Ltd. and Nanjing Ericsson Panda Mobile Terminals Co.,
  Ltd. infringed the plaintiffs' intellectual property rights, namely Chinese
  patent ZL96120693.4, "Keyboard Assignment of Stroke Input and its Screen
  Prompt" (the same patent under suit in the First Dalian Ericsson Action). On
  February 22, 2001, Ericsson sent Zi Corporation a request for indemnification
  pursuant to the Ericsson Chinese License Agreement (defined below). The
  Company and its affiliates have not been named as a party in the Second Dalian
  Ericsson (Panda) Action. A ruling in Ericsson's favour was issued by the Lower
  Court on this matter on May 23, 2002. The Lower Court rejected the plaintiff's
  claims of infringement finding that: (1) there was no literal infringement of
  the plaintiff's patent by Zi's input technology on the Ericsson phone models
  in dispute; and (2) the doctrine of equivalence argued by the plaintiff could
  not be accepted as it would broaden the original scope of the plaintiff's
  patent claims. The plaintiff was charged with paying a nominal amount of
  RMB1,000 to cover case handling fees. The plaintiff has filed a notice of
  appeal to the High Court in order to appeal this Lower Court ruling. To the
  Company's knowledge, Ericsson is defending this appeal.

67

---

Both claims described in (i) and (ii) above will be
collectively referred to as the "Ericsson/HuBin Claims" and the Ericsson parties
named in the Ericsson/HuBin Claims shall be referred to as "Ericsson". Under the
respective notices sent to us, Ericsson asserted its rights to indemnification
granted by us to Ericsson under our Chinese eZiText license agreement with
Ericsson signed February 17, 1998 (the "Ericsson Chinese License Agreement").
Pending determination of the actual scope of the alleged infringement and
whether the scope of indemnity provided under the Ericsson Chinese License
Agreement applies, we have taken a course of action where we pay for Ericsson's
legal fees and where we exercise sole control of the conduct of Ericsson's defense against the Ericsson/HuBin Claims. Ericsson is cooperating and
participating with Zi to defend against the Ericsson/HuBin Claims. We believe
that the allegations are unfounded and without merit and Zi and Ericsson are
vigorously defending against the Hu Bin claims.

Furthermore, Ericsson made a separate application to the PRC
Patent Office seeking invalidation of the HuBin Patent (the "Invalidation
Application"). An invalidation hearing was held with the PRC Patent
Re-examination Board on May 27, 2002. In March 2004, a ruling from the PRC
Patent Re-examination Board was rendered in favour of the patent. An appeal was
heard in October 2004 and Ericsson was successful on most counts. As a result,
certain portions of the Hu Bin patent were found to be invalid. This ruling is
currently under appeal. We are awaiting advice with respect to the status of
this appeal. We have been informed by our attorneys that, on March 2, 2005, the
High Court issued an administrative ruling to suspend the proceedings of the
Ericsson/HuBin Claims, in light of the fact that a final decision has not yet
been made in respect of the Invalidation Application, and our attorneys believe
that it is unlikely for such proceedings to resume prior to a final decision
being made on the Invalidation Application.

> (iii)

A ruling in Alcatel's favour on this matter was also issued
by the Lower Court on May 23, 2002. The rulings by the Lower Court in this Dalian Alcatel Action are substantially similar to those given in the Second
Dalian Ericsson (Panda) Action. The plaintiff has filed a notice of appeal to
the High Court in order to appeal this Lower Court ruling. To the Company's
knowledge, Alcatel is defending this appeal.

We have disputed the applicability of the indemnity provided
by us to Alcatel under the license agreement dated October 20, 1999 (the
"Alcatel License Agreement") in respect of the Alcatel/HuBin Claims. To date, we
are not providing any indemnification to Alcatel in respect of Alcatel's defense
of the Alcatel/Hu Bin claim; however, we have been actively providing Alcatel
technical support for their defense. The Company believes that the Dalian
Alcatel Action has been suspended in light of the fact that a final decision has
not yet been made in respect of the Invalidation Application.

> (iv)

The Company is not a named party in the action. The
  Company has not accepted liability for any indemnity pursuant to its customer
  license agreements or otherwise. As a result of the Company's efforts the
  claim against two of the Company's customers was dismissed prior to any
  defence being filed. Without any admission of liability, the Company agreed as
  a business decision to assume the defence of five of its customers. Given the
  costs involved, as a business decision, the Company settled the claims against
  three of the Company's relatively minor customers. The Company continues to
  defend the action on behalf of two of its customers.

68

---

The Company is waiting on the Court's decision from
  the Markman Hearing in the litigation, a court process through which the claim
  terms in the '112 Patent are construed. At present, a decision under the Markman Hearings is expected by approximately April 30, 2006.

Simultaneously, the world's second largest provider
  of mobile phones and the Company's principal competitor are seeking
  reexamination of the '112 Patent in the US Patent & Trademark Office.

It is the Company's position that its product or
  products on a standalone basis does not infringe the '112 patent.

The Company intends to vigorously defend the
  litigation on behalf of its customers.

Dividend Policy

To date, we have not paid any dividends on shares, and do not
anticipate doing so in the foreseeable future. The declaration of dividends on
our common shares is within the discretion of our Board of Directors and will
depend upon, among other factors, earnings, capital requirements, and the
operating and financial condition of the Company.

B.

Not applicable

Item 9. The Offer and Listing.

A.

Our common shares are traded on the Toronto Stock Exchange under the symbol "ZIC"
and on the NASDAQ National Market under the symbol "ZICA". The following tables
set forth, for the periods indicated, high and low sale prices of our common
shares as reported on the Toronto Stock Exchange and on the NASDAQ National
Market.

Toronto Stock Exchange (in CDN$):

|Period                               |   | High |   | Low 
|------------------------------------ | - | ---- | - | ----
|February 2006                        | $ | 2.60 | $ | 1.83
|January 2006                         | $ | 2.18 | $ | 1.73
|December 2005                        | $ | 2.08 | $ | 1.53
|November 2005                        | $ | 2.51 | $ | 1.86
|October 2005                         | $ | 3.49 | $ | 2.47
|September 2005                       | $ | 3.66 | $ | 2.70
|Quarter ended December 31, 2005      | $ | 3.49 | $ | 1.53
|Quarter ended
    September 30, 2005 | $ | 3.81 | $ | 2.64
|Quarter ended
    June 30, 2005      | $ | 5.08 | $ | 2.66
|Quarter ended
    March 31, 2005     | $ | 9.15 | $ | 4.87
|Quarter ended
    December 31, 2004  | $ | 8.69 | $ | 3.23
|Quarter ended
    September 30, 2004 | $ | 4.26 | $ | 2.57
|Quarter ended
    June 30, 2004      | $ | 3.85 | $ | 2.78
|Quarter ended March 31, 2004         | $ | 4.03 | $ | 3.17
|Year ended December 31, 2005         | $ | 9.15 | $ | 1.53
|Year ended
    December 31, 2004     | $ | 8.69 | $ | 2.57

|Year ended
    December 31, 2003 | $ | 5.60  | $ | 2.39
|-------------------------------- | - | ----- | - | ----
|Year ended
    December 31, 2002 | $ | 11.29 | $ | 2.35
|Year ended December 31, 2001     | $ | 14.50 | $ | 7.36

69

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|                                     |   |      |   |     
|------------------------------------ | - | ---- | - | ----
|NASDAQ (in
    U.S.$):               |   |      |   |     
|                                     |   |      |   |     
|Period                               |   | High |   | Low 
|February 2006                        | $ | 2.28 | $ | 1.56
|January 2006                         | $ | 1.86 | $ | 1.49
|December 2005                        | $ | 1.78 | $ | 1.32
|November 2005                        | $ | 3.05 | $ | 1.55
|October 2005                         | $ | 7.45 | $ | 2.1 
|September 2005                       | $ | 7.55 | $ | 2.26
|Quarter ended December 31, 2005      | $ | 4.08 | $ | 1.32
|Quarter ended
    September 30, 2005 | $ | 7.04 | $ | 2.14
|Quarter ended
    June 30, 2005      | $ | 9.44 | $ | 2.17
|Quarter ended
    March 31, 2005     | $ | 7.45 | $ | 3.96
|Quarter ended
    December 31, 5004  | $ | 7.55 | $ | 2.65
|Quarter ended
    September 30, 2004 | $ | 3.35 | $ | 2.00
|Quarter ended
    June 30, 2004      | $ | 2.89 | $ | 2.03
|Quarter ended March 31, 2004         | $ | 3.05 | $ | 2.42
|Year ended December 31, 2005         | $ | 7.45 | $ | 1.32
|Year ended
    December 31, 2004     | $ | 7.55 | $ | 2.00
|Year ended
    December 31, 2003     | $ | 4.08 | $ | 1.62
|Year ended
    December 31, 2002     | $ | 7.04 | $ | 2.27
|Year ended December 31, 2001         | $ | 9.44 | $ | 4.00

B.

Not applicable.

C.

Our common shares are listed on the Toronto Stock Exchange and NASDAQ
National Market Exchange. At December 31, 2005, the Company had 46,272,568
common shares outstanding, with no par value.

D.

Not applicable.

E.

Not applicable.

F.

Not applicable.

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Item 10. Additional Information.
A.
Share capital.

Not applicable.

B.

The Company's Certificate of Incorporation, together with all
amendments, which we refer to as our articles of incorporation, are on file with
the Alberta Registrar of Corporations under Alberta Corporate Access Number
203761614. Our articles of incorporation do not include a stated purpose and
contain no restrictions on the nature of business to be carried on. Under the
Alberta

Directors

A director of our Company need not be a shareholder. In
accordance with the Alberta

Dependent Adults Act

A majority of the lesser of the number of directors holding
office at the time of the meeting and the minimum number of directors required
by our articles of incorporation will constitute a quorum, provided that at
least one quarter of the directors present are resident Canadians. Business
cannot be transacted at a directors' meeting without a quorum.

A director who is a party to, or who is a director or officer
of or has a material interest in any person who is a party to, a material
contract or transaction or proposed material contract or transaction with our
Company shall disclose to the Company the nature and extent of his interest at
the time and in the manner provided by the Alberta

- is an
  arrangement by way of security for money lent to or obligations undertaken by
  the director for the benefit of the Company or an affiliate;
- relates
  primarily to his or her remuneration as a director, officer, employee or agent
  of the Company or an affiliate;
- is for indemnity
  or insurance; or
- is with an
  affiliate.

Our Board of Directors may, on behalf of the Company and
without authorization of our shareholders:

- borrow money upon the credit of the company;
- issue, reissue, sell or pledge bonds, debentures, notes or
  other evidences or indebtedness or guarantees of our company, either secured
  or unsecured;
- subject to certain disclosure requirements of the Alberta

issue common
  shares or other securities of the Company.

Our articles of incorporation permit our Board of Directors
to appoint one or more additional directors of the Company to serve until the
next annual meeting of shareholders, provided that the number of additional
directors does not at any time, exceed one-third of the number of directors who
held office at the expiration of the last annual meeting of shareholders of the
Company.

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Common Shares

Our articles of incorporation authorize the issuance of an
unlimited number of common shares. The holders of the common shares of the
Company are entitled to receive notice of and to attend all meetings of the
shareholders of our Company and have one vote for each common share held at all
meetings of the shareholders of the Company, except for meetings at which only
holders of another specified class or series of shares of the Company are
entitled to vote separately as a class or series.

Subject to the prior rights of the holders of preferred shares of the
Company, the holders of common shares are entitled to receive dividends if and
when declared by our Board of Directors.

In the event of the dissolution, liquidation or winding-up of
the Company and subject to the prior rights of the holders of preferred shares,
the holders of the common shares will be entitled to share equally in the
remaining property and assets of the Company.

Preferred Shares

Our articles of incorporation authorize the issuance of an
unlimited number of preferred shares, in one or more series. The Alberta

Our articles of incorporation require that preferred shares
of each series must, with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, or any other return
of capital or distribution of the assets of the Company among its shareholders
for the purpose of winding up our affairs, rank on a parity with the preferred
shares of every other series and be entitled to preference over the common
shares and over any other shares of the Company ranking junior to the preferred
shares.

If any cumulative dividends or amounts payable on the return of capital in
respect of a series of preferred shares are not paid in full, all series of
preferred shares shall participate rateably in respect of accumulated dividends
and return of capital.

The holders of preferred shares will not be entitled to
receive notice of or vote at any shareholders' meetings, except as specifically
provided by the Alberta

Changing Rights of Shareholders

We are required to amend our articles of incorporation to
effect any change to the rights of our shareholders. Such an amendment would
require the approval of holders of two-thirds of the shares cast at a duly
called special meeting. If we wish to amend the rights of holders of a specific
class of shares, such approval would also be required from the holders of that
class. A shareholder is entitled to dissent in respect of such a resolution and,
if the resolution is adopted and the Company implements such changes, demand
payment of the fair value of its shares.

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Shareholder Meetings

An annual meeting of shareholders is held each year,
generally held not later than 15 months after the last preceding annual meeting,
for the purpose of considering the financial statements and reports, electing
directors, appointing auditors and for the transaction of other business as may
be brought before the meeting. The Board of Directors has the power to call a
special meeting of shareholders at any time. The By-laws of the Company provide
that two persons present in person holding or representing by proxy five percent
(5%) of the issued common shares of the Corporation, shall constitute a quorum
for the meeting in respect of holders of common shares. Although this quorum
requirement is less than that imposed by the rules of the NASDAQ National Market
System, we have operated for the past two years under an exemption from such
requirement on the basis that we are a foreign private issuer and such a quorum
requirement is consistent with normal business practices in our jurisdiction of
incorporation.

Notice of the time and place of each meeting of shareholders
must be given not less than 21 days, nor more than 50 days, before the date of
each meeting to each director, to the auditor and to each shareholder who at the
close of business on the record date for notice is entered in the securities
register as the holder of one or more shares carrying the right to vote at the
meeting. Notice of meeting of shareholders called for any other purpose other
than consideration of the minutes of an earlier meeting, financial statements
and auditor's report, election of directors and reappointment of the incumbent
auditor, must state the nature of the business in sufficient detail to permit
the shareholder to form a reasoned judgement and must state the text of any
special resolution to be submitted to the meeting.

The only persons entitled to be present at a meeting of
shareholders are those entitled to vote, the directors of the company and the
auditor of the company. Any other person may be admitted only on the invitation
of the chairman of the meeting or with the consent of the meeting. If a
corporation is winding-up, the Alberta

Our articles of incorporation state that meetings of our
shareholders may be held in the cities of San Francisco, California, Los
Angeles, California, New York, New York and Phoenix, Arizona in the United
States of America, in Toronto, Ontario, Canada and in Hong Kong, China and
Beijing, China in addition to anywhere in the Province of Alberta.

Limitations on Right to Own Securities

There is no limitation imposed by Canadian law or by our
articles or other charter documents on the right of a non-resident to hold or
vote common shares or preference shares with voting rights (the "Voting
Shares"), other than as provided in the

The notification procedure involves a brief statement of
information about the investment on a prescribed form which is required to be
filed with the IRD by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment
is in a specific type of business activity related to Canada's cultural heritage
and national identity.

If an investment is reviewable under the ICA, an application
for review in the form prescribed is normally required to be filed with the IRD
prior to the investment taking place and the investment may not be implemented
until the review has been completed and the Minister of Industry ("Minister")
(the Minister responsible for Investment Canada) is satisfied that the
investment is likely to be of net benefit to Canada. The Minister has up to 75
days to make this determination. If the Minister is not satisfied that the
investment is likely to be of net benefit to Canada, the non-Canadian must not
implement the investment or, if the investment has been implemented, may be
required to divest himself of control of the business that is the subject of the
investment.

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In 1999, some of the powers, duties and functions of the
Minister were transferred to the Minister of Canadian Heritage under Parts II to
VI of the ICA as they relate to the prescribed business activities enumerated
under paragraph 15(a) of the ICA, namely those that relate to Canada's "cultural
heritage or national identity" (Cultural Activities") Cultural Activities
include, among other things, the distribution or sale of books, magazines, film
and video recordings and music recordings. As a result, an application for
review must be submitted to the Cultural Sector Review Division of the
Department of Canadian Heritage (the "CSRD") in respect of the acquisition of
control of a Canadian business engaged in a Cultural Activity that exceeds the
prescribed lower monetary threshold applicable to the acquisition of such
Canadian businesses.

The Minister of Canadian Heritage's review, similar to the
Minister's review, is based on the statutory threshold of net benefit to Canada. CSRD is guided by certain policy statements regarding investments by
non-Canadians in Canadian businesses engaged in certain Cultural Activities.
CSRD's policy statements address certain Cultural Activities at the
production/publication, distribution and/or exhibition levels.

The following investments by non-Canadians are subject to notification under
the ICA:

> 1.

2.

The following investments by a non-Canadian are subject to review under the
ICA:

> 1.

> a.

b.Except as specified in
    paragraph (c) below, a threshold is calculated annually for reviewable
    direct acquisitions by or from WTO investors. The threshold for 2006 is
    CDN$265 million. Pursuant to Canada's international commitments, indirect
    acquisitions by or from WTO investors are not reviewable;

c.The limits set out in
    paragraph (a) apply to all investors for acquisitions of a Canadian business
    that:

> i.engages in the production
>     of uranium and owns an interest in a producing uranium property in Canada;
>     ii.provides any financial
>     service;
>     iii.provides any
>     transportation services; or
>     iv.is a cultural business.

2.

Generally speaking, an acquisition is direct if it involves
the acquisition of control of the Canadian business or of its direct or indirect
Canadian parent and an acquisition is indirect if it involves the acquisition of
control of a non-Canadian direct or indirect parent of an entity carrying on the
Canadian business. No change of voting control will be deemed to have occurred
if less than one-third of the voting control of a Canadian corporation is
acquired by an investor.

A WTO investor, as defined in the ICA, includes an individual
who is a national of a member country of the WTO or who has the right of
permanent residence in relation that WTO member, a government or government
agency of a WTO investor-controlled corporation, a limited partnership, trust or
joint venture that is neither WTO-investor controlled or Canadian controlled of
which two-thirds of its Board of Directors, general partners or trustees, as the
case may be, are any combination of Canadians and WTO investors.

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The higher thresholds for WTO investors do not apply if the Canadian business
engages in activities in certain sectors such as uranium, financial services
(except insurance), transportation services or cultural business.

The ICA exempts certain transactions from the notification
and review provisions of ICA, including, among others, (a) an acquisition of
Voting Shares if the acquisition were made in the ordinary course of that
persons' business as a trader or dealer in securities; (b) an acquisition of
control of the company in connection with the realization of a security interest
granted for a loan or other financial assistance and not for any purpose related
to the provisions of the ICA; (c) the acquisition of voting interests by any
person in the ordinary course of a business carried on by that person that
consists of providing, in Canada, venture capital on terms and conditions not
inconsistent with such terms and conditions as may be fixed by the Minister; and
(d) acquisition of control of the Company by reason of an amalgamation, merger,
consolidation or corporate reorganization, following which the ultimate direct
or indirect control in fact of the Company, through the ownership of voting
interests, remains unchanged.

Change of Control

Our articles of incorporation and by-laws do not contain any
specific provision that has the effect of delaying, deferring or preventing a
change of control of our company or that would operate only with respect to a
merger, acquisition or corporate restructuring involving the company (or any of
its subsidiaries).

Our authorized capital consists of an unlimited number of
common shares and an unlimited number of preferred shares. Although we have not
issued any preferred shares to date, the Board of Directors, may without any
further vote by the common shareholders, issue preferred shares and determine
the price, preferences, rights and restrictions, including voting and dividend
rights, of these shares. The rights of the holders of common shares are subject
to the rights of holders of any preferred shares that the Board of Directors may
issue in the future. That means that we can, for example, issue preferred shares
with more voting rights, higher dividend payments or more favourable rights upon
dissolution, than the common shares. If we issued certain types of preferred
shares in the future, it may also be more difficult for a third-party to acquire
a majority of our outstanding voting shares.

Disclosure of Ownership

Our by-laws do not contain provisions regarding public
disclosure of share ownership. Applicable Canadian securities legislation
requires certain public disclosure of the shareholdings of those persons who are
insiders of the Company. Insiders include directors and senior officers as well
as those persons who own common shares that exceed 10 percent of our company's
total issued and outstanding common shares.

C.

In the past two years the Company has not entered into any material contract
(other than contracts entered into in the ordinary course of business) except
for the following:

> 1.

2.

3.

See also the exhibits to this Annual Report.

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The Company has also entered into employment agreements with certain
executive officers of the Company. See
Item 6 - Directors - Senior
Management and Employees.

D.

The Company is aware of no governmental laws, decrees
regulations or other legislation, including foreign exchange controls, in Canada
which may affect the export or import of capital or that may affect the
remittance of dividends, interest or other payments to non-resident holders of
the Company's securities. Any such remittances to United States residents,
however, are subject to a withholding tax pursuant to

Except as provided in the ICA, the Company knows of no
limitations under the laws of Canada, the Province of Alberta, or in the charter
or any other constituent documents of the Company imposed on the right of
foreigners to hold or vote the shares of the Company. See

E.

Material Canadian Income Tax Consequences

Generally, cash dividends paid by Canadian corporations to
non-resident shareholders are subject to a withholding tax of 25 percent.
However, the

A non-resident shareholder who holds shares of the Company as
capital property will not be subject to tax on capital gains realized on the
disposition of such shares unless such shares are "taxable Canadian property"
within the meaning of the

Material United States Federal Income Tax Consequences

The following is a general discussion of material United
States federal income tax consequences, under current law, generally applicable
to a U.S. Holder (as defined below) of the Company's common shares. This
discussion does not address all potentially relevant federal income tax matters
and it does not address consequences peculiar to persons subject to special
provisions of federal income tax law, such as those described below as excluded
from the definition of a U.S. Holder. In addition, this discussion does not
cover any state, local or foreign tax consequences. See "

The following discussion is based upon the

This discussion is of a general nature only and is not
exhaustive of all U.S. federal income tax implications, and it is not intended
to be, nor should it be construed to be, legal or tax advice to any particular
holder or prospective holder of the Company's common shares and no opinion or
representation with respect to the United States federal income tax consequences
to any such holder or prospective holders is made. Accordingly, holders and
prospective holders of the Company's common shares should consult their own tax
advisors about the federal, state, local, and foreign tax consequences of
purchasing, owning and disposing of the Company's common shares.

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U.S. Holders

As used herein, a "U.S. Holder" means a holder of the
Company's common shares who is a U.S. citizen or individual income tax resident
of the United States under U.S. domestic law and the Convention, a corporation
created or organized in or under the laws of the United States or of any
political subdivision thereof, an estate the income of which is includable in
gross income for U.S. federal income tax purposes regardless of its source or a
trust if a U.S. court is able to exercise primary supervision over the trust's
administration and one or more U.S. persons have authority to control all
substantial decisions of such trust. This summary does not address the tax
consequences to, and a U.S. Holder does not include, persons subject to special
provisions of federal income tax law, including but not limited to tax-exempt
organizations, qualified retirement plans, individual retirement accounts and
other tax-deferred accounts, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals, persons or entities that have a "functional
currency" other than the U.S. dollar, shareholders who hold common stock as part
of a "straddle", hedging or a conversion transaction and shareholders who
acquired their stock through the exercise of employee stock options or otherwise
as compensation for service. This discussion is limited to U.S. Holders who hold
the common shares as capital assets and who hold the common shares directly
(e.g., not through an intermediate entity such as a corporation, partnership,
LLC or trust). This discussion does not address the consequences to a person or
entity holding an interest in a U.S. Holder or the consequence to a person of
the ownership, exercise or disposition of any warrants, options or other rights
to acquire common shares.

Distributions on Common Shares

U.S. Holders receiving dividend distributions with respect to
the Company's common shares are required to include in gross income for United
States federal income tax purposes the gross amount of such distributions
(including any Canadian tax withheld) equal to the U.S. dollar value of each
dividend on the date of receipt (based on the exchange rate on such date) to the
extent that the Company has current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. It
should be noted that as used in this discussion of U.S. Federal Income Tax
Consequences, the term "earnings and profits" refers to the Company's earnings
and profits as determined under the Code and the term "dividend" refers to
corporate distributions taxable as dividends for U.S. federal income tax
purposes. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States federal taxable income by those who itemize deductions. (See more
detailed discussion at "

In the case of foreign currency received as a dividend that
is not converted by the recipient into U.S. dollars on the date of the receipt,
a U.S. Holder will have a tax basis in the foreign currency equal to its U.S.
dollar value on the date of receipt. Generally, any gain or loss recognized upon
a subsequent sale or other disposition of the foreign currency, including an
exchange for U.S. dollars, will be ordinary income or loss. Under Treasury
Regulations, dividends paid on the Company's common shares, if any, generally
will not be subject to backup withholding tax (at a 28% rate) if the paying
agent is furnished with a duly completed and signed Form W-9 or certain other
circumstances apply. Any amounts withheld under the U.S. backup withholding tax
rules will be allowed as a refund or a credit against the U.S. Holder's U.S.
federal income tax liability, provided the required information is furnished to
the IRS.

Foreign Tax Credit

A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of the Company's common shares may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit
because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and generally
applies to all foreign taxes paid by (or withheld from) the U.S. Holder during
that year.

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The operation of the foreign tax credit for any particular
U.S. Holder will be dependent on his or its particular situation. There are
significant and complex limitations which apply to the credit, among which is
the general limitation that the credit cannot exceed the proportionate share of
the U.S. Holder's United States income tax liability that the U.S. Holder's
foreign source income bears to his, her or its worldwide taxable income. In the
determination of the application of this limitation, the various items of income
and deduction must be classified into foreign and domestic sources. Complex
rules govern this classification process. In addition, this limitation is
calculated separately with respect to specific classes of income such as
"passive income," "high withholding tax interest," "financial services income,"
"shipping income," and certain other classifications of income. Dividends
distributed by the Company will generally constitute "passive income" or, in the
case of certain U.S. Holders, "financial services income" for these purposes.

Disposition of Common Shares

A U.S. Holder will recognize gain or loss upon the sale or
other disposition of common shares equal to the difference, if any, between (i)
the amount of cash plus the fair market value of any property received, and (ii)
the shareholder's tax basis in the Company's common shares. Preferential tax
rates apply to long-term capital gains of U.S. Holders who are individuals,
estates or trusts. At present, there are no preferential tax rates applicable to
U.S. Holders which are corporations. This gain or loss generally will be capital
gain or loss if the common shares are a capital asset in the hands of the U.S.
Holder, which will be a long-term capital gain or loss if the common shares of
the Company are held for more than one year. Deductions for net capital losses
may be carried over to be used in later tax years until such net capital loss is
thereby exhausted. For U.S. Holders which are corporations (other than
corporations subject to Subchapter S of the Code), an unused net capital loss
may be carried back three years from the loss year and carried forward five
years from the loss year to be offset against capital gains until such net
capital loss is thereby exhausted.

Other Considerations

In the following circumstances, the above sections of this discussion may not
describe the United States federal income tax consequences resulting from the
holding and disposition of common shares.

As used herein "U.S. Person" means a citizen or income tax resident of the
United States as determined under U.S. domestic law.

Foreign Personal Holding Company

If at any time during a taxable year more than 50 percent of
the total combined voting power or the total value of the Company's outstanding
shares is owned, directly or indirectly (including through attribution), by five
or fewer U.S. Persons who are individuals and 60 percent or more of the
Company's gross income for such year was derived from certain passive sources
(e.g., dividends, interest, rents, royalties, etc.), the Company is a "foreign
personal holding company" ("FPHC"). (The 60 percent test is reduced to 50
percent after the first tax year that the entity is a FPHC.) In that event, U.S.
Holders would be required to include in gross income for such year their
allocable portions of the Company's undistributed income.

Foreign Investment Company

If 50 percent or more of the combined voting power or total
value of all classes of the Company's stock is held, directly or indirectly
(including through attribution), by U.S. Persons, the Company is found to be
engaged primarily in the business of investing, reinvesting, or trading in
securities, commodities, or any interest therein, and certain other conditions
are met, it is possible that the Company may be treated as a "foreign investment
company" as defined in Section 1246 of the Code. This characterization causes
all or part of any gain realized by a U.S. Holder selling or exchanging common
shares to be treated as ordinary income rather than capital gain.

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Passive Foreign Investment Company

As a foreign corporation with U.S. Holders, the Company could
potentially be treated as a passive foreign investment company ("PFIC"), as
defined in Section 1297 of the Code, depending upon the percentage of the
Company's income which is passive, or the percentage of the Company's assets
which are producing passive income. Generally, U.S. Holders of PFICs are taxed
upon receipt of "excess distributions" which include (i) gains recognized on the
sale or deemed disposition of PFIC stock, and (ii) distributions made by the
PFIC to the extent that the total distributions received for the tax year
exceeds 125 percent of the average actual distributions received in the
preceding three years. An excess distribution is allocated rateably to each day
in the shareholder's holding period for the stock. Amounts allocated to the
current year and the pre-PFIC holding period (if any) are included in gross
income as ordinary income. Amounts allocated to the PFIC period (other than the
current year) are subject to tax at the highest U.S. income tax rate plus an
interest charge to reflect the benefit of tax deferral.

However, if the U.S. Holder makes a timely election to treat
a PFIC as a qualified electing fund ("QEF") with respect to such shareholder's
interest therein, the above-described rules generally would not apply. Instead,
the electing U.S. Holder would include annually in gross income his, her or its
pro rata share of the PFIC's ordinary earnings and net capital gain, regardless
of whether such income or gain was actually distributed. A U.S. Holder making a
QEF election can, however, under certain circumstances elect to defer the
payment of United States federal income tax on such income inclusions subject to
an interest charge on the amount of deferred taxes. In addition, subject to
certain limitations, U.S. Holders owning (actually or constructively) marketable
stock in a PFIC will be permitted to elect to mark that stock to market
annually, rather than be subject to the excess distribution regime described
above. Amounts included in or deducted from income under this alternative (and
actual gains and losses realized upon disposition, subject to certain
limitations) will be treated as ordinary gains or losses.

Controlled Foreign Corporation

If more than 50 percent of the voting power of all classes of
stock or the total value of the stock of the Company is owned, directly or
indirectly (including through attribution), by U.S. Persons, each of whom own 10
percent or more of the total combined voting power of all classes of stock of
the Company ("United States Shareholder"), the Company is a "controlled foreign
corporation" under the Code. This classification has many complex consequences,
one of which is the inclusion of certain income of a CFC in the U.S.
Shareholders' income on a current basis, regardless of distributions. Such U.S.
Shareholders are generally treated as having received a current distribution out
of the CFC's Subpart F income (generally, passive income and certain income
generated by transactions between related parties) and are also subject to
current U.S. tax on their pro rata shares of the CFC's earnings invested in U.S.
property. In certain circumstances, a foreign tax credit may apply to reduce the
U.S. tax on these amounts. In addition, under Section 1248 of the Code, gain
from the sale or exchange of stock by a holder of common shares who is or was a
United States Shareholder at any time during the five year period ending with
the sale or exchange may be treated as ordinary dividend income to the extent of
earnings and profits of the Company attributable to the stock sold or exchanged.
If a foreign corporation is both a PFIC and a CFC, the foreign corporation
generally will not be treated as a PFIC with respect to United States
shareholders of the CFC.

F.

Not applicable.

G.

Not applicable.

H.

Public documents are available for inspection at the Company's head offices
located at 2100, 840 - 7th Avenue S.W., Calgary, AB T2P 3G2, and, for
certain documents, on the Internet at www.sedar.com and at www.edgar.com.

The Company is subject to the information requirements of the

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Statements made in this annual report on Form 20-F about the contents of
contracts or other documents are not necessarily complete and we refer
Shareholders to the copy of such contracts or other documents filed as exhibits
to this annual report.

The Company's Securities and Exchange Commission filings, and
the exhibits thereto, are available for inspection and copying at the public
reference facilities maintained by the Securities and Exchange Commission in
Judiciary Plaza, Room 1024, 450 Fifth Street N.W., Washington, D.C., 20549.
Copies of these filings may be obtained from these offices after the payment of
prescribed fees. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms. These
filings are also available on the Securities and Exchange Commission's website
at www.sec.gov.

The Company will also provide its shareholders with proxy
statements prepared according to Canadian law. As a Canadian company, the
Company is exempt from the Exchange Act rules about prescribing the furnishing
and content of proxy statements to shareholders and is also exempt from the
short-swing profit recovery and disclosure regime of section 16 of the Exchange
Act.

I.

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risk.

(A) Quantitative information about market risk.

Accounts receivable, cash equivalents, investment in
significantly influenced company, accounts payable, accrued liabilities, note
payable, capital lease obligations and other deferred costs constitute financial
instruments. The carrying values of these financial instruments approximate
their fair value given the relatively short periods to maturity. The carrying
values for these financial instruments represent their maximum credit risk. The
note receivable constitutes a financial instrument with a fair value that is not
determinable due, in part, to the unrecognized contingent portion of the note
(note 3). The investment in significantly influenced company constitutes a
financial instrument with a fair value that is not determinable due to the
unavailability of independent third party evidence to support a valuation of
this investment.

The Company maintains substantially all cash and cash
equivalents with major financial institutions. Deposits held with banks may
exceed the amounts of insurance provided on such deposits. Credit risk exposure
includes accounts receivable with customers primarily located in North America,
China, Korea, and Western Europe. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, require no
collateral from customers. The Company is exposed to the risks arising from
fluctuations in foreign exchange rates, and the volatility of those rates. The
Company does not use derivative instruments to reduce its exposure to foreign
currency exchange risk.

(B) Qualitative information about market risk

Interest Rate Risk

The Company does not maintain any market risk sensitive instruments for
trading purposes or instruments entered into for purposes other than trading
purposes, other than maintaining a short term investment portfolio consisting
mainly of term deposits purchased with an average maturity of less than three
months. These securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent of their levels at December 31,
2005, the fair value of the portfolio would decline by an immaterial amount. The
Company generally has the ability to hold its fixed income investments until
maturity and therefore it would not expect its operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on its investment portfolio.

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Foreign Exchange Rate Risk

The foreign operations of the Company are translated into U.S. dollars for
financial statement presentation. Consequently, movements in exchange rates may
have significant impact on financial results.

Substantially all of the Company's product revenues are
denominated in U.S. dollars while expenses are denominated in Canadian dollars,
Hong Kong dollars, U.S. dollars, Swedish Kronor, and Chinese renminbis. Based on
the 2005 distribution of revenues and cash flows, a one percent change in the
U.S. dollar relative to all other named currencies is estimated to affect
revenues by $nil and expenses by $118,853.

Item 12. Description of Securities Other than Equity Securities.

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.

Not applicable

Item 15. Controls and Procedures.

As of December 31, 2005, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation
our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures are effective to ensure that
information required to be included in our periodic reports to the Securities
and Exchange Commission is recorded, processed, summarized and reported in a
timely manner.

As disclosed in the company's annual report on Form 20-F for
the financial year ended December 31, 2004, the Company identified a "material
weakness" in its internal controls over financial reporting, as defined in
Public Company Accounting Oversight Board ("PCAOB"), Auditing Standard No. 2. As
defined by the PCAOB, a material weakness is "a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected." The material weakness related to
a failure to properly reflect in the notes to the consolidated financial
statements the stock based compensation expense reflecting a variety of vesting
periods consistent with its stock option grants. In 2003, the determination of
the stock based compensation expense was based on amortization periods that did
not best reflect the variety of vesting periods for the associated stock option
grants. Accordingly, the Company restated the 2003 stock compensation expense
and appropriate related balances as disclosed in notes 2 and 16 to the Company's
2004 consolidated financial statements.

During the course of the period covered by this Form 20-F,
management undertook new control measures to remediate this issue. These
measures included making appropriate changes to the Company's documented
accounting policies and procedures for stock based compensation accounting and
the associated stock option grants and added an additional Chartered Accountant
to the Company's accounting department staff. There were no other changes in the
Company's internal control over financial reporting that occurred during the
year ended December 31, 2005 that have materially affected, or are reasonably
likely to materially affect the Company's internal control over financial
reporting. Following the implementation of these measures, management concluded
that the material weakness discussed above had been remediated and that the
Company's disclosure controls and procedures were sufficiently well developed to
support an assessment that these controls and procedures were effective.

81

---

While the Company concluded that its disclosure controls and
procedures controls were effective, in connection with the Company's
implementation of Section 404 of the Sarbanes Oxley Act ("Sox 404"), the Company
is in the process of strengthening controls and remediating identified
deficiencies in its controls and procedures. In the event that deficiencies that
have been or might be identified are not remediated within the required period,
once tested, such deficiencies could result in a conclusion that the Company has
a material weakness in internal control. The Company is required to comply with
the requirements of Sox 404 by December 31, 2007.Item 16. [Reserved]
Item 16A. Audit committee financial expert.The Board of Directors of the Company has appointed Mr. H.
Donald Hyde to the audit committee. Mr. Hyde is a chartered accountant and has
had his own practice since 1991. Prior to setting up his own practice, Mr. Hyde
was the vice president of finance and administration for an international oil
and gas drilling and service company. The Board of Directors has determined that
Mr. Donald Hyde possesses the necessary attributes for designation as the
Company's audit committee financial expert and has designated Mr. Hyde as its
audit committee financial expert to the extent that this requirement currently
applies to the Company. Management of the Company believes that Mr. Hyde and the
other members of the Audit Committee have the skills, experience and education
that qualify them to carry out their duties as members of the Audit Committee.
Mr. Hyde is independent as defined by the rules of the NASDAQ National Market
System.

Item 16B. Code of Ethics.

The Company has adopted a Code of Business Conduct and Ethics
that currently applies to its directors, officers and employees. Copies of the
code will be provided to any person free of charge upon receipt of a written
request, sent to our registered office via mail or fax.

Item 16C. Principal Accountant Fees and Services.

Audit Fees

Deloitte & Touche LLP were the Company's independent
registered chartered accountants for both 2005 and 2004. Audit fees paid were
$220,934 for 2005 and $95,691 for 2004. Audit fees relate to the audit of the
year end financial statements, reviews of interim financial statements, and
review of SEC filings.

Audit Related Fees

Audit related fees paid were $41,366 for 2005 and $3,029 for
2004. Audit related fees paid in 2003 were related to consultations concerning
financial accounting and reporting standards and the accounting for acquisitions
and dispositions carried out by the Company.

Tax Fees

In 2005, we paid Deloitte & Touche LLP $69,743 for tax related services. In
2004, we paid Deloitte & Touche LLP $7,922 for tax related services.

All Other Fees

We did not purchase any other services from Deloitte & Touche LLP in 2005 or
2004.

Our Audit Committee has adopted a policy and procedures for
the approval of audit and non-audit services rendered by our independent
registered chartered accountants, Deloitte & Touche LLP. The policy generally
requires the Audit Committee's approval of the scope of the engagement of our
independent registered chartered accountants on an individual basis. The policy
prohibits retention of the independent registered chartered accountants to
perform the prohibited non-audit functions defined in Section 201 of the
Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether
proposed services are compatible with the independence of the registered
chartered accountants. Our Audit Committee approved all of the audit fees,
audit-related fees and tax fees from May 2003 onward.

82

---

Item 16D. Exemptions from the Listing Standards for Audit Committees.Not applicable

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.

Not applicable

PART III

Item 17. Financial Statements.

Not Applicable.

Item 18. Financial Statements.

See attached

Item 19. Exhibits.

The list of exhibits is included following the signature page hereto.

SIGNATURE

The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

ZI CORPORATIONPer: /s/Michael LobsingerMichael
      LobsingerChairman,
      President and Chief Executive OfficerDate: March 31,
      2006Per: /s/Dale KearnsDale KearnsChief Financial
      OfficerDate: March 31,
      2006


83

---

ANNUAL REPORT ON FORM 20-Ffor the year ended
December 31, 2005

EXHIBIT INDEX

|         |                                                                                                                                                                                                                                                                                                                                                             
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |                                                                                                                                                                                                                                                                                                                                                             
|No. Item | Description
    of Exhibit                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                             
|1.1**    | Certificate of
    Incorporation, together with all amendments. (Previously filed as Exhibit
    1.1)                                                                                                                                                                                                                                                       
|1.2**    | Bylaws.
    (Previously filed as Exhibit 1.2)                                                                                                                                                                                                                                                                                                               
|4.1+     | Employment
    Agreement dated December 31, 1999, between Zi Corporation and Michael
    Lobsinger. (Previously filed as Exhibit 3.4)                                                                                                                                                                                                                       
|4.2***   | Amending
    Agreement, dated March 2004 between Zi corporation and Michael Lobsinger.                                                                                                                                                                                                                                                                      
|4.4+     | Employment
    Agreement dated February 5, 2001 between Zi Corporation of America, Inc. and
    Roland Williams. (Previously filed as Exhibit 3.6)                                                                                                                                                                                                          
|4.5***   | Employment
    Agreement between Zi Corporation and Milos Djokovic.                                                                                                                                                                                                                                                                                         
|4.6***   | Employment
    Agreement between Zi Corporation and Dale Kearns, as amended.                                                                                                                                                                                                                                                                                
|4.8**    | Zi Corporation
    Amended 1999 Stock Option Plan approved by shareholders at the Annual
    General Meeting on June 5, 2002. (Previously filed as Exhibit 4.13)                                                                                                                                                                                            
|4.9      | Zi Corporation
    1996, 1998 and 1999 Stock Option Plans as amended (previously filed on Form
    S-8)                                                                                                                                                                                                                                                     
|4.10++   | Settlement
    Agreement made December 6, 2002 between America Online, Inc., Zi Corporation
    and Zi Corporation of America, Inc. (Portions of this exhibit have been
    redacted, omitted and filed separately with the Securities and Exchange
    Commission pursuant to a request for confidential treatment) (Previously
    filed as Exhibit 4.17.)
|4.11++   | Consent Judgment
    Order and Permanent Injunction dated December 20, 2002 made by The
    Honourable Maxine M. Chesney, United States District Court Judge in the
    United States District Court for the Northern District of California San
    Francisco Division. (Previously filed as Exhibit 4.18.)                                                
|8.1      | List of
    Subsidiaries (included in Item 4)                                                                                                                                                                                                                                                                                                               
|11.1***  | Zi Corporation
    Code of Ethics                                                                                                                                                                                                                                                                                                                           
|12.1     | Section 302
    Certification by Dale Kearns, Chief Financial Officer dated March 31, 2006.                                                                                                                                                                                                                                                                 
|12.2     | Section 302
    Certification by Michael Lobsinger, Chief Executive Officer dated March 31,
    2006.                                                                                                                                                                                                                                                       
|13.1     | Section 906
    Certification by Dale Kearns, Chief Financial Officer dated March 31, 2006.                                                                                                                                                                                                                                                                 
|13.2     | Section 906
    Certification by Michael Lobsinger, Chief Executive Officer, dated March 31,
    2006.                                                                                                                                                                                                                                                      
|99.1     | Audit Committee
    Charter                                                                                                                                                                                                                                                                                                                                 
|99.2     | Consent of
    Independent Registered Chartered Accountants                                                                                                                                                                                                                                                                                                 
|*        | Previously filed
    on Form 20-F Annual Report for December 31, 1999.                                                                                                                                                                                                                                                                                      
|+        | Previously filed
    on Form 20-F Annual Report for December 31, 2000.                                                                                                                                                                                                                                                                                      
|**       | Previously filed
    on Form 20-F Annual Report for December 31, 2001.                                                                                                                                                                                                                                                                                      
|++       | Previously filed
    on Form 20-F Annual Report for December 31, 2003.                                                                                                                                                                                                                                                                                      
|***      | Previously filed
    on Form 20-F Annual Report for December 31, 2004.                                                                                                                                                                                                                                                                                      

---

Management's ReportThe consolidated financial statements and all information in
the Annual Report have been prepared by management and approved by the Board of
Directors. These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, where appropriate, reflect management's best estimates and
judgments. Management is responsible for the accuracy, integrity and objectivity
of these consolidated financial statements within reasonable limits of
materiality and for the consistency of financial data included in the text of
the Annual Report with that in these consolidated financial statements.
To assist management in the discharge of these
responsibilities, the Company maintains a system of internal controls over
financial reporting designed to provide reasonable assurance that accounting
records are reliable and assets are safeguarded.
The Board of Directors appoints the Audit Committee. The
Audit Committee meets with management as well as with the independent registered
chartered accountants to satisfy itself that management is properly discharging
its financial reporting responsibilities and to review these consolidated
financial statements and the report of independent registered chartered
accountants. The Audit Committee reports its findings to the Board of Directors
for consideration in approving these consolidated financial statements for
presentation to the shareholders. The independent registered chartered
accountants have direct access to the Audit Committee of the Board of Directors.
Deloitte & Touche LLP has audited these consolidated
financial statements independently on behalf of the shareholders, in accordance
with Canadian generally accepted accounting standards and the standards of the
Public Company Accounting Oversight Board (United States). Their report outlines
the nature of their audit and expresses their opinion on these consolidated
financial statements.

|(signed)                                  | (signed)                   
|----------------------------------------- | ---------------------------
|Michael E. Lobsinger                      | Dale Kearns                
|President and Chief
    Executive Officer | Chief Financial
    Officer
|March 17, 2006                            |                            

-1-

---

Report of Independent Registered Chartered
AccountantsTo the Board of Directors and Shareholders of Zi Corporation

We have audited the consolidated balance sheets of Zi
Corporation as at December 31, 2005 and 2004 and the consolidated statements of
loss, shareholders' equity and cash flow for each of the years in the three year
period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position of Zi
Corporation as at December 31, 2005 and 2004 and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 2005 in accordance with accounting principles generally accepted in the
United States of America.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion.

/s/ Deloitte and Touche LLP
Independent Registered Chartered Accountants 
Calgary, Alberta, Canada 
March 17, 2006
-2-

---

Consolidated
Balance Sheets

|As at December 31                                                            |   | 2005         |   | 2004        
|---------------------------------------------------------------------------- | - | ------------ | - | ------------
|(All amounts in United States of America
    dollars except share amounts)   |   |              |   |             
|                                                                             |   |              |   |             
|Assets                                                                       |   |              |   |             
|Current assets                                                               |   |              |   |             
|Cash and cash equivalents                                                    | $ | 12,157,440   | $ | 12,889,335  
|Accounts receivable, net of allowance of $426,697
    (2004 - $154,108)      |   | 4,579,966    |   | 5,570,869   
|Accounts receivable from related party (note 13)                             |   | -            |   | 43,629      
|Work-in-progress and inventory                                               |   | 13,897       |   | -           
|Prepayments and deposits                                                     |   | 607,375      |   | 414,994     
|Total current assets                                                         |   | 17,358,678   |   | 18,918,827  
|Notes receivable (note
    4)                                                |   | -            |   | -           
|Capital assets - net
    (note 5)                                            |   | 1,210,947    |   | 1,087,957   
|Intangible assets - net
    (note 6)                                         |   | 3,834,880    |   | 1,692,087   
|Investment in significantly influenced
    company (notes 3 and 10)          |   | -            |   | -           
|                                                                             | $ | 22,404,505   | $ | 21,698,871  
|                                                                             |   |              |   |             
|Liabilities and shareholders' equity                                         |   |              |   |             
|Current liabilities                                                          |   |              |   |             
|Bank indebtedness (note 7)                                                   | $ | 106,650      | $ | -           
|Accounts payable and accrued liabilities (note
    17)                       |   | 4,211,564    |   | 3,081,280   
|Deferred revenue                                                             |   | 4,185,341    |   | 2,704,105   
|Current portion of other long-term liabilities
    (note 8)                  |   | 64,927       |   | 71,969      
|Total current liabilities                                                    |   | 8,568,482    |   | 5,857,354   
|Notes payable (note 7)                                                       |   | 147,678      |   | -           
|Other long-term liabilities (note 8)                                         |   | 30,530       |   | 92,361      
|                                                                             |   | 8,746,690    |   | 5,949,715   
|                                                                             |   |              |   |             
|Contingent liabilities,
    commitments and guarantees (notes 12 & 14)       |   |              |   |             
|                                                                             |   |              |   |             
|Shareholders' equity                                                         |   |              |   |             
|Share capital (note 9)                                                       |   |              |   |             
|Unlimited number of
    Class A, 9% convertible, preferred shares authorized |   |              |   |             
|and no shares issued or outstanding                                          |   | -            |   | -           
|Unlimited number of
    common shares, no par value, authorized,             |   |              |   |             
|46,272,568 (2004 - 45,225,190) issued and
    outstanding                    |   | 109,365,824  |   | 106,025,634 
|Additional paid-in
    capital                                               |   | 2,114,190    |   | 2,114,190   
|Accumulated deficit                                                          |   | (97,244,454) |   | (91,927,031)
|Accumulated other
    comprehensive loss                                     |   | (577,745)    |   | (463,637)   
|                                                                             |   | 13,657,815   |   | 15,749,156  
|                                                                             | $ | 22,404,505   | $ | 21,698,871  
|See
    accompanying notes to consolidated financial statements.            

|                      |            
|--------------------- | -----------
|(signed)              | (signed)   
|Michael E. Lobsinger  | Donald Hyde
|Chairman of the Board | Director   

-3-

---

Consolidated Statements of Loss

|Years ended December 31                                                    |   | 2005        |   | 2004        |   | 2003       
|-------------------------------------------------------------------------- | - | ----------- | - | ----------- | - | -----------
|(All amounts in United States of America
    dollars except share amounts) |   |             |   |             |   |            
|Revenue                                                                    |   |             |   |             |   |            
|License and implementation fees                                            | $ | 10,614,043  | $ | 12,898,838  | $ | 9,918,998  
|Other product revenue                                                      |   | 770,470     |   | 504,213     |   | 684,070    
|                                                                           |   | 11,384,513  |   | 13,403,051  |   | 10,603,068 
|Cost of sales                                                              |   |             |   |             |   |            
|License and implementation fees                                            |   | 355,597     |   | 362,562     |   | 349,824    
|Other product costs                                                        |   | 248,689     |   | 109,252     |   | 85,711     
|                                                                           |   | 604,286     |   | 471,814     |   | 435,535    
|Gross margin                                                               |   | 10,780,227  |   | 12,931,237  |   | 10,167,533 
|                                                                           |   |             |   |             |   |            
|Operating expenses                                                         |   |             |   |             |   |            
|                                                                           |   |             |   |             |   |            
|Selling general and
    administrative                                     |   | (9,861,123) |   | (9,281,365) |   | (8,137,551)
|Litigation and legal(note 12)                                              |   | (1,673,486) |   | (833,197)   |   | (886,860)  
|Product research and
    development                                       |   | (4,243,172) |   | (2,350,141) |   | (2,098,735)
|Depreciation and
    amortization(note 6)                                  |   | (1,134,554) |   | (926,886)   |   | (1,380,265)
|Impairment of note
    receivable(note 4)                                  |   | (250,000)   |   | (2,000,000) |   | -          
|Gain on settlement of litigation
    (note 12)                             |   | 1,415,616   |   | -           |   | -          
|Operating loss before undernoted                                           |   | (4,966,492) |   | (2,460,352) |   | (2,335,878)
|                                                                           |   |             |   |             |   |            
|Interest on capital lease obligation                                       |   | (3,924)     |   | (25,558)    |   | (9,856)    
|Other interest expense                                                     |   | (2,368)     |   | (30,839)    |   | (608,858)  
|Interest income and other income                                           |   | 366,796     |   | 128,550     |   | 23,483     
|Loss before income taxes                                                   |   | (4,605,988) |   | (2,388,199) |   | (2,931,109)
|Equity interest in loss of significantly
    influenced company (note 10)  |   | -           |   | -           |   | -          
|Minority interest (note 3)                                                 |   | (23,920)    |   | -           |   | -          
|Income taxes (note 11)                                                     |   | (687,515)   |   | -           |   | -          
|Net loss                                                                   | $ | (5,317,423) | $ | (2,388,199) | $ | (2,931,109)
|Basic and diluted loss per share
    (note 9 and 17)                       | $ | (0.12)      | $ | (0.06)      | $ | (0.08)     
|Weighted average common shares -
    basic and diluted                     |   | 46,152,711  |   | 41,373,309  |   | 38,719,786 
|Common shares outstanding, end of
    year                                 |   | 46,272,568  |   | 45,225,190  |   | 39,371,560 
|See accompanying notes to consolidated
    financial statements.          

|
|

-4-

---

Consolidated
Statements of Shareholders' Equity

|                                                                            |                          |               |             |           |                 |   |               |   | Accumulated   |   |            
|--------------------------------------------------------------------------- | ------------------------ | ------------- | ----------- | --------- | --------------- | - | ------------- | - | ------------- | - | -----------
|                                                                            |                          |               |             |           |                 |   |               |   | other         |   | Total      
|                                                                            | Common shares
    issued |               | Additional  |           | Accumulated     |   | comprehensive |   | comprehensive
|                                                                            | Shares                   |               | Amount      |           | paid-in capital |   | deficit       |   | income (loss) |   | loss       
|(All amounts in United States of America dollars except share
    amounts) 
|Balance - December 31, 2002                                                 | 37,914,250               | $             | 90,975,597  | $         | 188,938         | $ | (86,607,723)  | $ | (901,924)     |   |            
|Issued on exercise of stock
    options                                     | 301,666                  |               | 697,457     |           | -               |   | -             |   | -             |   |            
|Issued under private placement                                              | 1,000,000                |               | 1,968,610   |           | -               |   | -             |   | -             |   |            
|Issued restricted stock units                                               | -                        |               | -           |           | 516,354         |   | -             |   | -             |   |            
|Settlement of debt with
    attached stock purchase warrants                | -                        |               | -           |           | (154,065)       |   | -             |   | -             |   |            
|Exercise of restricted stock
    units                                      | 33,961                   |               | -           |           | -               |   | -             |   | -             |   |            
|Issued shares on settlement of
    debt                                     | 21,683                   |               | 44,827      |           | -               |   | -             |   | -             |   |            
|Issued share purchase warrants                                              | -                        |               | -           |           | 50,517          |   | -             |   | -             |   |            
|Issued on exercise of share
    purchase warrants                           | 100,000                  |               | 271,161     |           | -               |   | -             |   | -             |   |            
|Net loss                                                                    | -                        |               | -           |           | -               |   | (2,931,109)   |   | -             |   | (2,931,109)
|Other comprehensive income from
    foreign currency translation adjustment | -                        |               | -           |           | -               |   | -             |   | 162,453       |   | 162,453    
|Balance - December 31, 2003                                                 | 39,371,560               | $             | 93,957,652  | $         | 601,744         | $ | (89,538,832)  | $ | (739,471)     | $ | (2,768,656)
|Issued on exercise of stock
    options                                     | 1,143,766                |               | 2,289,957   |           | -               |   | -             |   | -             |   |            
|Issued under a private
    placement                                        | 3,636,364                |               | 7,067,885   |           | -               |   | -             |   | -             |   |            
|Issued restricted stock units                                               | -                        |               | -           |           | 685,767         |   | -             |   | -             |   |            
|Issued share purchase warrants to
    consultant re private placement       | -                        |               | (141,048)   |           | 141,048         |   | -             |   | -             |   |            
|Issued on exercise of share
    purchase warrants                           | 1,073,500                |               | 2,851,188   |           | -               |   | -             |   | -             |   |            
|Issued stock options to
    non-employee                                    | -                        |               | -           |           | 685,631         |   | -             |   | -             |   |            
|Net loss                                                                    | -                        |               | -           |           | -               |   | (2,388,199)   |   | -             |   | (2,388,199)
|Other comprehensive income from
    foreign currency translation adjustment | -                        |               | -           |           | -               |   | -             |   | 275,834       |   | 275,834    
|Balance - December 31, 2004                                                 | 45,225,190               | $             | 106,025,634 | $         | 2,114,190       | $ | (91,927,031)  | $ | (463,637)     | $ | (2,112,365)
|Issued on exercise of stock
    options                                     | 290,967                  |               | 736,867     |           | -               |   | -             |   | -             |   |            
|Issued on exercise of share
    purchase warrants                           | 609,482                  |               | 1,605,187   |           | -               |   | -             |   | -             |   |            
|Issued on acquisition of
    subsidiary                                     | 146,929                  |               | 998,136     |           | -               |   | -             |   | -             |   |            
|Net loss                                                                    | -                        |               | -           |           | -               |   | (5,317,423)   |   | -             |   | (5,317,423)
|Other comprehensive loss from
    foreign currency translation adjustment   | -                        |               | -           |           | -               |   | -             |   | (114,108)     |   | (114,108)  
|Balance - December 31, 2005                                                 | 46,272,568               | $ 109,365,824 | $           | 2,114,190 | $ (97,244,454)  | $ | (577,745)     | $ | (5,431,531)  
|See accompanying notes to consolidated
    financial statements.            |                          |               |             |           |                 |   |               |   |               |   |            

-5-

---

Consolidated
Statements of Cash Flow

|Years ended December 31                                                  |   | 2005        |   | 2004        |   | 2003       
|------------------------------------------------------------------------ | - | ----------- | - | ----------- | - | -----------
|(All amounts in United States of America
    dollars)                    |   |             |   |             |   |            
|Net cash flow from
    (used in) operating activities:                   |   |             |   |             |   |            
|Net loss                                                                 | $ | (5,317,423) | $ | (2,388,199) | $ | (2,931,109)
|Items not affecting cash:                                                |   |             |   |             |   |            
|Loss on dispositions of capital assets                                   |   | 8,354       |   | 9,899       |   | 2,415      
|Depreciation and amortization                                            |   | 1,162,118   |   | 926,886     |   | 1,380,265  
|Impairment of note receivable                                            |   | 250,000     |   | 2,000,000   |   | -          
|Non-cash interest expense                                                |   | -           |   | -           |   | 95,344     
|Non-cash compensation expense                                            |   | -           |   | 685,767     |   | 516,353    
|Non-cash consultant compensation expense                                 |   | -           |   | 685,631     |   | -          
|Decrease (increase) in non-cash working capital
    (note 17)            |   | 2,749,878   |   | (989,769)   |   | (370,608)  
|Cash flow from (used in) operating activities                            |   | (1,147,073) |   | 930,215     |   | (1,307,340)
|Cash flow from (used in) financing
    activities:                       |   |             |   |             |   |            
|Proceeds from issuance of common shares, net of
    issuance costs       |   | 2,342,054   |   | 12,209,030  |   | 2,937,228  
|Settlement of note payable (note 7)                                      |   | -           |   | (1,000,000) |   | (3,300,000)
|Issuance of note payable                                                 |   | -           |   | -           |   | 1,000,000  
|Bank indebtedness                                                        |   | 106,650     |   | -           |   | -          
|Payment of capital lease obligations                                     |   | (16,141)    |   | -           |   | (96,223)   
|Cash flow from financing activities                                      |   | 2,432,563   |   | 11,209,030  |   | 541,005    
|Cash flow from (used in) investing
    activities:                       |   |             |   |             |   |            
|Note receivable                                                          |   | (250,000)   |   | -           |   | -          
|Purchase of capital assets                                               |   | (258,485)   |   | (178,258)   |   | (133,297)  
|Proceeds from capital dispositions                                       |   | 1,906       |   | -           |   | 2,772      
|Software development costs                                               |   | (930,264)   |   | (1,661,974) |   | (237,618)  
|Other deferred costs                                                     |   | (52,732)    |   | (52,397)    |   | (47,622)   
|Acquisition of subsidiaries                                              |   | (434,546)   |   | -           |   | -          
|Cash flow used in investing
    activities                               |   | (1,924,121) |   | (1,892,629) |   | (415,765)  
|Effect of foreign exchange rate
    changes on cash and cash equivalents |   | (93,264)    |   | 275,834     |   | 162,453    
|Net cash inflow (outflow)                                                |   | (731,895)   |   | 10,522,450  |   | (1,019,647)
|Cash and cash equivalents, beginning of
    year                         |   | 12,889,335  |   | 2,366,885   |   | 3,386,532  
|Cash and cash equivalents, end of year                                   | $ | 12,157,440  | $ | 12,889,335  | $ | 2,366,885  
|                                                                         |   |             |   |             |   |            
|Non-cash financing
    activity                                          |   |             |   |             |   |            
|Equipment acquired under capital lease                                   | $ | -           | $ | 29,118      | $ | -          
|                                                                         |   |             |   |             |   |            
|Components of cash
    and cash equivalents                              |   |             |   |             |   |            
|Cash                                                                     | $ | 4,768,375   | $ | 5,867,700   | $ | 2,366,885  
|Cash equivalents                                                         | $ | 7,389,065   | $ | 7,021,635   | $ | -          
|                                                                         |   |             |   |             |   |            
|Supplemental cash
    flow information                                   |   |             |   |             |   |            
|Cash paid for interest                                                   | $ | 6,292       | $ | 56,397      | $ | 523,370    
|Cash paid for income taxes                                               | $ | 687,515     | $ | -           | $ | -          
|See accompanying notes
    to consolidated financial statements.         |   |             |   |             |   |            

-6-

---

Notes
to the Consolidated Financial StatementsFor the years ended December 31, 2005, 2004
and 2003 
(All amounts expressed in United States of America dollars except share amounts)



1.Nature of Operations

Zi Corporation (the "Company" or "Zi") is incorporated under
the Business Corporations Act of Alberta. Zi develops software designed to
enhance the usability of mobile and consumer electronic devices. On January 26,
2005, the Company purchased the assets of Decuma AB ("Decuma"), a Swedish
company specializing in developing and marketing handwriting recognition
software. The handwriting recognition software created by Decuma, with its
patented Geometrical Invariant Technology ("GIT"), has the ability to recognize
an individual's unique writing style. In 2005, through its e-Learning business
segment which includes Beijing Oztime Education & Network Co. Ltd. ("Oztime"),
EnglishPractice Inc. ("EPI"), Archer Education Group Inc. ("Archer") and an
equity interest in Magic Lantern Group, Inc. ("MLG"), the Company is also
involved in e-Learning technology, content and customer service as well as
educational content and distribution channels to offer learning management
systems, interactive online courses and network education solutions to meet
diverse client requirements. Also, Archer provides personal and organizational
teaching and learning through Canadian based schools.

2.
Significant Accounting
Policies

The accompanying consolidated financial statements are
prepared by management in conformity with accounting principles generally
accepted in the United States of America ("U.S. GAAP"), which conforms in all
material respects with Canadian generally accepted accounting principles
("Canadian GAAP"), except as disclosed in note 16. Prior to December 31, 2004,
the primary consolidated financial statements of the Company were prepared in
accordance with Canadian GAAP with annual reconciliation of the Company's
financial position and results of operations to U.S. GAAP. Management elected to
report in conformity with U.S. GAAP as of December 31, 2003 to provide
information on a more comparable basis with Zi's industry peers and to better
assist with the understanding of the financial statements to the majority of
their users, who are primarily in the United States of America.

Other revisions to disclosures throughout the consolidated balance sheets,
statements of loss, shareholders' equity and cash flow and notes have been
amended to comply with U.S. GAAP requirements, including comparative
disclosures.

Note 16 includes explanations of material differences to Canadian GAAP, a
reconciliation of net loss under U.S. GAAP to net loss using Canadian GAAP for
all periods presented and relevant Canadian GAAP disclosure not already
reflected in these consolidated financial statements.

Principles of consolidation

These consolidated financial statements include the accounts
of Zi and its subsidiaries. All inter-company transactions and balances have
been eliminated. All subsidiaries are controlled by the Company except MLG. This
investment, which the Company does not control but exercises significant
influence over its operating, investing and financing policies, is accounted for
using the equity method. With respect to MLG, the Company does not recognize its
proportionate share of losses that would result in a negative carrying value of
its equity investment. Unrecorded losses would be first offset against the
Company's proportionate share of income from the equity investment upon the
investee's return to profitability.

The Company consolidates an entity's financial statements
when the Company either will absorb a majority of the entity's expected losses
or residual returns, in the case of a variable interest entity ("VIE"), or has
the ability to exert control over a subsidiary. Control is normally established
when ownership interests exceed 50 percent in an entity. However, when the
Company does not exercise control over a majority-owned entity as a result of
other investors having rights over the management and operations of the entity,
the Company accounts for the entity under the equity method. As of December 31,
2005 and 2004, there were no greater-than-50 percent-owned affiliates whose
financial statements were not consolidated.

Foreign currency translation

Zi Corporation's functional currency, on a stand-alone basis,
is the United States dollar. For the United States, Swedish, Chinese, Hong Kong
and other Canadian subsidiaries, the functional currencies are the U.S. dollar,
Swedish krona, Chinese renminbi, Hong Kong dollar and Canadian dollar,
respectively. The balance sheet accounts of the Company's foreign operations for
which the local currency is the functional currency are translated into U.S.
dollars at period-end exchange rates, while income, expense and cash flows are
translated at average exchange rates for the period. Translation gains or losses
related to net assets of such operations are shown as a component of accumulated
other comprehensive income in shareholders' equity. Gains and losses resulting
from foreign currency transactions, which are transactions denominated in a
currency other than the entity's functional currency, are included in the
consolidation statements of loss.

Use of estimates

The preparation of these consolidated financial statements
and related disclosures in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
these financial statements, and revenue and expenses during the period reported.
Estimates include allowance for doubtful accounts, valuation of the note
receivable, estimated useful life of intangible assets, deferred costs and
capital assets, provisions for contingent liabilities, measurement of
stock-based compensation, valuation allowance for deferred tax assets, and
revenue for other product revenue using the percentage of completion method, and
reflect management's best estimates. By their nature, these estimates are
subject to uncertainty and the effect on the financial statements of changes in
estimates in future periods could be significant. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. The allowance for doubtful accounts
reflects estimates of doubtful amounts in accounts receivable. The allowance is
based on specifically identified accounts, historical experience and other
current information.

-7-

---

Notes to the Consolidated
Financial Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Cash and cash equivalents

The Company considers all balances with banks and highly liquid investments
with original maturities of three months or less at the time of purchase to be
cash and cash equivalents.

Capital assets

The Company records capital assets at cost and provides for
amortization over the useful life of the asset using the declining-balance
method at a rate of 30 percent for computer and office equipment. Leasehold
improvements are recorded at cost and amortized using the straight-line method
over the shorter of the estimated useful lives or the remaining term of the
lease. The amortization periods for leasehold improvements range from one to
five years. Inducements received upon entering into new leases have been
deferred and are being recognized as a reduction in rent expense over the
corresponding lease term.

In the year of disposal, the resulting gain or loss is included in the
consolidated statements of loss and the cost of assets retired or otherwise
disposed and the related accumulated amortization are eliminated from these
accounts.

Intangible assets

All research and development costs are expensed as incurred
except those that qualify under Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". Research and development costs incurred prior to the
establishment of the technological feasibility of a particular software project
are expensed as incurred. Software development costs, including costs associated
with coding and testing of project related software, are capitalized subsequent
to when the technological feasibility of a project is established. Capitalized
costs are amortized commencing in the period of the products' commercial
release. The determination of whether a project is technically feasible involves
establishing, at a minimum, that the Company has a detailed, documented and
consistent product and program design, including high risk development issues
related to the project, with the necessary resources to complete the project. If
a detailed program design is not used, technological feasibility will be
established when a product design or working model of the software model,
consistent with the product design, is complete and tested.

Costs of start-up activities and organizational costs are expensed as
incurred. Start-up costs include those one-time activities related to organizing
a new entity.

The Company records intangible assets, excluding goodwill and intangible
assets with indefinite lives at cost and provides for amortization over their
expected useful lives using the straight-line method over the following periods:

|Customer agreements        | 3 years 
|-------------------------- | --------
|Patents and trademarks     | 11 years
|Software development costs | 3 years 
|Curriculum                 | 10 years
|Contracts relationship     | 10 years

Goodwill and other intangible assets with indefinite lives are not amortized,
but are tested for impairment at least annually, or more frequently, if events
or changes in circumstances indicate that the asset might be impaired.

Impairment of long-lived assets

The Company annually reviews the carrying value of it's
long-lived assets, including intangible assets, on September 30 of each year and
periodically reviews the carrying value of its long-lived assets whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future net cash inflows from such
assets is less than the carrying amount, an impairment loss is recognized. The
Company considers factors such as significant changes in the business climate
and projected discounted cash flows from the respective assets in determining
the fair value of the asset. The Company evaluated its remaining long-lived
assets at September 30, 2005 and determined that no impairment had occurred.

Revenue recognition

Revenues from software licensing royalties related to the sale of the product
in which the Company's technologies have been embedded are recorded as earned.
Software licensing royalties are included in fees from licensing and
implementation.

-8-

---

Notes to the Consolidated Financial Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Under software licensing arrangements, the Company recognizes
revenues - provided that: a non-cancellable license agreement has been signed;
the software and related documentation have been delivered; there are no
uncertainties regarding customer acceptance; collection of the resulting
receivable is deemed probable; the fees are fixed and determinable; and no other
significant vendor obligations exist. Any revenue associated with contracts
having multiple elements is deferred and recognized rateably over the period of
the contract unless clear evidence exists with respect to the fair value of each
separate element of the contract. Fair value for each separate element is
evidenced by existing customer contract which stipulate rates associated with
separate yet similar services or deliverables. In addition, contracts involving
significant modifications or customization of the software sold are accounted
for under the guidelines of contract accounting.

Customer support revenues consist of revenue derived from contracts to
provide post contract support, such as maintenance and service support, to
license holders. These revenues are recognized ratably over the term of the
contract.

Revenues from Oztime product contracts recorded in other
product revenue are recognized using the percentage of completion method,
whereby revenue is recorded at the estimated realizable value of work completed
to date and costs incurred to date are compared to total estimated contract
costs to determine whether a loss will be realized. Amounts received in advance
are recorded as deferred revenue. Estimated losses on contracts are recognized
when they become known. Other product revenue recorded by the Company is mainly
comprised of revenue for the e-Learning business segment and this revenue is
recognized through the percentage of completion method as previously described.

Revenues from Archer consist primarily of tuition and fees
derived from courses taught in Archer's colleges, schools, and training centers.
Revenues from tuition fees are recognized pro-rata (on a straight-line basis) on
a monthly basis over the relevant period attended by the student of the
applicable course or program. If a student withdraws from a course or program,
the paid but unearned portion of the student's tuition is refunded. Refunds are
calculated and paid in accordance with applicable provincial law and accrediting
agency standards for refund policies. Textbook sales and other revenues are
recognized as sales occur or services are performed and represent less than 10
percent of total revenues. Prepaid tuition is the portion of payments received
but not earned and is reflected as a current liability in the accompanying
consolidated balance sheets, as such, amounts are expected to be earned within
the next year.

Income taxes

The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes", wherein the liability method is used for
determining income taxes. Under this method, deferred income tax assets and
liabilities are recognized for the estimated tax recoverable or payable that
would arise if assets and liabilities were recovered and settled at the
financial statement carrying amounts. Deferred tax assets and liabilities are
measured using enacted tax rates and laws expected to apply to taxable income in
the years in which temporary differences are expected to be recovered or
settled. Valuation allowances are provided when necessary to reduce net deferred
tax assets to an amount that is more likely than not to be realized.

Leases

Leases are classified as capital or operating leases. A lease
that transfers to the lessee substantially all the benefits and risks incidental
to ownership is classified as a capital lease. At inception, a capital lease is
recorded as if it were an acquisition of an asset and the incurrence of an
obligation. Assets recorded as capital leases are amortized on a basis
consistent with that of accounting for capital assets. Operating lease costs are
expensed as incurred. The Company accounts for tenant improvement allowances as
a deferred rent liability included in other liabilities on the consolidated
balance sheets and as a component of investing activities on the consolidated
statements of cash flows.

Minority Interest

Minority interest in earnings of consolidated subsidiaries
represents the minority shareholders' share of the equity and after-tax net
income or loss of consolidated subsidiaries. The minority interest included in
the consolidated balance sheets reflects the original investments by these
minority shareholders in the consolidated subsidiaries, along with their
proportionate share of the earnings or losses of the subsidiaries.

Share issue costs

The Company reduced the value of consideration assigned to shares issued by
direct costs, net of applicable income tax recoveries, of issuing the shares.

Loss per share

Loss per share is computed based on the weighted average
basic number of shares outstanding for the period. Diluted loss per share has
been calculated using the treasury stock method, whereby diluted loss per share
is calculated as if options, restricted stock units ("RSU's") and common share
purchase warrants were exercised at the beginning of the year and funds received
were used to purchase the Company's own stock. Diluted shares have not been used
in calculating diluted loss per share for the years ended December 31, 2005,
2004 and 2003 as they were anti-dilutive (see note 17).

-9-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Comprehensive loss

Comprehensive income is defined as the change in net assets
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources, and includes all changes in equity during
a period except those resulting from investment by owners and distributions to
owners. Comprehensive income (loss) includes foreign currency translation
adjustments. The Company has reported components of comprehensive income (loss)
on its consolidated statement of shareholders' equity.

Gains on issuance of stock by subsidiaries

At the time a subsidiary sells its stock to unrelated parties
at a price in excess of its book value, the Company's net investment in that
subsidiary increases. If at that time, the subsidiary is not a newly formed,
non-operating entity, nor a research and development, start-up or development
stage company, nor is there a question as to the subsidiary's ability to
continue in existence, the Company records the dilution gain in the consolidated
statements of loss. Otherwise, the increase is reflected in "additional paid-in
capital" in the Company's consolidated statements of shareholders' equity.

Financial instruments

Accounts receivable, cash equivalents, investment in
significantly influenced company, accounts payable, accrued liabilities, note
payable, capital lease obligations and other deferred costs constitute financial
instruments. The carrying values of these financial instruments approximate
their fair value given the relatively short periods to maturity, except for the
note receivable and the investment in significantly influenced company. The
carrying values for these financial instruments represent their maximum credit
risk. The note receivable constitutes a financial instrument with a fair value
that is not determinable due, in part, to the unrecognized contingent portion of
the note (note 4). The investment in significantly influenced company
constitutes a financial instrument with a fair value that is not determinable
due to the unavailability of independent third party evidence to support a
valuation of this investment.

The Company maintains substantially all cash and cash
equivalents with major financial institutions. Deposits held with banks may
exceed the amounts of insurance provided on such deposits. Credit risk exposure
includes accounts receivable with customers primarily located in North America,
China, Korea, and Western Europe. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from customers. The Company is exposed to the risks arising from
fluctuations in foreign exchange rates, and the volatility of those rates. The
Company does not use derivative instruments to reduce its exposure to foreign
currency exchange risk.

Stock-based compensation plan

As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", in accounting for the grant of the Company's employee and
director stock options, the Company has elected to use the intrinsic value
method, following Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), and related interpretations. Under
APB No. 25, companies are not required to record any compensation expense
relating to the grant of options to employees or directors where the awards are
granted upon fixed terms with an exercise price equal to fair value at the date
of grant and the only condition of exercise is continued employment. The Company
accounts for RSU's in accordance with SFAS No. 123, whereby the intrinsic value
method is used and the related compensation expense is recognized over the
vesting period.

The Company has a stock-based compensation plan, which is
described in note 9. Any consideration paid by employees on exercise of stock
options or purchase of stock is credited to share capital. If stock or stock
options are repurchased from employees, the excess of the consideration paid
over the carrying amount of the stock or stock option cancelled is charged to
retained earnings.

Under SFAS No. 123, as amended by SFAS No. 148, "Accounting
for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123", companies that elect a method other than the fair value
method of accounting are required to disclose pro forma net loss and loss per
share information, using an option pricing model such as the Black-Scholes
model, as if the fair value method of accounting had been used. Had compensation
cost for the Company's employee stock option plan been determined by this
method, Zi's net loss and loss per share would have been as follows:

|Years ended December 31,                                                   |   | 2005        |   | 2004        |   | 2003       
|-------------------------------------------------------------------------- | - | ----------- | - | ----------- | - | -----------
|Net loss:                                                                  |   |             |   |             |   |            
|As reported                                                                | $ | (5,317,423) | $ | (2,388,199) | $ | (2,931,109)
|Stock compensation expense                                                 |   | (2,874,033) |   | (3,901,903) |   | (4,317,459)
|Pro forma net loss                                                         |   | (8,191,456) |   | (6,290,102) |   | (7,248,568)
|Net loss per common share:                                                 |   |             |   |             |   |            
|As reported, basic and diluted                                             | $ | (0.12)      | $ | (0.06)      | $ | (0.08)     
|Stock compensation expense, basic and diluted                              |   | (0.06)      |   | (0.09)      |   | (0.11)     
|Pro forma, basic and diluted                                               | $ | (0.18)      | $ | (0.15)      | $ | (0.19)     
|Stock options and RSU's issued during
    the period                       |   | 940,375     |   | 2,105,500   |   | 2,342,532  
|Weighted average exercise price                                            | $ | 3.22        | $ | 2.27        | $ | 2.50       
|Weighted average fair value of stock
    options granted during the period | $ | 2.22        | $ | 1.19        | $ | 1.39       
|                                                                           |   |             |   |             |   |            
|                                                                           |   | 2005        |   | 2004        |   | 2003       
|Risk free interest rate                                                    |   | 3.30%       |   | 3.60%       |   | 3.80%      
|Expected life in years                                                     |   | 3.7         |   | 3.7         |   | 3.8        
|Expected dividend yield                                                    |   | 0%          |   | 0%          |   | 0%         
|Expected volatility                                                        |   | 104%        |   | 52%         |   | 65%        

-10-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Recent accounting pronouncements

In December 2004, FASB issued SFAS No. 123(R) "Share Based
Payment." This statement is a revision to SFAS No.123 and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and amends FASB Statement
No. 95, "Statement of Cash Flows". This statement requires a public entity to
expense the cost of employee services received in exchange for an award of
equity instruments. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements of these equity
arrangements. This statement is effective for the first interim reporting period
that begins after June 15, 2005. SFAS No. 123(R) permits public companies to
choose between the following two adoption methods:

1.

2.

As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, the Company generally recognizes no compensation cost for employee stock
options.

To assist in the implementation of SFAS No. 123, the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB")
No. 107, "Share-Based Payment". While SAB No. 107 addresses a wide range of
issues, the largest area of focus is valuation methodologies and the selection
of assumptions. Notably, SAB No. 107 lays out simplified methods for developing
assumptions. In addition to providing the SEC staff's interpretive guidance on
SFAS No. 123(R), SAB No. 107 addresses the interaction of SFAS No. 123(R) with
existing SEC guidance. In April 2005, the SEC delayed the effective date of SFAS
No. 123(R). SFAS No.123(R) will now be effective for Zi as of the interim
reporting period beginning January 1, 2006.

Adoption of SFAS No. 123(R) will materially increase our
stock compensation expense and increase our net loss and basic and diluted loss
per share. However adoption of SFAS No. 123(R) will have no impact on our
financial position. For the year ended December 31, 2006, total stock
compensation expense using the modified prospective method, including amounts
from stock option fair value provisions of SFAS No. 123(R), is estimated to be
approximately $332,563 and is based on issued and unvested stock option at
December 31, 2005. The Company has decided to use the Black-Scholes closed-form
model valuation technique to value its share options. In order to project stock
option grants, expected term and volatility were similar to amounts determined
and used for the year ended December 31, 2005. SFAS No. 123(R) also requires
that the excess tax benefits related to stock compensation be reported as a cash
inflow from financing activities rather than as a reduction of taxes paid in
cash from operations.

In November 2005, FASB issued staff position ("FSP") FAS
115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments", which nullified 2004 guidance issued by the
Emerging Issues Task Force ("EITF") on determining whether an impairment is
other than-temporary, and effectively reverted back to previous guidance in this
area. The FSP generally encompasses guidance for determining when an investment
is impaired, how to measure the impairment loss and what disclosures should be
made regarding impaired securities. This FSP is effective for the first quarter
of 2006 and is not expected to have a material impact on the Company's
consolidated financial statements.

In May 2005, the FASB, as part of an effort to conform to
international accounting standards, issued SFAS No. 154, "Accounting Changes and
Error Corrections," which is effective for the Company beginning on January 1,
2006. SFAS No. 154 requires that all voluntary changes in accounting principles
are retrospectively applied to prior financial statements as if that principle
had always been used, unless it is impracticable to do so. When it is
impracticable to calculate the effects on all prior periods, SFAS No. 154
requires that the new principle be applied to the earliest period practicable.
The adoption of SFAS No. 154 had no impact on the Company's consolidated results
of operations and financial condition.

In March 2005, the FASB issued FASB Interpretation No.
("FIN") 46(R)-5,"Implicit Variable Interests under FASB Interpretation No. 46(R)
or Consolidation of Variable Interest Entities" to address whether a company has
a implicit variable interest in a VIE or Potential VIE where specific conditions
exist. The guidance describes an implicit variable interest as an implied
financial interest in an entity that changes with changes in fair value of the
entity's net assets exclusive of variable interests. An implicit variable
interest acts the same as an explicit variable interest except it involves the
absorbing and or receiving of variability directly from the entity. Restatement
to the date of initial adoption of FIN 46(R) is permitted but not required. FIN
46(R) became applicable to the Company in the quarter end June 30, 2005. FIN
46(R) had no impact on the Company's consolidated results of operations and
financial condition.

-11-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



In March 2005, the FASB issued FIN 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143 (FIN 47)", which requires an entity to recognize a liability for the
fair value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005. The adoption of this statement had
no impact on the Company's consolidated results of operations and financial
condition.

In November 2004, the FASB issued SFAS No. 151, "Inventory
Costs", an amendment of Accounting Research Bulletin ("ARB"), No. 43. This
statement amends ARB No. 43 to clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials should be recognized as
current period charges. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of production facilities. The provisions of this statement are to be
applied prospectively, and the statement is effective for fiscal years beginning
after June 15, 2005, with earlier application permitted for inventory costs
incurred in fiscal years beginning after November 2004. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or liquidity, as the
Company does not hold inventory.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 29." The amendments made by
SFAS No. 153 are based on the principle that exchanges of non-monetary assets
should be measured based on the fair value of the assets exchanged. The
amendment also eliminates the narrow exception for non-monetary exchanges of
similar productive assets and replaces it with a broader exception for exchanges
of non-monetary assets that do not have commercial substance. The provisions of
this statement are effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 153 to have a material impact on our financial condition or
our results of operations.

In September 2004, EITF Issue 4-10 "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds"("EITF
4-10") was issued, which addresses the criteria for aggregating operating
segments. The Company reviewed the segment reporting and determined that our
aggregation of segments is consistent with the guidance in EITF Issue No. 4-10.

3. Acquisitions and Dispositions

All acquisitions have been accounted for using the purchase method with
results from operations included in these consolidated financial statements from
the date of acquisition.

Acquisition - Decuma

On January 26, 2005, the Company purchased the assets of
Decuma AB ("Decuma"), a Swedish company specializing in developing and marketing
handwriting recognition software. The Decuma purchase is part of Zi's long term
expansion strategy of developing software to further simplify and enhance the
use of wireless devices. Decuma's handwriting recognition technology is an
important complement to Zi's eZiText and eZiTap solutions. The combination of
the technologies is intended to further bolster the Company's competitive
advantage and increase Zi's market share by enabling us to deliver an expanded
suite of innovative products to customers. The Company has accounted for the
purchase under the purchase method of accounting, and accordingly, included the
results of operations of Decuma in the consolidated operating result of the
Company from the date of acquisition. As part of the acquisition, the Company
acquired Decuma's intellectual property and customer agreements. Amounts
assigned to intangible assets were supported through discounted cash flow
analyses. Patents and trademarks are amortized over 11 years. Customer
agreements are amortized over the remaining life of the agreement (up to 55
months). The purchase price consideration included 146,929 common shares of the
Company with a value of $1.0 million, cash consideration of $175,254 to settle
certain working capital related adjustments and other costs and fees related to
the purchase in the amount of $281,348 for a total acquisition cost of
$1,456,602.

Through an assessment process carried out by the Company upon completion of
this acquisition, it was decided that a certain senior management position in
Decuma was redundant. Included in the purchase price is $200,000 to
involuntarily terminate this position.

-12-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



The purchase price is allocated as follows:

|Net assets acquired:                |   |          
|----------------------------------- | - | ---------
|Non-cash working capital deficiency | $ | (15,334) 
|Capital assets                      |   | 49,821   
|Customer agreements                 |   | 187,100  
|Patents and trademarks              |   | 1,235,015
|                                    | $ | 1,456,602

Pro forma information has not been presented showing the effect of a January
1, 2005 acquisition on the current year's results as the effect is not material.
The following summarized unaudited pro forma information assumes the acquisition
had occurred on January 1, 2004:

|Pro forma information:             | Year ended December 31, 2004 (unaudited)
|---------------------------------- | ----------------------------------------
|Revenue                            | $                                       
|Net loss                           |                                         
|Loss per share - basic and diluted | $                                       

The pro forma results do not purport to be indicative of
results that would have occurred had the acquisition been in effect for the
period presented, nor do they purport to be indicative of the results that would
be obtained in the future.

Acquisition of Archer Education Group Inc.

The Company's ownership of Archer shares resulted primarily
from the sale of its Oztime and EPI subsidiaries to Archer, a related party (see
note 13). At December 31, 2005, the Company held 53.2 percent of the outstanding
shares of Archer. As a result of certain third party Archer share subscription
agreements that did not close until after the end of Zi's financial year end
(resulting in 44.8 percent ownership of Archer by Zi), Zi has accounted for its
investment in Archer as a purchase under the purchase method of accounting,
including its results from December 21, 2005 (the date of acquisition) to
December 31, 2005 and its assets and liabilities, net of minority interest at
December 31, 2005.

Archer was incorporated in February 2005 for the purpose of
acquiring a number of educational learning institutions in Canada. Prior to the
completion of the Archer acquisition of Oztime and EPI, Zi held 24.9 percent of
Archer's shares, acquired through share subscription agreements in 2005.
Consequently, Zi is a related party to Archer.

Under the sale agreements, Zi received 6,140,000 million
shares of Archer, including contingent consideration of 1,000,000 shares placed
in escrow and a $125,000 note receivable related to post closing working capital
adjustments. The release of the escrowed shares is subject to performance
criteria requiring revenues earned through Oztime related operations, from the
date of purchase to December 31, 2006, be $2,950,000 or more. The Company
determined there was uncertainty that Oztime's revenues related to its
operations would achieve the performance criteria and as such the contingent
consideration was not considered as part of the sale proceeds.

Subsequent to year end, Zi's interest in Archer was diluted
to 44.8 percent (as of March 6, 2006).

-13-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



The purchase price is allocated as follows:

|Net assets acquired:                         |   |          
|-------------------------------------------- | - | ---------
|Non-cash working capital deficiency          | $ | (90,164) 
|Capital assets                               |   | 186,730  
|Ministry registration and assistant programs |   | 135,742  
|Curriculum                                   |   | 134,590  
|Contracts relationship                       |   | 338,498  
|Long-term liabilities                        |   | (147,678)
|Minority interest                            |   | 23,920   
|                                             | $ | 581,638  

Unaudited pro forma information presented shows the effect of the acquisition
as at Archer's date of incorporation February 28, 2005 on the current year's
results:

|Pro forma information:             | Year ended December 31, 2005 (unaudited)
|---------------------------------- | ----------------------------------------
|Revenue                            | $                                       
|Net loss                           |                                         
|Loss per share - basic and diluted | $                                       

The pro forma results do not purport to be indicative of results that would
have occurred had the acquisition been in effect for the period presented, nor
do they purport to be indicative of the results that would be obtained in the
future.

4. Note Receivable  Magic Lantern Group, Inc.

On November 7, 2002, the Company completed the sale of Magic
Vision Media, parent of Magic Lantern Communications Ltd.. (collectively, "Magic
Lantern") to JKC Group Inc. ("JKC"), a related party (note 13) and an American
Stock Exchange listed company incorporated in the state of New York. Magic
Lantern operations comprised the most significant portion of JKC's operations
subsequent to the sale. Following the closing of the transaction on November 7,
2002, JKC was renamed to MLG. Under the agreement, as part of the sale
consideration, Zi received a three-year promissory note from MLG in the amount
of $3,000,000, bearing interest at the rate of 5 percent per annum, due in full
November 7, 2005. The note was subject to adjustment based on MLG's financial
performance during the first year after the sale. The performance criteria
stipulated under the agreement were not met. The purchase price was reduced by
$1,000,000, offset against the principal amount of the MLG promissory note
reducing it to $2,000,000.

At December 31, 2004, the Company evaluated the note
receivable for impairment and determined that subject to SFAS No. 114
"Accounting by Creditors for Impairment of Loan" using a projected discounted
cash flow model at the loan's effective interest rate, the full amount of the
note receivable including accrued interest was impaired and hence provided for.
At the time of the impairment, MLG was under a going concern qualification and
subject to ongoing operating cash requirements, continued operating losses and
other debt to which the Company is subordinate. Due to those factors and the
absence of private placements originally anticipated by MLG to occur in the
fourth quarter of 2004, it was probable that MLG would not have the necessary
funds available to meet the requirements under the note, including accrued
interest. Interest due on the note will not be accrued but will be recognized
only upon payment by MLG of such interest.

-14-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



In April 2005, the Company advanced $250,000 under a secured
loan agreement to MLG. The terms of the agreement required repayment on demand
and provided the Company with a security interest in the assets of MLG. At June
30, 2005, the Company evaluated the note receivable for impairment and
determined that subject to SFAS no. 114 "Accounting by Creditors for Impairment
of Loan" using a projected discounted cash flow model at the loan's effective
interest rate, the full amount of the note receivable including accrued interest
was impaired and hence provided for. At the time of the impairment, MLG was
under a going concern qualification and subject to ongoing operating cash
requirements, continued operating losses and other debt to which the Company is
subordinate. Due to these factors and the directive by Zi's Board of Directors
to not provide further funding to MLG, it was probable that MLG would not have
the necessary funds available to meet the requirements under the note, including
accrued interest. Interest due on the note will not be accrued but will be
recognized only upon payment by MLG of such interest.

To the best of the Company's knowledge, MLG ceased all operations in July
2005 and is undertaking a voluntary dissolution and windup (See note 10). All
amounts have been written off the Company's accounts as of December 31, 2005.

5. Capital Assets

|                              |   |           |   | Accumulated  |   | Net book 
|----------------------------- | - | --------- | - | ------------ | - | ---------
|                              |   | Cost      |   | amortization |   | value    
|2005                          |   |           |   |              |   |          
|Computer and office equipment | $ | 3,654,212 | $ | 2,618,484    | $ | 1,035,728
|Leasehold improvements        |   | 636,804   |   | 461,585      |   | 175,219  
|                              | $ | 4,291,016 | $ | 3,080,069    | $ | 1,210,947
|2004                          |   |           |   |              |   |          
|Computer and office equipment | $ | 3,041,544 | $ | 2,188,900    | $ | 852,644  
|Leasehold improvements        |   | 527,452   |   | 292,139      |   | 235,313  
|                              | $ | 3,568,996 | $ | 2,481,039    | $ | 1,087,957

Included in computer and office equipment are assets under capital lease
totalling $510,700 (2004  $494,130) and related accumulated amortization of
$388,638 (2004  $334,052).

6. Intangible Assets

|                                             |   |            |   | Accumulated  |   | Net book 
|-------------------------------------------- | - | ---------- | - | ------------ | - | ---------
|                                             |   | Cost       |   | amortization |   | value    
|2005                                         |   |            |   |              |   |          
|Patents                                      | $ | 1,596,673  | $ | 451,616      | $ | 1,145,057
|Trademarks                                   |   | 62,950     |   | 5,723        |   | 57,227   
|Customer agreements                          |   | 166,473    |   | 36,321       |   | 130,152  
|Software development costs                   |   | 9,581,903  |   | 7,688,289    |   | 1,893,614
|Ministry registration and assistant programs |   | 135,742    |   |             |   | 135,742  
|Curriculum                                   |   | 134,590    |   |             |   | 134,590  
|Contracts relationship                       |   | 338,498    |   |             |   | 338,498  
|                                             | $ | 12,016,829 | $ | 8,181,949    | $ | 3,834,880
|2004                                         |   |            |   |              |   |          
|Patents                                      | $ | 547,709    | $ | 298,155      | $ | 249,554  
|Software development costs                   |   | 8,281,828  |   | 6,839,295    |   | 1,442,533
|                                             | $ | 8,829,537  | $ | 7,137,450    | $ | 1,692,087

-15-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



During 2005, $930,264 (2004  $1,661,974) of software
development costs were deferred and are being amortized using the straight-line
method over a three-year economic life. Amortization for 2005 includes $602,570
of amortization of deferred software development costs and $156,213 and $38,787,
respectively, of amortization of patents and trademarks and customer agreements.
Amortization for 2004 includes $510,167 of amortization of deferred software
development costs and $47,440 of patents. The Company evaluated its other
intangible assets at September 30, 2005 and determined that no impairment had
occurred.

The following is the estimated amortization expense of intangible assets for
each of the next five years:

|2006  | $ | 1,180,587
|----- | - | ---------
|2007  |   | 871,506  
|2008  |   | 587,452  
|2009  |   | 196,363  
|2010  |   | 175,175  
|Total | $ | 3,011,083

7. Bank Indebtedness and Notes Payable

Through two subsidiaries of Archer, the Company holds two
lines of credit. Both lines of credit have a maximum credit limit of $42,992,
bear interest between prime and prime plus 1.3 percent, are unsecured and
payable on demand.

On December 19, 2003, the Company borrowed
$1,000,000 through a demand loan facility. The note payable bore annual interest
at the prime rate (4.5 percent at December 31, 2003) plus one percent, payable
monthly. The facility was secured by a first security interest in 5,000,000
shares of MLG held by the Company. On July 20, 2004, the Company repaid the
loan.

On May 7, 2003, the Company entered into a
secured short-term credit facility in the amount of $1.94 million, which was
settled in full June 20, 2003. The note included interest payable at 12 percent
per annum. The terms of the note payable provided for a bonus payment of
$45,000, payable in common shares of the Company, which was paid 30 days from
the date of the agreement as the loan balance remained unpaid as of that date.
The note was secured through a general security agreement, a limited recourse
guarantee by a private company owned by an officer of the Company who is also a
director of the Company and a share pledge agreement by the Company which
granted a first security interest in 29,750,000 shares of MLG held by the
Company.

As part of the consideration of the acquisitions from the
purchase of Archer, long-term liabilities include two loans payable to former
shareholders of two subsidiaries of Archer in the amount of $81,255 and $66,423.
These loans will be paid when Archer achieves net profits calculated on a
quarterly basis for the consolidated Archer group of companies. The amount does
not bear any interest and has no specific repayment terms other than
aforementioned.

8. Capital Lease Obligations and Leasehold
Improvements

The Company has entered into leases for computer and office equipment with
payment terms over three years with interest at rates varying between 10.20
percent and 17.25 percent. Obligations as at December 31, 2005 are $9,378 (2004
 $25,519). The current portion at December 31, 2005 is $7,541 (2004  $16,445).

The future minimum lease payments under the capital leases are as follows:

|2006                                   | $ | 8,318 
|-------------------------------------- | - | ------
|2007                                   |   | 1,874 
|Total minimum lease payments           |   | 10,192
|Amount representing interest           |   | 814   
|Amount included in current liabilities |   | 7,541 
|                                       | $ | 1,837 

Inducements for leasehold improvements received by the Company
upon entering into new leases as at December 31, 2005 are $86,079 (2004 
$138,811). The current portion at December 31, 2005 is $57,386 (2004  $55,524).

-16-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



9. Share Capital

Stock purchase warrants

On July 16, 2004, the Company completed a
private placement of 3,636,364 units priced at CDN$2.75 per unit for net
proceeds of $6,926,836. Each unit consists of one share of the Company's stock
and one-half of a stock purchase warrant. Each whole stock purchase warrant is
exercisable into one share of the Company's stock on or before July 16, 2006 at
an exercise price of CDN$3.25 per share. At December 31, 2005, 290,200 (2004 
844,682) of these stock purchase warrants are outstanding. As part of the
consideration for services rendered by an agent related to this private
placement, the Company issued 218,182 stock purchase warrants with each warrant
exercisable through the purchase of one common share at a price of CDN$3.25. The
warrants were exercisable immediately and expire if unexercised two years from
the date of issue. At December 31, 2005, 68,182 (2004  118,182) of these stock
purchase warrants are outstanding. The Company accounted for the 218,182 stock
purchase warrants in accordance with SFAS No. 123 and recognized as common share
issue costs of $141,048, calculated by using the Black-Scholes option pricing
model. Under the terms of the private placement, the units sold in the private
placement are subject to statutory restrictions on resale, including hold
periods.

On June 19, 2003, the Company completed a
private placement of 1.0 million units priced at $2 per unit for net proceeds of
$1,968,610. Each unit consists of one share of the Company's stock and one-half
of a stock purchase warrant. Each whole stock purchase warrant is exercisable
into one share of the Company's stock on or before May 31, 2006 at an exercise
price of $2.25 per share. Under the terms of the private placement, the units
sold in the private placement are subject to statutory restrictions on resale,
including hold periods. At December 31, 2005, 495,000 (2004  500,000) share
purchase warrants are outstanding.

On December 5, 2002, the Company issued, in
conjunction with a note payable of $3,300,000, 100,000 share purchase warrants
to acquire 100,000 common shares of the Company at a price of CDN$3.62 per
share, which were to expire two years from the date of issue (note 7). In June
2003, the Company issued 100,000 shares through the exercise of these 100,000
share purchase warrants.

Stock options and restricted stock units

At December 31, 2005, the Company maintained a Stock Option
Plan for all directors, officers, employees and consultants of the Company.

Under the terms of the Stock Option Plan, options and RSU's
may be granted at the discretion of the Board of Directors. The option price
equals the closing price of the Company's shares on the day preceding the date
of grant. The options and RSU's are not assignable, vest at the discretion of
the Board of Directors, and expire, at maximum, after the tenth anniversary of
the date of grant. In 2005, nil (2004  250,000) RSU's were granted and issued
without performance criteria attached and at no cost to the grantee. At December
31, 2005, 378,571 (2004  378,571) RSU's are outstanding. The RSU's vest upon
granting and expire five years from the date of grant. The Company has recorded,
as part of selling, general and administration expense, compensation expense in
2005 of nil (2004  $685,767; 2003  $516,353 ) related to the RSU's, calculated
by using the intrinsic value method.

The Company entered into a Financial Advisory Services
Agreement effective January 9, 2004 with an unrelated third party. The agreement
stipulates that the third party shall provide to the Company management and
consulting services for a period of one year from the date of the agreement. As
consideration for these services, the Company granted 400,000 stock options with
each option exercisable through the purchase of one common share at a price of
CDN$3.25. The options vest immediately and expire, if unexercised five years
from the date of grant. The Company has accounted for these options in
accordance with SFAS No. 123 and has recognized $685,631 in 2004 as part of
selling, general and administrative expense calculated by using the Black-Scholes
option pricing model.

Since inception of the Stock Option Plan in 1993,
shareholders have approved resolutions reserving a total of 12,915,000 common
shares for issuance under the plan of which 500,000 are issuable as RSU's. At
December 31, 2005, the Company had 1,257,702 common shares and 87,468 RSU's
(2004  743,184 common shares and 87,468 RSU's) remaining reserved for possible
future allocation under the plan.

Stock option, RSU activity and related information for the three years ended
December 31, 2005 is as follows:

|                                                               |               | 2005           |               | 2004           |               | 2003          
|-------------------------------------------------------------- | ------------- | -------------- | ------------- | -------------- | ------------- | --------------
|                                                               | Shares        | Weighted       | Shares        | Weighted       | Shares        | Weighted      
|                                                               | under options | average        | under options | average        | under options | average       
|                                                               | and RSU's     | exercise price | and RSU's     | exercise price | and RSU's     | exercise price
|Outstanding, beginning of year                                 | 4,911,972     | $ 4.28         | 5,474,904     | $ 5.18         | 5,135,700     | $ 5.65        
|Granted                                                        | 940,375       | 3.22           | 2,105,500     | 2.27           | 2,342,532     | 2.50          
|Exercised                                                      | (290,967)     | (2.53)         | (1,143,766)   | (2.00)         | (335,627)     | (2.08)        
|Forfeited or expired                                           | (1,454,893)   | (5.25)         | (1,524,666)   | (7.78)         | (1,667,701)   | (3.48)        
|Outstanding, end of year                                       | 4,106,487     | $ 3.82         | 4,911,972     | $ 4.28         | 5,474,904     | $ 5.18        
|Exercisable, end of year                                       | 3,990,321     | $ 3.83         | 4,102,142     | $ 4.54         | 4,683,732     | $ 5.55        
|Weighted-average fair value of
    stock options and intrinsic |               |                |               |                |              
|value of RSU's granted during the year                         |               | $ 2.22         |               | $ 1.19         |               | $ 1.39        

-17-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



The following table summarizes the exercise price ranges of outstanding and
exercisable stock options as of December 31, 2005:

|                         | Total stock options and RSU's outstanding | Total stock options and RSU's exercisable
|------------------------ | ----------------------------------------- | -----------------------------------------
|                         |                                           | Weighted                                 
|                         | Number outstanding                        | average remaining                        
|Range of exercise prices | December 31, 2005                         | contractual life                         
|$ 1.81  $ 4.30          | 3,229,737                                 | 3.10 years                               
|$ 4.47  $ 9.21          | 466,750                                   | 1.37 years                               
|$10.03  $12.94          | 410,000                                   | 0.52 years                               
|$
    1.81  $12.94      | 4,106,487                                 | 2.62 years                               

Escrowed shares

Pursuant to the acquisition of Magic Lantern in March 2003, the Company
placed 35,000 common shares in escrow that were subject to release based upon
performance obligations. The performance obligations were not met under the
terms of the purchase agreement and the escrowed shares were cancelled in 2004.

10. Equity Interest in Significantly Influenced
Company

MLG ceased operations in July 2005 due to a substantial
slowdown in operations, its inability to raise sufficient capital and
successfully market the company's product line. MLG has retained legal counsel
to commence voluntary liquidation and wind down procedures. The Company does not
expect any recovery of funds from this process and had previously provided for
impairment of amounts due from MLG (note 4). The Company holds a 40.42 percent
(as calculated from MLG's Form 10-K dated December 31, 2004) interest in MLG,
received upon the disposition of Magic Lantern on November 7, 2002 (note 4). At
December 31, 2005, the Company held 29,750,000 shares of MLG with a par value of
$0.01 per share and a fair market value of nil. The Company's proportionate
share of the loss from MLG operations for the year ended December 31, 2005 has
not been recognized as the carrying value of the investment in MLG is nil and
the Company has no commitment to fund this loss. The Company's unrecorded share
of the loss from MLG's operations between November 8, 2002 and December 31, 2004
is $7,445,161. The Company is unable to report a more recent unrecorded share of
the loss as MLG has not provided a more recent financial position.

In April 2005, the Company advanced $250,000 under a secured loan agreement
to MLG, which has been provided for (note 4).

11. Income Taxes

Substantially all of the Company's activities are carried out
through operating subsidiaries in several countries. The income tax effect of
operations depends on the tax legislation in each country and operating results
of each subsidiary and the parent company. The provision for income taxes
reflects an effective tax rate that differs from the corporate tax rate for the
following reasons:

|                                                                                        |   | 2005        |   | 2004        |   | 2003       
|--------------------------------------------------------------------------------------- | - | ----------- | - | ----------- | - | -----------
|Combined basic federal and provincial income tax rate                                   |   | 33.62%      |   | 36.6%       |   | 39%        
|Expected combined Canadian federal and
    provincial tax recovery based on above rates | $ | (1,548,533) | $ | (874,081)   | $ | (1,392,979)
|Enacted tax rate adjustment differences                                                 |   |            |   | 151,862     |   | 172,549    
|Differences in foreign statutory tax rates                                              |   | 433,916     |   | 149,344     |   | (324,918)  
|Permanent differences                                                                   |   | (128,003)   |   | 618,992     |   | 338,079    
|Loss on dissolution of subsidiaries                                                     |   |            |   | 1,159,877   |   |           
|Impairment of note receivable                                                           |   | 84,050      |   | 677,400     |   |           
|Unrecognized recoveries on losses                                                       |   | (5,774)     |   | (2,619,798) |   | (1,263,234)
|Scientific research and experimental
    development                                    |   | (289,080)   |   |            |   |           
|Prior expenses charged to current year                                                  |   | (117,659)   |   |            |   |           
|2004 PRC tax paid in 2005                                                               |   | 131,113     |   |            |   |           
|Other                                                                                   |   | 124,924     |   | (15,350)    |   | (195,908)  
|Valuation allowance                                                                     |   | 2,002,561   |   | 751,754     |   | 2,666,411  
|Consolidated income tax                                                                 | $ | 687,515     | $ |            | $ |           
|                                                                                        |   |             |   |             |   |            

-18-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



|The components of deferred income taxes are
    as follows: |   |              |   |              |   |             
|----------------------------------------------------------- | - | ------------ | - | ------------ | - | ------------
|                                                            |   |              |   |              |   |             
|December 31,                                                |   | 2005         |   | 2004         |   | 2003        
|Capital assets                                              | $ | 206,932      | $ | 102,294      | $ | 51,629      
|Software development costs                                  |   | (636,633)    |   | (496,898)    |   | (96,645)    
|Deferred revenue                                            |   | 322,027      |   |             |   |            
|Share issue costs                                           |   | 154,899      |   | 181,667      |   | 167,438     
|Other                                                       |   | 32,843       |   | 73,892       |   | 33,641      
|Loss carryforwards                                          |   | 18,220,277   |   | 18,997,435   |   | 14,353,867  
|Valuation allowance                                         |   | (18,300,345) |   | (18,858,389) |   | (14,509,930)
|Net
    deferred income tax asset                           | $ |             | $ |             | $ |            

The Company provided a full valuation allowance against the deferred income
tax assets based on the Company's evaluation of the likelihood of realization of
these assets. The Company will continue to evaluate and examine the valuation
allowance on a regular basis.

At December 31, 2005, the Company and Canadian subsidiaries have non-capital
losses of $28,793,982 and net capital losses of $46,593,123 which are available
to reduce Canadian taxable income in future years.

According to Peoples Republic of China ("PRC") tax law, those
Foreign Investment Entities ("FIE") established in China that are involved in
"productive" activities are entitled to tax holidays and tax reductions. These
FIE tax benefits include a two-year tax holiday followed by a 50 percent
reduction of the otherwise applicable tax rate for the following three years.
Our Zi Technology subsidiary Huayu Zi Software Technology (Beijing) Co. Ltd. ("Huayu
Zi") was categorized as a productive-type FIE in all its PRC statutory filings,
including its routine filings to tax authorities. As a result, the Company had
not accrued income tax related to 2004 and the first quarter of 2005 even though
tax losses from previous tax years had been utilized or expired.

Recently, PRC tax authorities tightened the scope of FIE tax
incentives and narrowed the tax-free/reduction entitlement to only those who are
engaged in productive activities or are engaged in "encouraged" industries.
Recent changes to the operations of Huayu Zi resulted in decreases to its
research and development activities and revenues generated from productive
activities (as defined under the FIE guidelines) are below the stipulated levels
now required to qualify as a FIE eligible for the tax holidays and reductions.
As confirmed in December 2005 by the PRC tax authorities, Huayu Zi does not
qualify as a productive type FIE and is not eligible for the tax holidays and
tax reductions. In 2005, Huayu Zi made provision for income taxes payable as a
result of no longer having prior years' tax losses available and the uncertainty
associated with qualifying for statutory tax relief. The Company has included in
the current periods income tax expense $131,113 related to the 2004 tax year and
$556,402 related to the 2005 tax year.

Operating loss carryforwards for each of the countries listed below will
expire as follows:

|                   |                    | Canadian   |           | Year of expiry |        | U.S. net-operating |              | Year of expiry |        | U.S. net-operating
|------------------ | ------------------ | ---------- | --------- | -------------- | ------ | ------------------ | ------------ | -------------- | ------ | ------------------
|Year
    of expiry | non-capital losses |            | (Federal) |                | losses |                    | (California) |                | losses
|2006               | $                  | 136,810    |           | 2018           | $      | 418,576            |              | 2010           | $      | 1,988,493         
|2007               | $                  | 1,364,036  |           | 2019           | $      | 225,966            |              | 2011           | $      | 807,595           
|2008               | $                  | 310,058    |           | 2020           | $      | 255,200            |              | 2012           | $      |                  
|2009               | $                  | 3,331,488  |           | 2021           | $      | 2,171,180          |              | 2013           | $      |                  
|2010               | $                  | 11,885,033 |           | 2022           | $      | 1,468,355          |              | 2014           | $      | 322,572           
|2011               | $                  | 4,916,630  |           | 2023           | $      | 572,219            |              | 2015           | $      | 1,025,568         
|2012               | $                  | 3,217,706  |           | 2024           | $      |                   |              | Total          | $      | 4,144,228         
|2013               | $                  | 3,632,221  |           | 2025           | $      | 1,025,568          |              |                |        |                   
|Total              | $                  | 28,793,982 |           | Total          | $      | 6,137,064          |              |                |        |                   

The Company's Hong Kong subsidiaries have non-capital losses for tax purposes
of $34,852,270. These losses may be carried forward indefinitely.

-19-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



12. Contingent Liabilities

Commencing on March 11, 2005, the Board of
Regents of the University of Texas System ("UT") filed federal lawsuits against
numerous alleged infringers of U.S. Patent No. 4,674,112 in the U.S. District
Court for the Western District of Texas, Austin Division, including certain of
the Company's licensees. The Company is not named in any of the actions. Zi has
not assumed any liability for indemnity pursuant to its customer license
agreements, or at all. The Company has, however, assumed the defense of this
claim on behalf of its customers. The action is ongoing and will result in the
Company incurring defense costs.

On November 18, 2005, the former President and
Chief Executive Officer of the Company (the "Plaintiff") filed a wrongful
termination lawsuit against the Company in the Court of Queen's Bench of
Alberta, Judicial District of Calgary. The Plaintiff was the President and Chief
Executive Officer of Zi for the period from July 23, 2003 to May 26, 2005, when
he submitted his resignation. On December 9, 2005, the Company filed its
Statement of Defense and Counterclaim, denying the Plaintiff's claims. The
Company has accrued sufficient settlement costs related to this lawsuit as of
December 31, 2005.

On December 4, 2003, the Company commenced a
legal action against former counsel in respect of, among other things, their
representation of the Company in a lawsuit, the outcome of which was unfavorable
to the Company. As part of its defense, prior counsel filed a cross complaint
against the Company for $1.1 million in unpaid legal fees and costs, which has
been accrued by the Company in its financial statements. On April 6, 2005, the
Company settled this litigation. The Company recorded a gain of $1,415,616 in
the three month period ended June 30, 2005.

From time to time, the Company is involved in
other claims in the normal course of business. Management assesses such claims
and where it is not probable to result in a material exposure and where the
amount of the claim is quantifiable, provisions for loss are made based on
management's assessment of the likely outcome. The Company does not provide for
claims that are unlikely to result in a significant loss, claims for which the
outcome is not determinable or claims where the amount of the loss cannot be
reasonably estimated. Any settlements or awards under such claims are provided
for when reasonably determinable.

13. Related Party Transactions

The following table outlines the Company's related party transactions for the
years ending:

|                                                                           |   | 2005    |   | 2004    |   | 2003   
|-------------------------------------------------------------------------- | - | ------- | - | ------- | - | -------
|Legal services provided by a law firm in
    which a director is a partner | $ | 227,883 | $ | 125,708 | $ | 110,373
|Fees paid on behalf of a significantly
    influenced company              | $ | 760     | $ | 10,442  | $ | 33,187 
|Management fees paid to a firm owned by a
    director                     | $ |        | $ | 30,000  | $ | 120,000
|Consulting fees paid to a firm owned by an officer                         | $ | 49,333  | $ | 46,067  | $ | 26,136 



-20-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



These transactions are in the normal course of operations and are measured at
their exchange value, which approximates the fair market value as with any third
party.

In April 2005, the Company advanced $250,000 under a secured loan agreement
to MLG. At June 30, 2005, the full amount of the note receivable including
accrued interest was impaired and hence provided for (see note 4).

At year-end, the amounts due from (to) related parties are as follows:

|                                                       |   | 2005     |   | 2004    |   | 2003    
|------------------------------------------------------ | - | -------- | - | ------- | - | --------
|Due to a law firm in which a director is a
    partner | $ | (47,388) | $ | (5,338) | $ | (411)   
|Due from significantly influenced company              | $ |         | $ | 43,629  | $ | 33,187  
|Due
    to companies owned by a director or an officer | $ |         | $ |        | $ | (10,000)

On December 30, 2005, an entity that is a related party to a director of the
Company, who is also an officer, purchased 180,000 shares of Archer representing
1.6 percent of its outstanding shares at December 31, 2005.

14. Commitments and Guarantees

The Company rents premises and equipment under operating leases, which expire
at various dates up to June 2010. The Company recorded rent expense for 2005 of
$573,516 (2004  $480,575; 2003  $747,023).

Annual rentals under these leases for each of the next five years are as
follows:

|2006  | $ | 1,161,165
|----- | - | ---------
|2007  |   | 638,202  
|2008  |   | 119,471  
|2009  |   | 74,755   
|2010  |   | 37,377   
|Total | $ | 2,030,970

Under the Private Vocational Schools Act for the Province of
Ontario, Section 9 of Regulation 939, all institutions conducting or operating a
private vocational school must be accompanied by a bond. Such bond can be
obtained from a guarantee company approved under the Guarantee Companies
Securities Act and it is non-negotiable and nontransferable. Two schools owned
by Archer operate under this regulation and have bonds totaling $55,890 with a
recognized guarantee company.

From time to time the Company enters into certain types of
contracts that require it to indemnify parties against possible third party
claims particularly when these contracts relate to licensing agreements. The
Company may provide indemnities. The terms of such obligations vary and
generally, a maximum is not explicitly stated. Because the financial obligations
in these agreements are often not explicitly stated, the overall maximum amount
of the obligations cannot be reasonably estimated. Historically, the Company has
not been obligated to make significant payments for these indemnification
obligations. The Company's management actively monitors the Company's exposure
to the above risks and obtains insurance coverage to satisfy potential or future
claims as necessary.

-21-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



15. Segmented Information

Zi Corporation develops software designed to enhance the
usability of mobile and consumer electronic devices through its Zi Technology
business segment. Zi Corporation has a singular focus: to make mobile devices
smarter and easier to use. Zi makes "intelligent interfaces"  software products
that simplify data entry and interaction on communications devices. The result
is richer, more personalized interaction for quicker, easier communication in 54
different language databases for use around the world.

Zi's product portfolio includes five products. eZiTap
combines the power of predictive texting and automatic vocabulary learning with
the familiarity and flexibility of multi-tap input. eZiTap is ideal for the
youth market in which multi-tap is used to create unique and fun vocabulary and
texting shortcuts. eZiType is a comprehensive predictive text entry product for
mobile email users. Ideal for keyboard-based mobile devices such as smartphones,
PDAs and gaming consoles, eZiType improves the mobile email user's text entry
experience by enhancing typing speed and spelling accuracy. eZiText®
provides fast, efficient, predictive one-touch entry and word completion,
enhanced with the interactive learning and personalization of a user's own
language patterns and behavior. Qix is a new service discovery engine that
provides a quick and easy method for accessing a phone's full set of features,
applications and services without having to remember where and how to find them
via the traditionally structured menu system. Decuma® is a new
interactive handwriting input product from Zi that mimics how humans write with
pen on paper  naturally and efficiently  in a broad range of languages.
Revenues are reported under the contracting Zi subsidiary's country of
residence.

Through its e-Learning business segment which includes Oztime,
EPI, Archer and an equity interest in MLG, the Company is also involved in
e-Learning technology, content and customer service as well as educational
content and distribution channels to offer learning management systems,
interactive online courses and network education solutions to meet diverse
client requirements. Archer provides personal and organizational teaching and
learning through Canadian based schools.

Other includes unallocated segment expenses such as legal fees, public
company costs, interest and other income and head office costs. The accounting
policies of each of the business segments are the same as those described in
note 2.

The Company's primary operations are located in North America. The Company
operates three reportable business segments in four reportable geographic
segments:

|                                                   |                     |              |              |              |                   |              |               |               |                 |             | Operating profit
|-------------------------------------------------- | ------------------- | ------------ | ------------ | ------------ | ----------------- | ------------ | ------------- | ------------- | --------------- | ----------- | ----------------
|                                                   |                     |              |              | Revenue      |                   |              |               |               |                 |             |                 
|                                                   |                     | License and  |              | Other        |                   |              |               |               | Other operating |             | interest and    
|                                                   | implementation fees |              | product      |              | Total             |              | Amortization  |               | expenses        |             | other income    
|2005                                               |                     |              |              |              |                   |              |               |               |                 |             |                 
|Zi Technology                                      | $ 10,614,043        | $            |             | $ 10,614,043 | $                 | 975,867      | $ 12,125,972  | $ (2,487,796)
|e-Learning                                         |                     |             |              | 770,470      |                   | 770,470      |               | 9,825         |                 | 1,606,974   |                 
|Corporate                                          |                     |             |              |             |                   |             |               | 176,427       |                 | 1,455,940   |                 
|Total                                              | $ 10,614,043        | $            | 770,470      | $ 11,384,513 | $ 1,162,119       | $ 15,188,886 | $ (4,966,492)
|Interest expense and interest and other
    income |                     |              |              |              |                   |              |               |               |                 |             |                 
|Minority interest                                  |                     |              |              |              |                   |              |               |               |                 |             |                 
|Loss
    before income taxes                       |                     |              |              |              |                   |              |               |               |                 |             | $               
|2004                                               |                     |              |              |              |                   |              |               |               |                 |             |                 
|Zi Technology                                      | $ 12,898,838        | $            |             | $            | 12,898,838        | $            | 709,064       | $             | 7,915,192       | $           | 4,274,582       
|e-Learning                                         |                     |             |              | 504,213      |                   | 504,213      |               | 24,646        |                 | 3,223,272   |                 
|Corporate                                          |                     |             |              |             |                   |             |               | 193,176       |                 | 3,798,053   |                 
|Total                                              | $ 12,898,838        | $            | 504,213      | $            | 13,403,051        | $            | 926,886       | $ 14,936,517  | $               | (2,460,352)
|Interest expense and interest and other income     |                     |              |              |              |                   |              |               |               |                 |             |                 
|Loss
    before income taxes                       |                     |              |              |              |                   |              |               |               |                 |             | $ ( 2,388,199)  
|2003                                               |                     |              |              |              |                   |              |               |               |                 |             |                 
|Zi Technology                                      | $                   | 9,918,998    | $            |             | $                 | 9,918,998    | $             | 1,124,047     | $               | 6,928,139   | $               
|e-Learning                                         |                     |             |              | 684,070      |                   | 684,070      |               | 75,042        |                 | 1,400,830   |                 
|Corporate                                          |                     |             |              |             |                   |             |               | 181,176       |                 | 3,229,712   |                 
|Total                                              | $                   | 9,918,998    | $            | 684,070      | $                 | 10,603,068   | $             | 1,380,265     | $               | 11,558,681  | $               
|Interest expense and interest and other income     |                     |              |              |              |                   |              |               |               |                 |             |                 
|Loss
    before income taxes                       |                     |              |              |              |                   |              |               |               |                 |             | $               
|                                                   |                     |              |              |              |                   |              |               |               |                 |             |                 
|                                                   |                     |              |              |              |                   |              |               |               |                 |             |                 
|                                                   |                     |              |              | 2005         |                   |              |               |               |                 | 2004        |                 
|                                                   |                     | Capital and  |              |              |                   | Identifiable |               | Capital and   |                 |             |                 
|                                                   | intangible assets   | Other assets |              | assets       | intangible assets |              | Other assets  |               | assets         
|Zi Technology                                      | $                   | 3,855,682    | $ 6,036,312  | $ 9,891,994  | $                 | 2,092,519    | $             | 6,375,649     | $               | 8,468,166  
|e-Learning                                         |                     | 795,559      |              | 833,102      |                   | 1,628,661    |               | 30,879        |                 | 1,016,799   |                 
|Corporate                                          |                     | 394,586      | 10,489,264   |              | 10,883,850        |              | 656,646       |               | 11,526,381      |             | 12,183,027      
|Total                                              | $ 5,045,827         | $ 17,358,678 | $ 22,404,505 | $            | 2,780,044         | $ 18,918,827 | $             | 21,698,871   

-22-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Corporate includes non-cash compensation expense related to
issuance of non-employee stock options and RSU's in 2005 of nil (2004 
$1,371,398; 2003  $516,354) and non-cash interest expense of nil (2004  nil;
2003  $95,344). All additions to software development costs of $930,264 in 2005
(2004  $1,661,974) are part of Zi Technology operations.

|                                                   |                     |              |         |            |                   |              |              |             |                 |            |              | Operating profit
|-------------------------------------------------- | ------------------- | ------------ | ------- | ---------- | ----------------- | ------------ | ------------ | ----------- | --------------- | ---------- | ------------ | ----------------
|                                                   |                     |              |         | Revenue    |                   |              |              |             |                 |            |              | (loss), before  
|                                                   |                     | License and  |         | Other      |                   |              |              |             | Other operating |            | interest and
|                                                   | implementation fees |              | product |            | Total             |              | Amortization |             | expenses        |            | other income
|2005                                               |                     |              |         |            |                   |              |              |             |                 |            |              |                 
|Canada                                             | $                   | 4,175,334    | $       | 45,717     | $                 | 4,221,051    | $            | 909,599     | $               | 6,869,298  | $            | (3,557,846)     
|China                                              |                     | 5,019,599    |         | 724,753    |                   | 5,744,352    |              | 59,836      |                 | 4,800,499  |              | 884,017         
|USA                                                |                     | 1,021,769    |         |           |                   | 1,021,769    |              | 14,246      |                 | 2,024,754  |              | (1,017,231)     
|Sweden                                             |                     | 397,341      |         |           |                   | 397,341      |              | 164,042     |                 | 1,406,772  |              | (1,173,473)     
|Other                                              |                     |             |         |           |                   |             |              | 14,396      |                 | 87,563     |              | (101,959)       
|Total                                              | $                   | 10,614,043   | $       | 770,470    | $                 | 11,384,513   | $            | 1,162,119   | $               | 15,188,886 | $            | (4,966,492)     
|Interest expense and interest and other
    income |                     |              |         |            |                   |              |              |             |                 |            |              | 360,504         
|Minority interest                                  |                     |              |         |            |                   |              |              |             |                 |            |              | (23,920)        
|Loss
    before income taxes                       |                     |              |         |            |                   |              |              |             |                 |            | $            | (4,629,908)     
|2004                                               |                     |              |         |            |                   |              |              |             |                 |            |              |                 
|Canada                                             | $                   | 5,884,396    | $       | 8,120      | $                 | 5,892,516    | $            | 785,332     | $               | 9,087,566  | $            | (3,980,382)     
|China                                              |                     | 5,207,579    |         | 496,093    |                   | 5,703,672    |              | 111,477     |                 | 3,870,783  |              | 1,721,412       
|USA                                                |                     | 1,806,863    |         |           |                   | 1,806,863    |              | 15,681      |                 | 1,868,755  |              | (77,573)        
|Other                                              |                     |             |         |           |                   |             |              | 14,396      |                 | 109,413    |              | (123,809)       
|Total                                              | $                   | 12,898,838   | $       | 504,213    | $ 13,403,051      | $            | 926,886      | $           | 14,936,517      | $          | (2,460,352) 
|Interest expense and interest and other income     |                     |              |         |            |                   |              |              |             |                 |            |              | 72,153          
|Loss
    before income taxes                       |                     |              |         |            |                   |              |              |             |                 |            | $            | (2,388,199)     
|2003                                               |                     |              |         |            |                   |              |              |             |                 |            |              |                 
|Canada                                             | $                   | 3,731,859    | $       | 13,982     | $                 | 3,745,841    | $            | 1,027,630   | $               | 5,649,385  | $            | (2,931,174)     
|China                                              |                     | 3,378,770    |         | 670,088    |                   | 4,048,858    |              | 298,575     |                 | 3,731,641  |              | 18,642          
|USA                                                |                     | 2,808,369    |         |           |                   | 2,808,369    |              | 34,689      |                 | 2,031,146  |              | 742,534         
|Other                                              |                     |             |         |           |                   |             |              | 19,371      |                 | 146,509    |              | (165,880)       
|Total                                              | $                   | 9,918,998    | $       | 684,070    | $                 | 10,603,068   | $            | 1,380,265   | $               | 11,558,681 | $            | (2,335,878)     
|Interest expense and interest and other income     |                     |              |         |            |                   |              |              |             |                 |            |              | (595,231)       
|Loss
    before income taxes                       |                     |              |         |            |                   |              |              |             |                 |            | $            | (2,931,109)     
|                                                   |                     |              |         |            |                   |              |              |             |                 |            |              |                 
|                                                   |                     |              |         |            |                   |              |              |             |                 |            |              |                 
|                                                   |                     |              |         | 2005       |                   |              |              |             |                 | 2004       |              |                 
|                                                   |                     | Capital and  |         |            |                   | Identifiable |              | Capital and |                 |            |              | Identifiable    
|                                                   | intangible assets   | Other assets |         | assets     | intangible assets |              | Other assets |             | assets         
|Canada                                             | $                   | 3,534,976    | $       | 11,044,847 | $                 | 14,579,823   | $            | 2,408,257   | $               | 15,920,950 | $            | 18,329,207      
|China                                              |                     | 198,330      |         | 5,181,836  |                   | 5,380,166    |              | 213,375     |                 | 2,215,414  |              | 2,428,789       
|USA                                                |                     | 26,860       |         | 535,127    |                   | 561,987      |              | 50,441      |                 | 750,474    |              | 800,915         
|Sweden                                             |                     | 1,192,086    |         | 579,669    |                   | 1,771,755    |              |            |                 |           |              |                
|Other                                              |                     | 93,575       |         | 17,199     |                   | 110,774      |              | 107,971     |                 | 31,989     |              | 139,960         
|Total                                              | $                   | 5,045,827    | $       | 17,358,678 | $                 | 22,404,505   | $            | 2,780,044   | $               | 18,918,827 | $            | 21,698,871      

-23-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



In 2005, two Zi Technology customers accounted for 31 percent
or $3,583,403 (2004  34 percent or $4,587,871; 2003  26 percent or $2,719,936)
of the Company's total revenue. Canada includes non-cash compensation expense
related to issuance of non-employee stock options and RSU's in 2005 of nil (2004
 $1,371,398; 2003  516,354) and non-cash interest expense of nil (2004  nil;
2003  $95,334). All additions to software development costs of $930,264 in 2005
(2004  $1,661,974) are part of Canadian operations.

16. Canadian Generally Accepted Accounting
Principles

The consolidated financial statements, prepared in accordance with U.S. GAAP,
conform to Canadian GAAP, in all material respects, except:

Start-up costs

Pursuant to Canadian GAAP Emerging Issues Committee ("EIC")
Abstract 27, "Revenues and Expenditures During the Pre-Operating Period",
certain costs of start-up activities and organizational costs are capitalized as
incurred as long as the expenditure is directly related to placing the new
business into service, is incremental in nature and recoverable through future
operations. Start-up costs include those one-time activities related to
organizing a new entity. Consequently, start-up costs associated with the 1999
acquisition of Beijing Oz Education Network System Co. Ltd. of $205,842 have
been capitalized. Related amortization charges recorded pursuant to Canadian
GAAP are included in income under Canadian GAAP.

Share capital

Under Canadian GAAP, the December 31, 1997 stated capital of the Company was
reduced by its December 31, 1996 deficit of $24,339,036. U.S. GAAP does not
allow for such restatement. This reclassification has no effect on net
shareholders' equity as at December 31, 2005, 2004 and 2003.

Shares outstanding used to compute per share figures under Canadian GAAP are
as follows:

|                                  | 2005       | 2004       | 2003      
|--------------------------------- | ---------- | ---------- | ----------
|Weighted average number of shares | 46,152,711 | 41,373,309 | 38,719,786

Foreign currency translation

Under Canadian GAAP, the Company, on a consolidated basis, is
required, for the years ended December 31, 2005, 2004 and 2003, to translate the
accounts of its subsidiaries to U.S. dollars using the temporal method. The
accounts of the Company's integrated operations in foreign subsidiaries are
translated into U.S. dollars using the temporal method whereby monetary items
are translated at the rate of exchange in effect at the balance sheet date and
non-monetary items are translated at applicable historical rates. The resulting
foreign exchange gain or loss on translation is included as part of the
calculation of the net loss as compared to inclusion as part of other
comprehensive income disclosed on the statement of shareholders equity under
U.S. GAAP.

Consolidated statement of loss

The application of Canadian GAAP would have the following effects on net loss
as reported:

|                                                          |   | 2005        |   | 2004        |   | 2003       
|--------------------------------------------------------- | - | ----------- | - | ----------- | - | -----------
|Net
    loss as reported in accordance with U.S. GAAP     | $ | (5,317,423) | $ | (2,388,199) | $ | (2,931,109)
|Adjustments:                                              |   |             |   |             |   |            
|Fair value of stock
    options issued                    |   | (2,752,396) |   | (1,624,153) |   | (1,679,224)
|Foreign exchange gain (loss)                              |   | (114,108)   |   | 275,834     |   | 162,453    
|Total adjustments                                         |   | (2,866,504) |   | (1,348,319) |   | (1,516,771)
|Net
    loss under Canadian GAAP                          | $ | (8,183,927) | $ | (3,736,518) | $ | (4,447,880)
|Loss
    per share under Canadian GAAP, basic and diluted | $ | (0.18)      | $ | (0.09)      | $ | (0.12)     

-24-

---



Notes to the Consolidated Financial
Statements
For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Stock-based compensation

The Company has a stock-based compensation plan, which is
described in note 9. The Company accounts for its grants under those plans in
accordance with the fair value-based method of accounting for stock-based
compensation. For stock option plans, the fair value of stock options is
determined on their grant date and recorded as compensation expense over the
period that the stock options vest, with a corresponding increase to contributed
surplus. When stock options are exercised, the proceeds, together with the
amount recorded in contributed surplus, are recorded in share capital. The
Company adopted the fair-value method of accounting for stock options in the
fourth quarter of 2003. The Company adopted the fair-value based method
prospectively, whereby compensation cost is recognized for all options granted
on or after January 1, 2003.

Consolidated balance sheets

The application of Canadian GAAP would have the following effects on balance
sheet items as reported:

|Shareholders' Equity                                            |   | 2005        |   | 2004        |   | 2003       
|--------------------------------------------------------------- | - | ----------- | - | ----------- | - | -----------
|Shareholders' equity under Canadian GAAP,
    beginning of year | $ | 12,445,779  | $ | 2,601,869   | $ | 3,654,888  
|Share capital issued and contributed surplus                    |   | 3,340,190   |   | 13,580,428  |   | 3,394,861  
|Net loss under U.S. GAAP                                        |   | (5,317,423) |   | (2,388,199) |   | (2,931,109)
|Adjustments to net loss for the year under Canadian GAAP        |   | (2,866,504) |   | (1,348,319) |   | (1,516,771)
|Shareholders' equity under Canadian GAAP, end of year           | $ | 7,602,042   | $ | 12,445,779  | $ | 2,601,869  

New accounting standards

The following guidelines issued by the Canadian Institute of
Chartered Accountants ("CICA") did not or are not expected to impact the
Company:

In January 2005, the CICA issued Section 1530,
"Comprehensive Income", Section 3251, "Equity", Section 3855,"Financial
Instruments  Recognition and Measurement" and section 3865,"Hedges". The new
standards increase harmonization with U.S. GAAP and will have no impact on the
Company as we report under U.S. GAAP which includes similar requirements.

In June 2005, the CICA issued Section 3831, "Non-Monetary
Transactions". The new standard increases harmonization with U.S. GAAP and had
no impact on the Company as we report under U.S. GAAP which includes similar
requirements.

Effective in 2005, Accounting Guideline 15, "Consolidation of
Variable Interest Entities", which requires consolidation of certain entities
that are subject to control on a basis other than ownership of voting interests,
called a VIE. The new guidance had no impact on the Company as we report under
U.S. GAAP which includes similar VIE requirements.

17. Supplemental Financial Information

Accrued liabilities

The following items are included in the accounts payable and accrued
liabilities balance:

|Accounts payable and accrued liabilities |   | 2005      |   | 2004     
|---------------------------------------- | - | --------- | - | ---------
|Trade accounts payable                   | $ | 1,529,348 | $ | 371,865  
|Compensation                             |   | 1,275,824 |   | 1,011,397
|Withholding tax and income taxes payable |   | 721,966   |   | 372,685  
|Accounting and other compliance          |   | 311,251   |   | 173,363  
|Litigation and legal                     |   | 255,866   |   | 1,120,130
|Other accrued liabilities                |   | 117,309   |   | 31,840   
|Total                                    | $ | 4,211,564 | $ | 3,081,280

-25-

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Notes
to the Consolidated Financial Statements

For the years ended December 31,
2005, 2004 and 2003 
(All amounts expressed in United States of America dollars except share amounts)



Non-cash working capital

The following balances are included as part of non-cash working capital:

|Non-cash working capital                        |   | 2005      |   | 2004        |   | 2003       
|----------------------------------------------- | - | --------- | - | ----------- | - | -----------
|Accounts receivable                             | $ | 1,660,575 | $ | (1,561,047) | $ | (1,213,608)
|Work-in-progress and inventory                  |   |          |   |            |   | 97,455     
|Prepayments and deposits                        |   | (39,906)  |   | (15,227)    |   | 303,880    
|Accounts payable and accrued liabilities        |   | 110,063   |   | (1,018,027) |   | (151,974)  
|Deferred revenue                                |   | 1,019,146 |   | 1,604,532   |   | 593,639    
|Decrease (increase) in non-cash working capital | $ | 2,749,878 | $ | (989,769)   | $ | (370,608)  

Loss per share

In 2005, all stock options, RSU's and warrants in the amount of 4,959,869
have been excluded in the calculation of diluted loss per share as they are
anti-dilutive (2004  6,374,836; 2003  6,014,904).

18. Governmental Regulation

Archer and each institution are subject to regulation by
federal and provincial governmental agencies and accrediting bodies. In order to
participate in the various provincial student financial assistance programs, the
schools must satisfy regulatory scrutiny on the basis of numerous standards as
well as demonstrate their compliance to the governmental bodies on an ongoing
basis. As of December 31, 2005, management believes that Archer's institutions
were in compliance with the applicable regulations in all material respects.

All institutions participating in the provincial student assistance programs
must satisfy specific standards of financial responsibility. The provincial
governmental bodies evaluate the institutions for compliance with these
standards each year, based on the institutions' audited financial statements.

Because Archer operates in a regulated industry, it may be
subject to, from time to time, investigations, claims of non-compliance, or
lawsuits by governmental agencies or third parties, which allege statutory
violations, regulatory infractions, or common law causes of action. There can be
no assurance that other regulatory agencies or third parties will not undertake
investigations or make claims against Archer, or that such claims, if made, will
not have a material adverse effect on Archer's business results of operations or
financial condition.

19. Subsequent Events

Subsequent to year end, Zi effectively divested of an additional interest in
Archer through dilution and holds 44.8 percent.

-26-

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of Zi Corporation

We have audited the consolidated financial
statements of Zi Corporation (the ''Company'') as of December 31, 2005 and 2004,
and for each of the three years in the period ended December 31, 2005, and have
issued our reports thereon dated March 17, 2006 (which audit report expresses an
unqualified opinion and includes an explanatory paragraph referring to our
consideration of internal control over financial reporting); such financial
statements and reports are included in the 2005 Annual Report on Form 20-F. Our
audits also included the financial statement schedule of Zi Corporation. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

|                                                
|------------------------------------------------
|/s/ Deloitte & Touche LLP                       
|                                                
|Deloitte & Touche LLP                           
|Independent Registered Chartered
    Accountants
|Calgary, Alberta, Canada                        
|March 17, 2006                                  

Schedule 11 - Valuation and Qualifying Accounts

|                                | Balance at   |                  |            |            
|------------------------------- | ------------ | ---------------- | ---------- | -----------
|                                | Beginning of | Charged to costs |            | Balance at 
|                                | Year         | and expenses     | Deductions | End of Year
|Allowance for Doubtful Accounts |              |                  |            |            
|Year Ended December 31, 2005    | $ 154,108    | $ 278,589        | $ 6,000    | $ 426,697  
|Year Ended December 31, 2004    | $ 507, 640   | $ 68,844         | $ 422,376  | $ 154,108  
|Year Ended December 31, 2003    | $ 247,062    | $ 260,578        | $ -        | $ 507,640  

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