UNITED
        STATES SECURITIES
        AND EXCHANGE COMMISSION Washington,
        DC 20549
  **FORM 20-F**
  o
              REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934
 
 x
              ANNUAL REPORT PURSUANT TO SECTION 13 OR
                15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31,
                2004
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 Commission
        file number: 000-24018
   **Zi
                    Corporation**(Exact
                    name of Registrant as specified in its
                    Charter)**Alberta,
                    Canada**(Jurisdiction
                    of incorporation or
                    organization)**2100,
                    840 - 7thAvenue
                    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.**None**Securities
                    registered or to be registered
                    pursuant to Section 12(g) of the Act.**Common
                    Shares, no par
                    value**(Title
                    of Class)Securities
                    for which there is a reporting
                    obligation pursuant to Section 15(d) of the Act.**None**Indicate the number
                  of outstanding
                  shares of each of the issuer’s classes of capital or common stock as of
                  December 31, 2004.**45,225,190
                    Common Shares, no par
                    value**
  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
                o  No
   1
   Indicate by check mark which financial
                  statement item the registrant has elected to follow.o Item 17
                xItem 18
   2
   **TABLE
        OF CONTENTS**
   Page**PART
                I**
              **7****Introduction**
              **7****Forward
                  Looking Information**
              **7****Item 1 -
                Identity
                of Directors, Senior Management and Advisers**
              **8****Item 2 -
                Offer
                Statistics and Expected Timetable**
              **8****Item 3 -
                Key
                Information**
              **8**A.
              Selected
                  Financial Data
              8B.
              Capitalization
                  and Indebtedness
              10C.
              Reasons
                for the Offer and Use of Proceeds
              10D.
              Risk
                Factors
              10**Item 4 -
                Information on the Company**
              **19**A.
              History
                  and Development of the Company
              19B.
              Business
                  Overview
              28C.
              Property,
                  Plant and Equipment
              35**Item 5 -**
              **36**A.
              Operating
                Results
              36**Software
                  Development Costs**
              **37****Revenue
                Recognition**
              **38****Stock-based
                  Compensation Plan**
              **38**Operating
                  Results
              39B.
              Liquidity
                  and Capital Resources
              46C.
              Research
                  and Development, Patents and Licenses, etc.
              49D.
              Trend
                  Information
              51**Item 6 -
                  Directors, Senior Management and Employees**
              **56**
  3
   A.
                Directors
                    and Senior Management
                56Stock
                    Options
                60Long-term
                      Incentive Plans
                62Stock
                    Appreciation Rights and Restricted Shares
                62Stock
                    Option and SAR Repricing
                62Pension
                    and Retirement Plans and Payments made upon Termination of
                    Employment
                62Employment
                    Contracts
                62B.
                Board
                      Practices
                65C.
                Employees
                68D.
                Share
                    Ownership
                69Purpose
                    of Plans
                70Eligibility
                70Administration
                      of the Plans
                71Amendment
                      of the Plans
                71Necessary
                    Approvals
                71Adjustment
                    in Shares Subject to the Plan
                71**Item 7
                      - Major Shareholders and Related Party
                      Transactions**
                73A.
                Major
                    Shareholders
                73B.
                Related
                      Party Transactions
                74C.
                Interests
                      of Experts and Counsel
                75**Item 8
                      - Financial Information**
                75A.
                Consolidated
                    Statements and Other Financial Information
                75B.
                Significant
                    Changes
                78**Item 9 -
                  The
                  Offer and Listing**
                **78**A.
                Offer
                    and Listing Details - Stock Price History
                78B.
                Plan
                    of Distribution
    4
   C.
                  Markets
                  80D.
                  Selling
                      Shareholders
                  80E.
                  Dilution
                  80F.
                  Expenses
                    of the Issue
                  80**Item 10 -
                      Additional Information**
                  **80**A.
                  Share
                          Capital
                  80B.
                  Memorandum
                        and Articles of Association
                  80C.
                  Material
                        Contracts
                  86D.
                  Exchange
                      Controls
                  86E.
                  Taxation
                  87F.
                  Dividends
                      and Paying Agents
                  91G.
                  Statement
                      by Experts
                  91H.
                  Documents
                      on Display
                  91I.
                  Subsidiary
                      Information
                  92**Item 11 -
                        Quantitative and Qualitative Disclosure About Market
                        Risk**
                  **92**A.
                  Financial
                        Instruments
                  92B.
                  Foreign
                        Currency
                  93Item 12 -
                      Description of Securities Other than Equity Securities
                  **93****Part II****Item 13 -
                      Defaults, Dividend Arrearages and Delinquencies**
                  **93****Item 14 -
                      Material Modifications to the Rights of Security Holders and
                      Use of
                      Proceeds**
                  **93****Item 15 -
                      Controls and Procedures**
                  **93****Item 16 -
                      [Reserved]**
                  **94****Item
                      16A - Audit committee financial expert**
                  **94****Item
                      16B - Code of Ethics**
                  **94****Item
                      16C - Principal Accountant Fees and
                      Services**
                  **95**
   5
 **Item
                      16D - Exemption
                      from the Listing Standards for Audit
                      Committees**
                  **95****Item
                      16E - Purchases
                      of Equity Securities by the Issuer and Affiliated
                      Purchasers**
                  **95****Part III**
                  **95****Item 17 - Financial
                    Statements**
                  **95****Item 18 - Financial
                    Statements**
                  **96****Item 19 - Exhibits**
                  **97****SIGNATURE**
                  **97****CERTIFICATION**
                  **98**
   6
  **PART
          I**
  **Introduction**
  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” or the “Company”. 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 ® ,
          eZiNetTM, eZiTap TM ,
          QixTM,
          Decuma®, Zi ServicesTM, OztimeTM and EnglishPracticeTM. 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 and in parts of Asia and Europe and
          registration is pending in China. 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
          (“US
          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 US 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 US dollars, with comparative periods restated to US dollars.
          The
          comparative amounts in this Form 20-F have been restated to US
          dollars.
  On
          March
          23, 2005, the exchange rate for the United States of America (“US”) dollar was
          $0.8242 = CDN$1.00. Please see *Item 3 -
          Key Information - Selected Financial Data* for more
          detailed US dollar to Canadian dollar exchange rate information.
  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 “will”, “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; 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 US 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, investment risks associated
          with our
          e-Learning investments and other risks and uncertainties described under
          “ *Item 3 -
          Key Information - Risk Factors* ”
          and
          elsewhere in this report.
   7
   Forward-looking
        statements are based on the beliefs, opinions and expectations of our management
        on the date the statements are made. Although we believe that the
        forward-looking statements presented in this document are reasonable, we
        do not
        guarantee that they accurately or completely predict, reflect or state future
        results, levels of activity, performance, achievements or occurrence and
        we do
        not assume responsibility for failure to do so. Except as required by law
        we do
        not undertake to update forward-looking information to reflect actual results,
        new information, occurrence of future events, or changes in management’s
        beliefs, opinions or expectations. No undue reliance should be placed on
        such
        forward-looking statements.
  **Item 1
        -** **Identity
        of Directors, Senior Management and Advisers**
  Not
        applicable.
  **Item 2
        -** **Offer
        Statistics and Expected Timetable**
  Not
        applicable.
  **Item 3
        -** **Key
        Information**
  *A.            
        Selected Financial Data*
  The
        following table summarizes certain of our selected financial information
        (stated
        in thousands of US dollars) prepared in accordance with US GAAP. The information
        in the table was derived from the more detailed financial statements for
        the
        fiscal year ended December 31, 2000 through the fiscal year ended
        December 31, 2004, inclusive, and the related notes, and should be
        read in
        conjunction with the financial statements and with the information appearing
        under the headings “ *Item 5 -
        Operating and Financial Review and Prospects* ”
        and
“ *Item 18 -
        Financial Statements* ”.
        The
        consolidated statements of loss information for fiscal years 2000 and 2001,
        and
        the consolidated balance sheet information as of December 31, 2000,
        December 31, 2001 and December 31, 2002, as set forth below, have been derived
        from audited Consolidated Financial Statements not included in this annual
        report. Historical results are not necessarily indicative of results to be
        expected for any future period. No dividends have been paid in any of the
        fiscal
        years ended December 31, 2000 throughout the fiscal year ended December 31,
        2004.
   8
   **2004**
              
              **2003**
              
              **2002**
              
              **2001**
              
              **2000****(in
                  thousands of US dollars except per share data)**Revenue
                  from continuing operations
              
              
              13,403
              
              
              10,603
              
              
              8,416
              
              
              3,418
              
              
              4,419Operating
                  loss from continuing operations (1)
              
              
              (2,460
              )
              
              (2,336
              )
              
              (19,246
              )
              
              (8,934
              )
              
              (6,227
              )Operating
                  loss from continuing operations per share
              
              
              (0.06
              )
              
              (0.08
              )
              
              (0.52
              )
              
              (0.24
              )
              
              (0.17
              )Net
                  loss from continuing operations (1)
              
              
              (2,388
              )
              
              (2,931
              )
              
              (19,498
              )
              
              (8,081
              )
              
              (4,013
              )Net
                  loss from continuing operations per share
              
              
              (0.06
              )
              
              (0.08
              )
              
              (0.52
              )
              
              (0.22
              )
              
              (0.11
              )Net
                  loss (2)
              
              
              (2,388
              )
              
              (2,931
              )
              
              (25,206
              )
              
              (13,224
              )
              
              (8,512
              )Net
                  loss and diluted net loss per share
              
              
              (0.06
              )
              
              (0.08
              )
              
              (0.67
              )
              
              (0.36
              )
              
              (0.23
              )Total
                  assets
              
              
              21,699
              
              
              10,686
              
              
              11,870
              
              
              30,167
              
              
              41,772Capital
                  stock
              
              
              108,139
              
              
              94,559
              
              
              91,165
              
              
              89,966
              
              
              88,099Accumulated
                  deficit and other comprehensive
                income
              
              
              (92,391
              )
              
              (90,278
              )
              
              (87,510
              )
              
              (62,462
              )
              
              (48,490
              )Net
                  assets
              
              
              15,749
              
              
              4,281
              
              
              3,655
              
              
              27,504
              
              
              39,609Outstanding
                  shares, in thousands
              
              
              45,225
              
              
              39,372
              
              
              37,914
              
              
              37,544
              
              
              36,991
 (1)
        2002
        operating and net loss from continuing operations includes litigation and
        judgement 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; 2000 - $4.5 million)
  *Currency
        and Exchange Rates*
  The
        following table sets out the exchange rates for US dollars 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):
  **US
                  Dollars Per One Canadian Dollar**
                **Year
                  Ended December 31****2004**
              
              **2003**
              
              **2002**
              
              **2001**
              
              **2000**End
                  of period
              
              
              0.8319
              
              
              0.7713
              
              
              0.6339
              
              
              0.6275
              
              
              0.6666Average
                  for the period
              
              
              0.7685
              
              
              0.7158
              
              
              0.6369
              
              
              0.6461
              
              
              0.6740
 The
        following table sets out the high and low exchange rates for US dollars
        expressed in terms of one Canadian dollar in effect at the end of the following
        periods:
  **US
                  Dollars per One Canadian Dollar****September**
                **2004**
              
              **October**
                **2004**
              
              **November**
                **2004**
              
              **December**
                **2004**
              
              **January**
                **2005**
              
              **February**
                **2005**High
                  for the month
              
              
              0.7855
              
              
              0.8201
              
              
              0.8493
              
              
              0.8435
              
              
              0.8346
              
              
              0.8134Low
                  for the month
              
              
              0.7651
              
              
              0.7858
              
              
              0.8155
              
              
              0.8064
              
              
              0.8050
              
              
              0.7961
   9
  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, 2005 as reported
        by the
        United States Federal Reserve Bank of New York for the conversion of United
        States dollar into Canadian dollars was US$1.00 = CDN$1.2133.
  ***B.*** ***Capitalization
          and Indebtedness***
  Not
          applicable.
  ***C.*** ***Reasons
          for the Offer and Use of Proceeds***
  Not
          applicable.
  ***D.******Risk
          Factors*********
  We
          operate in a dynamic and rapidly changing environment that involves numerous
          risks and uncertainties, many of which are beyond our control. 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 $2.4 million in our fiscal year ended December 31, 2004, $2.9
          million
          in our fiscal year ended December 31, 2003, and $25.2 million in our fiscal
          year
          ended December 31, 2002. As of December 31, 2004, our accumulated deficit
          was
          $91.9 million. While we have recently been able to generate quarterly operating
          profits, net losses may continue. We face significant and potentially costly
          challenges in simultaneously pursuing key research and development goals
          and
          attracting customers for our products and services.
  ***Our
          shareholders may face dilution in future financings and our business may
          be
          restricted by future borrowings.***
  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.
  ***The
          price of our common shares and our ability to access capital markets may
          be
          affected by Lancer’s ownership of our common 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’ ownership amounted to approximately 49% 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. We believe we may be adversely affected in the
          following ways:
   10
   §
              the
                  price of our common shares may have been affected by periodic news
                  reports
                  relating to the legal proceedings affecting the Lancer
                  Funds;
 §
              Certain
                  investors have been reluctant to invest in our securities due to
                  uncertainties regarding potential market or other sales or distributions
                  of Zi common shares by the receiver for the Lancer
                  Funds;
 §
              The
                  Company’s ability to raise capital has and may continue to require the
                  cooperation of the Lancer Funds through lock up agreements or other
                  similar requirements.
  There
        can
        be no assurance that our share price or our access to the capital markets
        will
        not continue to be affected by the Lancer Fund’s ownership of our common
        shares.
  ***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; and
 §
              evolving
                  customer requirements.
 
 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;
 §
              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.
 
  11
   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 there can be no assurance
        that we can compete successfully or gain market
        acceptance.***
  The
        software industry is intensely competitive and is characterized by rapid
        technological advances, evolving industry standards and technological
        obsolescence. 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. We understand that 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; AOL Time Warner (“AOL”); Nokia;
        OpenWave; Apple; Microsoft; Research in Motion, Digit Wireless (Fastap),
        Scansoft, CIC, PenReader, Vision Objects, TealPoint in Latin languages, PenPower
        and HanWang. 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.
  ***Our
        products may contain defects that could harm our reputation, be costly to
        correct, expose us to litigation and harm our operating results and profits.***
  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.
  ***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.
   12
   ***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 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 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.
  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 service providers deciding to cancel or change
        their
        product plans. Our business would be adversely affected if a significant
        customer reduces or delays orders during our sales cycle or chooses not to
        deploy products incorporating our technology.
  Some
        of
        our major direct customers are not profitable and are subject to reduced
        demand
        for products and services currently affecting the telecommunications industry.
        In 2004, 2003 and 2002 we derived 34, 26 and 25 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 the end of their license terms and it is uncertain whether
        we will be successful in negotiating renewals with these customers.
   13
   Our
        overall market breadth for language input 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 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. 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 charged with infringement, and, as described in the section below,
        we
        have been affected by such litigation. 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.
  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 *Item 4 -
        Information on the Company - Intellectual Property
        Litigation* ,
        the
        Company and America Online Inc. (“AOL”) settled a judgment under a U.S. based
        litigation by a written settlement agreement dated December 6, 2002.
        Under
        the settlement agreement, the Company consented to, *inter
        alia* ,
        an
        injunction under the Consent Judgement which prohibits the sale or use in
        the
        United States of earlier versions of the Company’s eZiText product which are not
        currently sold or offered for sale or used by the Company in the United States.
        This injunction does not apply to or prohibit the sale or use of such earlier
        versions of the Company’s eZiText product in countries other than the United
        States. In the ordinary course of business, the Company, Tegic and others
        seek
        to protect their intellectual property in various countries and jurisdictions
        through administrative proceedings and civil litigation. The settlement of
        the
        Tegic lawsuit dealt only with certain patent infringement claims in the United
        States. There can be no assurance that we will be successful in various
        challenges we have filed in respect of certain of Tegic’s patent claims outside
        of the United States. The outcome of any of these proceedings, if determined
        adversely, raises the possibility that additional civil action could follow.
   14
   ***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 this 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. 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 Mike Donnell, President and Chief Executive
        Officer, Milos Djokovic, Chief Operating Officer and Chief Technical Officer,
        Glen Morgan, Senior Vice President Global Sales & Marketing and Dale Kearns,
        Chief Financial Officer, could have a materially adverse effect upon our
        ability
        to grow and operate profitably.
  ***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.
   15
  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 significant 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
        financed the majority of our growth largely through private placements of
        common
        shares. As of February 28, 2005, our cash position was approximately $15.3
        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 *Item 5 -
        Operating and Financial Review and Prospects - Liquidity and Capital
        Resources* .
        However, we may still require additional financing to support our product
        expansion or continued operations. There can be no assurance that sufficient
        financing will continue to be available to sustain our operations and growth,
        to
        develop new and existing markets or to complete development of products that
        fully exploit our owned or licensed technologies. Failure to obtain adequate
        additional financing on a timely basis could have a material adverse effect
        on
        our business.
  ***Our
        quarterly results are subject to fluctuations which could negatively affect
        our
        financial results.***
   16
  We
        have
        experienced, and are likely to continue to experience, significant fluctuations
        in quarterly operating results caused by many factors. These factors
        include:
  §
              dependence
                  on the market acceptance and sales of our licensees’ products in which our
                  technologies are embedded;
 §
              seasonality
                  of sales of our licensees’
                  products;
 §
              changes
                  in the demand for our technology;
 §
              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.
 
 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 produces 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 language and education 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
        Oztime or 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.
   17
  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 US 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.
  ***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. dollars, principally
        the
        Canadian dollar, Hong Kong dollar, Chinese renminbi and Swedish kormas. Our
        results are reported in U.S. dollars. Accordingly, fluctuations in exchange
        rates have a material effect on our results of operations. 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 gain of $275,834, a gain of $162,453, and a gain of $158,641
        in each of 2004, 2003 and 2002, 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 corporation 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 as a result of changes in management;
 §
              the
                  incurrence of amortization expenses; and
 §
              possible
                  dilution to our shareholders.
   18
  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 investments in Oztime and Magic
        Lantern Group.***
  We
        have
        material investments in two e-Learning businesses, our wholly-owned subsidiary,
        Oztime, and Magic Lantern Group, Inc., the latter of which is an AMEX-listed
        company of which we own approximately 43% of its outstanding shares. During
        2003
        we determined to concentrate on our core Zi Technology business unit. As
        part of
        this strategy, we regularly consider the monetization of the e-Learning
        investments, consistent with maximization of value to the Company and our
        shareholders. Market and industry conditions may limit our ability to achieve
        these goals. We have written off the carrying value of these investments
        but we
        have invested significant sums and would like to realize the value from such
        investments. As a result, we may invest additional resources in order to
        preserve their value. There can be no assurance that we will be able to realize
        value from our affiliates.
  ***As
        a non-US corporation, it may be difficult for shareholders to pursue claims
        under US 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
        judgements of courts of the United States predicated upon civil liabilities
        under the federal securities laws of the United States.
  **Item 4**- **Information
        on the Company**
  ***A.*** ***History
        and Development of the Company***
  Our
        head
        and principal office is located at Suite 2100, 840 - 7 th 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 National Market under the symbol “ZICA”.
   19
   We
        were
        incorporated under the *Business
        Corporations Act* (Alberta) in Alberta, Canada on December 4, 1987 as Cancom Ventures
        Inc. In
        June, 1990, we changed our name to Multi-Corp Inc. and thereafter changed
        our
        name to Zi Corporation in June, 1997.
  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. In one of these
        acquisitions, we acquired all of the shares in the capital of Miami
        International Gateway, Inc. (“MIG”), a US-based company engaged in the
        telecommunications business. The MIG acquisition cost was $1,286,000, of
        which
        $245,818 was paid in cash and 350,000 common shares at a deemed price
        of
        CDN$3.95 per share. In March, 1997, we sold all of the shares in MIG to Custom
        Technology Communication, a private Florida based company. 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 also provided Internet web development services
        in conjunction with carrying on our present business.
  ***Acquisition
        of Input Technology***
  Effective
        November, 1993, we acquired three licenses relating to certain computer
        software, word processing software and language translation technology known
        respectively, as the “Jiejing Input System”, the “Zitong Input System” and the
“Chappell/Yates Translation Technology” (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.
  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.
 
 20
  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 non-exclusive 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 composing the characters
        are
        classified into different groups, each identified by a code number. The string
        of code numbers representing each character follows exactly a traditional
        writing sequence of the character from the very first stroke to the end of
        the
        string of code numbers. The computer usually identifies the character before
        the
        entire writing sequence is completed. Certain aspects of our eZiText products
        are based on the intellectual property covered under the 352
        Patent.
  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 and Europe based on ideographic language input
        networks and software utilities which use text as a key part of their operation.
  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 increases the speed
        of
        input and allows inexperienced users to approach the desired character more
        quickly without having to search a long list of candidates. This is much
        simpler
        than full handwriting recognition and is compatible with low resource computing
        environments typical of the cellular telephone market.
  ***Acquisition
        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 *People’s
        Republic of China Foreign-Invested Business Act* )
        held by
        Beijing Senmo Ltd. (“Senmo”) to ONM. ONM subsequently sold, assigned and
        transferred its resulting 100 percent interest in Beijing Oz to 845,
        making
        representations and warranties to Zi of the validity of such actions. In
        addition, we also advanced $375,000 for, and on behalf of, Beijing Oz to
        pay the
        balance of the registered capital investment required under the joint venture
        contract that was entered into to form Beijing Oz.
   21
  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.
  In
        order
        to address this situation, on July 31, 2001, the Company caused one
        of its
        subsidiaries 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 now 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. We did not exercise the option which has now
        expired.
  ***Acquisition
        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.
  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
        has
        not proven to be effective and revenue streams have not developed since
        acquisition. We do not believe that EPI will contribute any material revenues
        to
        us in the future as a stand alone entity. As a result, EPI content and software
        products have been integrated into Oztime’s education portal
        business.
   22
  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 are in the course of being 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 has been integrated into Oztime’s
        business plan. See *Item 4 -
        Information on the Company - B. Business Overview* .
  ***Acquisition
        of Assets of Decuma AB***
  On
        January 26, 2005 the Company acquired the assets of handwriting recognition
        software specialists Decuma AB of Lund, Sweden. As part of the acquisition,
        the
        Company acquired the intellectual property and customer agreements of privately
        held Decuma. The purchase price was approximately US$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.*Pursuant
                  to a Complaint for Patent Infringement filed on March 21,
                  2000 in the
                  United States District Court in and for the Northern District of
                  California, Asian Communications Pty. Ltd. (“Asian Communications”) and
                  Tegic alleged that the Company and its affiliate, Zi Corporation
                  of
                  America, Inc.(“Zi America”) infringed certain Tegic patents in the United
                  States ( the “Tegic Lawsuit”).
  On
        February 21, 2002, the District Court granted a summary judgement
        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.
  The
        trial
        in this action was held in August, 2002. On September 4, 2002, the
        jury in
        this lawsuit found that certain versions earlier than version 4.5 of the
        Company’s eZiText product infringed Tegic’s US 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 US
        patents and to set aside the Damages Award.
   23
  The
        Company settled all claims in this lawsuit with AOL by a written settlement
        agreement dated December 6, 2002. The settlement of this lawsuit deals
        with
        patent infringement claims in the United States. As part of the settlement,
        a
        Consent Judgement was entered on December 20, 2002. The settlement
        in
        relation to the US 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 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.*The Company was also served with a Writ of Summons filed on March 30,
                  2000, by Asian Communications and Tegic in the High Court of the
                  Hong Kong
                  Special Administrative Region Court of First Instance seeking,
                  among other
                  things, a declaration that one of the plaintiffs’ patents is valid and
                  that the same has been infringed by Zi. A Statement of Claim dated
                  May 10, 2000 was subsequently served on the Company. We
                  are defending
                  this lawsuit and filed a Defence and Counterclaim. To date, to
                  the best of
                  the Company’s knowledge, no further action or proceeding has been
                  undertaken in this lawsuit by either
                  party.
  ***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”), an 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 BluetoothTM 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 was integrated into our wholly-owned subsidiary,
        Zi
        Corporation (H.K.) Limited. As part of this integration, Zi Services’ various
        business lines were narrowed to focus specifically on developing Bluetooth
        and
        VoIP technologies.
   24
   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 to a third party 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 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 Magic
        Lantern group of companies were retained at that time. Magic Lantern was
        acquired to give Zi a North American based company with which to leverage
        its
        relationships in China and capitalize on our Oztime e-learning
        investment.
  On
        November 7, 2002, the Company completed the sale of 55% of its interest
        in
        the Lantern Group to JKC Group Inc., which 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 trades on the AMEX under the ticker
        symbol “GML”. At closing, the Company received a 45% 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 has been 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 has been reduced to
        $2,000,000.
  Subsequent
        to the closing, it was learned that MLG’s then-controlling shareholder, an
        affiliate of Michael Lauer and several funds known as the Lancer Group, on
        an
        undisclosed basis, had acquired what was subsequently disclosed to be a 49.3%
        interest in Zi. There is no material impact on the financial statements of
        Zi as
        a result of the sale of the Lantern Group, to what is now known to be a related
        party, since no gain was recognized on the disposition of the Lantern
        Group.
  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
        the
        failure of MLG to make scheduled interest payments on the notes.
  Possible
        Divestiture of Oztime and EnglishPractice
  As
        of the
        date of this Report, the Company is seeking to divest Oztime and EnglishPractice
        through a series of transactions in which (i) the Company will transfer the
        shares of Oztime and EnglishPractice to a new company, Archer Education Group
        Inc. (“Archer”), (ii) Archer will seek outside equity investment for Archer, and
        (iii) Archer will seek to implement a business plan which includes complementary
        acquisitions in the language and
        lifelong  learning
        industry. While there are a number of letters of intent with respect to these
        transactions, the letters of intent are non-binding and there can be assurance
        that the Company will be successful in divesting Oztime and EnglishPractice.
   25
 
 ***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 in 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 totalling 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. Management requested
        that its attorneys obtain 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 funds' holdings.
        The
        Receiver remained uncertain of the 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 Fund holdings in the Company, including
        the
        provision of copies of its registered shareholder records.
  On
        December 3, 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.
   26
  The
        following is an excerpt from the Schedule 13D filed December 3,
        2003:
  *“The
        purpose of the appointment of the Reporting Person as Receiver was to administer
        and hold the assets of the Receivership Entities. In the course of the
        administration of the assets of the Receivership Entities, the Reporting
        Person
        has hired an investment manager and has charged its investment manager generally
        with the task of proposing strategies for maximizing the net present value
        obtainable from the assets of the Receivership Entities over the next five
        years. The Reporting Person currently does not intend to dispose of a
        substantial portion of the Common Stock of the Issuer held by the Receivership
        Entities in the public markets. The Reporting Person may from time to time
        seek
        to sell or transfer a limited amount of the Common Stock of the Issuer held
        by
        the Receivership Entities in the public markets based on its evaluation of
        the
        business prospects of the Issuer and upon other factors, including but not
        limited to, general economic and business conditions and stock market
        conditions.”*
  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 an Amendment to the Schedule
        13D
        dated January 28, 2005, the Receiver sold 439,895 shares on January 19,
        2005.
  *Principal
        Capital Expenditures and Divestiture*
  During
        the years ended December 31, 2001, 2002, 2003, 2004 and up to March
        23,
        2005 our principal capital expenditures were as follows:
  **Amount
                  of Expenditure (Divestiture)****Description
                  of Expenditure**
              
              **To
                  March23, 2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Capitalized
                  Software Development
                Costs
              
              $
              112,740
              
              $
              1,661,974
              
              $
              237,618
              
              $
              452,573
              
              $
              4,700,669Acquisition
                  of Decuma
              
              $
              930,870
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              NilAcquisition
                  of Magic Lantern
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              $
              1,600,627
              
              
              NilComputer &
                  office equipment
              
              $
              26,524
              
              $
              178,258
              
              $
              133,297
              
              $
              922,171
              
              $
              809,827
 
  During
        the years ended December 31, 2001, 2002, 2003, 2004 and up to March
        23,
        2005 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.
  See *Item 18 -
        Financial Statements - Note 3* for a
        detailed description of the acquisitions.
  In
        January 2005, the Company acquired the assets of Decuma AB for approximately
        US$1.0 million, including fees and expenses. In the remainder of 2005 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.
   27
  ***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 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 48 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, a new application interface that provides
          users
          with a quick and easy method for accessing and discovering a phone's full
          set of
          features, applications and services without having to remember where and
          how to
          find them via the phone'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
          phone and eliminates the need to scroll through complex menu
          systems.
  In
          addition to our Zi Technology business unit, we hold two separate investments
          in
          e-Learning. As discussed above in *Item
          4A - History and Development of the Company* ,
          we hold
          a substantial minority equity interest in MLG which owns and operates the
          business of the Magic Lantern Group of Companies in the e-Learning field
          in
          North America. We also hold a 100% equity interest in Oztime which includes
          EnglishPractice and carries on business activities in the e-Learning field
          in
          Asia and integrates the business activities of EnglishPractice in North
          America.
          Together, these investments in e-Learning business provide 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.
  ***Zi
          Technology Business Unit***
  Description
          of eZiText and eZiTap
  Although
          eZiText can be used in 48 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.
   28
  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 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
          of
          Chinese words consist of more than one character) and even phrase
          completion.
  eZiText
        Chinese has evolved. 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 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: Arabic, 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, Hebrew, Hindi, Hungarian, Icelandic, Indonesian, Italian,
        Japanese, Korean, Latvian, Lithuanian, Malay, Norwegian, Polish, Portuguese
        (European and Brazilian), Romanian, Russian, Serbian, Slovak, Slovenian,
        Spanish
        (European and Latin American), Swedish, Tagalog, Thai, Turkish, Ukrainian
        and
        Vietnamese.
  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 technology is distributed through licensing
        agreements.
  In
        2003,
        Zi released 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.
   29
  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 Series 60 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 development of a network-based platform that enables the
        integration of wireless communication devices with the network called eZiNet.
        In
        2003, the Company focused the majority of its effort on the development and
        expansion of its core products, eZiText and eZiTap, and did not undertake
        significant incremental effort to develop or license eZiNet.
  However,
        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 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.
  Licensing
        of eZiText
  As
        of
        March 23, 2005, Zi has entered into licenses with over 100 licensees
        who
        are typically original equipment manufacturers to embed eZiText into their
        respective products. These licensees include among others, cellular phone
        manufacturers, set-top box manufacturers and personal digital assistant
        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 2004, we derived
        approximately 96 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
        for every unit upon which eZiText is embedded. The royalty amount varies
        from
        customer to customer and varies 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,
        2004,
        two customers, Kyocera Corporation and Nokia Corporation, accounted for
        34 percent of our total revenue.
  Description
        of Qix
   30
   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 . Qix
        is
        currently in beta testing and is expected to be commercially available in
        late
        2005.
  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 Albanian, Danish, Dutch, English, Finnish,
        French,
        German, Icelandic, Irish, Italian, Luxembourgish, Norwegian, Portuguese,
        Spanish
        and Swedish characters as well as different writing styles in these
        languages.
  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 recognition
        engine
        has the smallest memory footprint on the market, requiring less than 30 percent
        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.
   31
  Investment
        in Oztime
  Our
        Oztime subsidiary represents our investment in China’s e-Learning market. Oztime
        was organized by the Company in July 2001. See *Item 4 -
        Information on the Company - Acquisition of Oztime.* In the
        past 24 months, Oztime has refined its business focus, transformed
        its
        senior management team to better address the development of its evolving
        businesses, and has integrated EnglishPractice as part of its business. Based
        in
        Beijing with over 50 employees, Oztime currently focuses on the development
        of 3 main business areas:
  ·
              **Learning
                  Management System (“LMS”)**-
                  Amethi 2.0 is Oztime’s flagship learning management system software
                  designed for the Chinese market. It is a complete LMS, written
                  entirely in
                  Chinese and suitable for a wide range of Chinese organizations
                  and
                  institutions of higher learning.
  ·
              **Building
                  Online Courseware**-
                  Oztime builds Storable Content Object Reference Model (SCORM) compliant
                  custom e-Learning courseware based on client materials and offers
                  Chinese
                  language standard courseware in the area of project management,
                  business
                  fundamentals and business English.
  ·
              **English
                  Teaching on the Internet**-
                  Working with the intellectual property from EnglishPractice, Oztime
                  is
                  distributing English as a Second Language (“ESL”) on the Internet through
                  a variety of channels in China. English teaching is in high demand
                  in
                  China and the Internet is increasingly becoming a medium for teaching
                  and
                  learning.
  Oztime’s
        clients for its current products include the People’s Liberation Army, National
        Statistics Bureau, Zhejiang Electric, Hainan High Court and Lenovo. Oztime
        is
        focused on expanding this client list in each of its three business
        areas.
  Oztime’s
        business is subject to the laws and regulations governing the PRC. The Internet
        industry is heavily regulated in China. The State Council and Ministry of
        Information Industry periodically promulgate regulations related to the Internet
        to address public policy considerations. There can be no assurance that the
        Chinese government will not attempt to regulate on-line education programs
        or
        educational content. Such regulation may have an adverse effect on Oztime
        and
        our business.
  The
        Company is actively seeking to divest its interest in Oztime, consistent
        with
        achieving value for the Company and its shareholders.
  Investment
        in MLG
  The
        Company holds an approximate 44 percent interest in. The primary operating
        company in the Magic Lantern Group, Magic Lantern Communications Ltd. (“Magic
        Lantern”), was founded in 1975 and is a distributor of educational content,
        primarily distributing videos to educational institutions. Magic Lantern
        has
        exclusive distribution rights to over 300 film producers representing
        over
        14,000 titles, and its customers include 9,000 of 12,000 English
        schools in Canada, Canadian Learning Television, TV Ontario and History
        Television. Magic Lantern’s subsidiary, Tutorbuddy Inc., is an Internet based
        content delivery service that aims to provide content and related educational
        services on demand to students, teachers and parents. Magic Lantern holds
        a
        75 percent interest in Sonoptic Technologies Inc. Sonoptic provides
        high
        quality, state-of-the-art digital video encoding services and has developed
        a
        proprietary video base indexing software that allows users to easily and
        quickly
        aggregate, bookmark, e-sort and add their own comment boxes to pre-existing
        content.
   32
  The
        Company intends to monetize its interests in MLG, as market conditions permit,
        to focus on its Zi Technology business unit.
  Geographic
        Segments
  The
        table
        below summarizes the Company’s revenues by activity and geographic market for
        the last three fiscal years:
  **Revenue****License
                  and implementation fees**
              
              **Software
                  and other**
              
              **Total****2004**
              
              
              Canada(1
              )
              **$**
              **5,884,396**
              
              **$**
              **8,120**
              
              **$**
              **5,892,516**China(2
              )
              
              **5,207,579**
              
              
              **496,093**
              
              
              **5,703,672**USA(3
              )
              
              **1,806,863**
              
              
              —
              
              
              **1,806,863**Total
              
              **$**
              **12,898,838**
              
              **$**
              **504,213**
              
              **$**
              **13,403,051**2003
              
              
              Canada(1
              )
              $
              3,731,859
              
              $
              13,982
              
              $
              3,745,841China
              
              
              3,378,770
              
              
              670,088
              
              
              4,048,858USA(3
              )
              
              2,808,369
              
              
              —
              
              
              2,808,369Total
              
              $
              9,918,998
              
              $
              684,070
              
              $
              10,603,0682002
              
              
              Canada(1
              )
              $
              2,315,344
              
              $
              1,638,898
              
              $
              3,954,242China
              
              
              1,368,614
              
              
              296,411
              
              
              1,665,025USA(3
              )
              
              2,796,980
              
              
              —
              
              
              2,796,980Total
              
              $
              6,480,938
              
              $
              1,935,309
              
              $
              8,416,247
 
  **Note** **s:**
  (1)
              The
                  actual geographic markets for the products licensed under licensing
                  agreements between OEMs and Zi Corporation of Canada, Inc. are
                  in Asia and
                  Europe.
  (2)
              Other
                  product revenue recorded by the Company is mainly comprised of
                  revenue for
                  the e-Learning business segment.
  (3)
              The
                  actual geographic markets for products licensed under licensing
                  agreements
                  between OEMs and Zi Corporation of America, Inc. are in Asia and
                  the
                  United States.
   33
  March
        23,
        2005. Unless otherwise indicated, Zi, or one of its subsidiaries, owns
        100 percent of the outstanding shares of the subsidiary.
  **Name
                  of Subsidiary**
              **Country
                  of Incorporation**Multi-Corp
                  International Ltd.
              BarbadosZi
                  Corporation of Canada, Inc.
              CanadaZi
                  Corporation of America, Inc.
              USAAsia
                  Translation & Telecommunications Limited
              Hong
                  KongZi
                  Corporation (H.K.) Limited
              Hong
                  KongHuayu
                  Zi Software Technology Limited.(1)
              Hong
                  KongHuayu
                  Zi Software Technology (Beijing) Co., Ltd.(2)
              ChinaEnglishPractice
                  Inc.
              Canada845162
                  Alberta Ltd.
              CanadaBeijing
                  Oztime Education & Network Technology Co., Ltd.
              ChinaZi
                  Oztime Corporation Ltd.
              BermudaZi
                  (Bermuda) Corporation Ltd.
              BermudaZi
                  Technology Corporation Ltd.
              BermudaTelecom
                  Technology Corporation Limited
              Hong
                  KongMagic
                  Lantern Group, Inc.(3)
              USAZi
                  Decuma AB
              SwedenArcher
                  Education Group, Inc.
              Canada
 
 **Note** **s:**
 (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-four percent (44%) of Magic Lantern
                  Group,
                  Inc.
   34
 
 ***C.*** ***Property,
          Plant and Equipment***
  Our
          current facilities include administrative and sales offices, and engineering
          offices. The table below describes our material properties:
  **Location**
              
              **Purpose**
              
              **Owned
                  or leased**
              
              **Approximate
                  squarefootage**Calgary,
                  Alberta
              
              Corporate
                  head office and engineering office
              
              Lease
                  expires June 30, 2007
              
              13,348 sq
                  ftDenver,
                  Colorado
              
              Head
                  office for Zi Corporation of America
              
              Lease
                  expires December 31, 2005
              
              500
                  sq ftWalnut
                  Creek, California(1)
              
              North
                  American sales office
              
              Rental
                  license
              
              300 sq
                  ftHong
                  Kong, SAR
              
              Asia
                  Pacific sales and engineering office
              
              Lease
                  expires November 14, 2006
              
              1,835 sq
                  ftBeijing,
                  PRC
              
              PRC
                  sales and engineering office
              
              Lease
                  expires May 31, 2007
              
              4,994 sq
                  ftBeijing,
                  PRC
              
              Oztime
                  office
              
              Lease
                  expires October 14, 2006
              
              8,138 sq
                  ftLund,
                  Sweden
              
              Corporate
                  head office and engineering office for Decuma
              
              June
                  30, 2005
              
              4,306
                  sq ft
  **Note** **:**
  (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 2005.
  Operating
        and Financial Review and Prospects
  The
        following table summarizes certain of our selected financial information
        (stated
        in thousands of US dollars) prepared in accordance with US GAAP. The information
        in the table was derived from the more detailed financial statements for
        the
        fiscal year ended December 31, 2002 through the fiscal year ended December
        31,
        2004, inclusive, and the related notes, and should be read in conjunction
        with
        the financial statements and with the information appearing under the headings *“Item
        5 - Operating and Financial Review and Prospects” and “Item 18 - Financial
        Statements”.*
   35
  **Item 5** **-**
  For
                  the years ended December 31 (thousands except per share
                  amounts)
              
              2004
              
              2003
              
              2002Revenue
              
              $
              13,403
              
              $
              10,603
              
              $
              8,416Gross
                  margin
              
              
              12,931
              
              
              10,168
              
              
              7,361Net
                  loss from continuing operations
              
              
              (2,388
              )
              
              (2,931
              )
              
              (19,498
              )Discontinued
                  operations
              
              
              —
              
              
              —
              
              
              (5,708
              )Net
                  loss
              
              $
              (2,388
              )
              $
              (2,931
              )
              $
              (25,206
              )Total
                  assets
              
              $
              21,699
              
              $
              10,686
              
              $
              11,870Net
                  loss per share from continuing operations - basic and
                  diluted
              
              $
              (0.06
              )
              $
              (0.08
              )
              $
              (0.52
              )Net
                  loss per share - basic and diluted
              
              $
              (0.06
              )
              $
              (0.08
              )
              $
              (0.67
              )Outstanding
                  shares, weighted average
              
              
              41,373
              
              
              38,720
              
              
              37,767Outstanding
                  shares, end of period
              
              
              45,225
              
              
              39,372
              
              
              37,914
 ***A.*** ***Operating
              Results***
  All
        dollar amounts are in US dollars and in conformity with US 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, PDAs, gaming devices
        and set-top boxes. Zi solutions are designed to improve the usability of
        these
        devices and the applications on them; including, SMS, MMS, e-mail and Internet
        browsing.
  The
        Company provides device manufacturers and network operators with a full range
        of
        intuitive and easy-to-use solutions, including: eZiText® for one-touch
        predictive text entry; eZiTapTM for intelligent multi-tap entry, Decuma® for
        natural handwriting recognition and soon, the recently announced QixTM user
        application interface to enhance the user experience and drive service usage
        and
        adoption. Zi’s product portfolio includes 48 different language databases, 70
        additional language interfaces and the ability to meet user needs in more
        than
        130 countries.
  Zi
        has a
        global presence with more than 103 million handset units using its technology
        in
        the market worldwide. Today, there are over 800 device models in the market
        embedded with Zi's technologies.
  With
        over
        100 handset manufacturing customers, Zi’s technologies can be found in the
        handsets of manufacturers from around the world, including Nokia, Sony, Sony
        Ericsson, Samsung, LG Electronics, Flextronics, HP, Sanyo, Fujitsu, Kyocera
        and
        others.
   36
  The
        early
        2005 acquisition of Decuma handwriting recognition and the launch of the
        Qix
        user application interface product to Zi’s core predictive text solutions of
        eZiText and eZiTap is expected to further bolster Zi’s competitive advantage and
        enable Zi to deliver an expanded suite of innovative products to customers.
  Zi
        signed
        important licensing agreements in 2004, including Nokia - the world’s largest
        handset manufacturer and Flextronics - the world’s largest Electronics
        Manufacturing Services (EMS) provider. In Asia, Zi continues to make progress
        with new agreements with leading Chinese manufacturers, including Panda Mobile
        Communications, China Putian and others. In 2004, Zi also expanded into the
        mobile gaming device market with a licensing agreement with Gizmondo.
  In
        2004,
        Zi completed pre-integration work with Series 60, an industry leading platform
        from Nokia. Zi is now pre-integrated on all major mobile operating systems
        (“OS”) and platform providers for smartphones, including Series 60, the Symbian
        OS, Microsoft Smartphone and the PalmSource OS. Zi also collaborated with
        QUALCOMM to make the eZiText Adaptation Kit for QUALCOMM’s BREW solution
        commercially available to Qualcomm manufacturing licensees through QUALCOMM.
  **Critical
        Accounting Policies and Estimates**
  The
        preparation of these consolidated financial statements and related disclosures
        in conformity with US 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
        future 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.
  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 Financial Accounting Standards Board Statement (“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.
   37
  **REVENUE
        RECOGNITION**
  The
        Company recognizes revenue when it is earned and realized in a manner consistent
        with interpretations in Staff Accounting Bulletin (“SAB”) No. 104 of the US
        Securities and Exchange Commission as further described in note 2 to the
        consolidated financial statements. Revenue from licensed software is recognized
        in accordance with Statement of Position (“SOP”) 97-2, “Software 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.
  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 contracts 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.
  Revenue
        from Oztime product contracts recorded in other product revenue is 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.
  **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 (“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.
   38
  The
        Company has a stock-based compensation plan, which is further described in
        note
        9 to the Company’s 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***
  *Discontinued
        Operations*
  On
        June 30, 2002, the Board of Directors of the Company approved the
        adoption
        of a plan to dispose of its Zi Services business segment. Accordingly, the
        results of operations of this business were accounted for on a discontinued
        basis as at June 30, 2002. On July 1, 2002, the Company announced
        that
        it had executed a letter of intent to sell Zi Services. On October 31,
        2002, the letter of intent expired. Management determined that the carrying
        value of Zi Services was no longer recoverable with certainty. As a result,
        in
        2002 the Company recorded a provision of $2.7 million to cover
        non-recoverability of costs. Combined operating losses and provision for
        non-recoverable costs amounted to $5.7 million. As at December 31,
        2002, the Company had sold the remaining assets of this business segment
        and no
        longer carries on related business activities.
  *Net
        Loss*
  In
        2004,
        the net loss was $2.4 million or $0.06 per share compared to $2.9 million
        or
        $0.08 cents 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,
        an
        approximate 44-percent owned subsidiary of the Company, and $1.4 million
        related
        to non-cash compensation expense pertaining to the issuance of restricted
        stock
        units to a director and 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 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. This $3.4 million reduction 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 selling, general & administration costs (“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.
  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. Other contributing factors to the year over
        year
        decrease in the net loss were the absence of costs from discontinued business
        segments and write-offs associated with impairment of intangible assets and
        reducing litigation and judgment settlement costs as experienced in 2002.
   39
  In
        2002,
        the financial impact of the loss at trial under the patent infringement suit
        required the Company to assess its ability to fund an appeal of the jury
        verdict, as well as its other businesses and investments. Consequently, included
        in the net loss of $25.2 million is provision for net losses in the aggregate
        amount of $15.8 million in respect of VoIP and Bluetooth technology
        business (our former Zi Services business segment) and Oztime, costs associated
        with legal fees and judgment settlement costs and the loss from discontinued
        operations of $5.7 million.
  *Results
        from Continuing Operations*
  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.
  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 Communications
        LTD (“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.
  The
        net
        loss from continuing operations for 2004 and 2003 is as described under “Net
        Loss” above.
  The
        net
        loss from continuing operations for 2003 was $2.9 million compared to $19.5
        million in 2002. Loss per share from continuing operations was $0.08 in 2003
        compared to $0.52 in the prior year. This decrease 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. Other
        contributing factors to the year over year decrease in the net loss from
        continuing operations were the absence of write-offs associated with impairment
        of intangible assets and reduction of litigation and judgment settlement
        costs
        as experienced in 2002.
  *Revenue*
  In
        2004,
        revenue from continuing operations rose $2.8 million to $13.4 million
        or 26 percent over 2003. License and implementation fees increased
        $3.0 million to $12.9 million in 2004, or 30 percent
        over 2003.
        Other product revenue of $0.5 million relates to our e-Learning business
        segment
        and has decreased by $0.2 million compared to 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 has increased its market penetration and is reducing
        its concentration in the Asian market through our customers on new devices
        introduced into the North American and European markets.
   40
  In
        2003,
        revenue from continuing operations 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 has 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.
  In
        2002,
        revenue from continuing operations rose $5.0 million to $8.4 million,
        or 146 percent over 2001. License and implementation fees increased
        $3.2
        million to $6.5 million or 99 percent over 2001. Other product
        revenue, including $1.6 million from Magic Lantern, increased $1.7
        million
        to $1.9 million in 2002.
  License
        and implementation fees reflect earned royalties from 30 eZiText licensees
        in 2002, compared to 14 in the same period a year earlier. During 2002,
        154 new handset models embedded with eZiText were released into the
        market,
        bringing the total at December 31, 2002 to 216 compared to 62 a year
        earlier.
  *Cost
        of Sales & Gross Margin*
  In
        2004,
        gross margin from continuing operations increased $2.8 million to
        $12.9 million, or 27 percent over the 2003 level. 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 from continuing operations, gross margin from
        continuing operations 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 from continuing operations increased $2.8 million to
        $10.2 million, or 38 percent over the 2002 level. As a percentage
        of
        revenue from continuing operations, gross margin from continuing operations
        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
  In
        2002,
        gross margin from continuing operations increased $5.1 million to
        $7.4 million, or 218 percent over the 2001 level. As a percentage
        of
        revenue from continuing operations, gross margin from continuing operations
        increased to 87 percent from 68 percent in 2001.
  Gross
        margin from license and implementations fees in 2002 increased to
        96 percent of revenue from 72 percent of revenue in 2001. This
        was due
        to the fact that in 2002 more of the revenue was royalty based than services
        based. This reflected the increased royalty-bearing eZiText implementations
        on
        handset models penetrating the market and the fact that, implementations
        have a
        higher cost of sales than license fees. This increase was partially offset
        by a
        lower gross margin as a percentage of revenue attributable to Magic Lantern
        than
        is attributed to text input software.
   41
  *Selling,
        General and Administrative Expenses*
  SG&A
        from continuing operations 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 of RSU’s and non-employee
        stock options of $1.4 million.
  SG&A
        from continuing operations decreased $3.2 million or 28 percent to
        $8.2 million in 2003 over 2002. The decrease is principally attributable
        to
        the reduction of $2.2 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.
  SG&A
        from continuing operations increased $4.8 million or 73 percent
        to
        $11.4 million in 2002 over 2001. The increase was due to SG&A of
        $2.2 million from the acquired Magic Lantern operations, severance
        costs
        from downsizing of operations throughout 2002, higher sales commissions and
        withholding taxes and allowance for potentially uncollectible customer
        accounts.
  *Legal*
  Legal
        costs for 2004 decreased $0.1 million to $0.8 million in 2004
        compared
        to 2003. The Company continues to incur costs related to ongoing patent related
        work and costs for corporate securities continuous reporting
        requirements.
  Legal
        costs for 2003 decreased $6.6 million to $0.9 million in 2003
        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 consolidated financial
        statements.
  Legal
        costs for 2002, as discussed in note 13 “Contingent Liabilities” to the
        Company’s December 31, 2002 consolidated financial statements increased
        $5.6 million to $7.5 million in 2002 over 2001.
  *Product
        Research and Development Expense*
  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
        new
        product development before capitalization increased $1.7 million reflecting
        the
        Company’s focused efforts on developing dramatically new and improved 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 from continuing operations decreased to
        $2.1 million in 2003 from $2.8 million in 2002. In 2003, the
        Company
        capitalized $0.2 million in software development costs as compared to $0.5
        million in 2002.
   42
  In
        1999,
        eZiText was in the early stages of its life cycle and substantially all
        development costs were deferred. In 2000, the Company continued to refine
        and
        develop eZiText, and certain costs related to eZiText were expensed to reflect
        the maintenance and upgrade nature of the expenditure. In 2001, 2002, 2003
        and
        2004 this trend continued.
  In
        the
        Oztime business unit, all of the product research and development costs prior
        to
        2001 were expensed. In 2001, Oztime achieved the critical milestone of proving
        technical feasibility and commercial viability through customer acceptance
        of
        its technology and commenced deferral of product development costs. At
        September 30, 2002, as a result of the unfavourable litigation outcome,
        the
        Company determined that recovery of these costs was uncertain and recorded
        a
        $1.5 million provision for impairment of all capitalized costs within
        Oztime.
  Product
        research and development expense from continuing operations rose to
        $2.8 million in 2002 from $0.6 million in 2001.
  *Depreciation
        and Amortization*
  Depreciation
        and amortization from continuing operations decreased in 2004 by
        $0.5 million or 33 percent to $0.9 million from $1.4 million
        in 2003. The decrease is due to the decrease in remaining unamortized eZiText
        related capitalized software development costs and decreased depreciation
        related to unamortized leasehold improvements.
  Depreciation
        and amortization from continuing operations decreased in 2003 by
        $0.8 million or 38 percent to $1.4 million from $2.2 million
        in 2002. The decrease is due to the lower remaining unamortized eZiText related
        capitalized software development costs and decreased depreciation related
        to
        unamortized leasehold improvements. In 2002, depreciation and amortization
        from
        continuing operations was $2.2 million, an increase of $0.1 million
        or
        4 percent from the $2.1 million in 2001.
  *Impairment
        of Note Receivable*
  At
        December 31, 2004, the Company evaluated its $2.0 million note receivable
        from
        its 44 percent owned MLG 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
        a
        provision warranted. MLG is currently subject to a going concern qualification
        and subject to its ongoing operating cash requirements, continued operating
        losses and other debt, to which the Company is subordinate. Due to these
        factors
        and the absence of private placements originally anticipated to occur by
        MLG in
        the fourth quarter of 2004, it is probable that MLG will not have the necessary
        funds available to meet the requirements under the note, including payment
        of
        accrued interest.
  *Impairment
        of Goodwill*
  In
        2002,
        as a result of the unfavourable litigation outcome, the Company determined
        that
        recovery of goodwill related to Oztime was uncertain and recorded an impairment
        charge of $1.3 million as described in note 6, “Intangible Assets” to the
        Company’s consolidated financial statements.
   43
  *Impairment
        of Intangible Assets*
  In
        2002,
        as a result of the unfavourable litigation outcome, the Company determined
        that
        the recovery of capitalized software development costs related to Oztime
        was
        uncertain and recorded an impairment charge of $1.5 million as described
        in
        note 6, “Intangible Assets” to the Company’s consolidated financial
        statements.
  *Interest
        and Other Income*
  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 has 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.
  The
        reduction in interest income to $0.2 million in 2002 from $1.0 million
        in 2001 was due to lower interest rates on lower cash balances. In 2002,
        interest rates earned on funds on deposit and other liquid investments ranged
        between one and three percent.
  *Interest
        Expense*
  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 from continuing operations in 2004 represents interest
        on
        capital lease obligations. These obligations relate to the purchase of computer
        and communications equipment.
  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 from continuing operations in 2003
        represents interest on capital lease obligations.
  Interest
        on long-term debt from continuing operations in 2002 included $67,961 of
        interest on debt owed by Magic Lantern. In 2002, other interest expense from
        continuing operations included the amortized portion of a deferred financing
        cost of $0.3 million and interest expense both related to a note payable
        of
        $3.3 million outstanding at December 31, 2002.
  *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 2004, 2003 and 2002, Zi incurred
        losses for tax purposes, the benefit of which has not been reflected in these
        financial statements. A valuation allowance equivalent to the full value
        of the
        future tax assets of $19.0 million is reflected in the consolidated financial
        statements.
   44
  Zi
        has
        tax loss carryforwards of approximately $77.7 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.
  *Net
        Loss from Continuing Operations*
  Zi’s
        net
        loss from continuing operations 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
                  increase in product research and development expense,
                  and;
 §
              $2.0
                  impairment of note receivable.
 
 Zi’s
        net
        loss from continuing operations 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.
 
 Zi’s
        net
        loss from continuing operations increased to $19.5 million in 2002
        from
        $8.1 million in 2001. The increase in loss of $11.6 million
        was due
        to:
  §
              $4.8 million
                  increase in SG&A costs, which included $2.2 million as a result
                  of the acquisition of MLG
                  operations;
 §
              $5.6 million
                  increase related to legal
                  expenditures;
 §
              $2.2 million
                  increase in product research and development
                  expense;
 §
              $1.3 million
                  impairment of goodwill charge;
 §
              $1.5 million
                  impairment of intangible assets
                  charge;
 §
              $0.8 million
                  decline in interest income, and;
 §
              $0.2
                  million equity in net loss of significantly influenced company,
                  offset
                  by;
 §
              $5.1 million
                  increase in gross margin, and;
 §
              $0.1
                  million decrease in income taxes.
 
  45
  *Impact
        of Inflation and Changing Prices*
  Inflation
        is not a major factor affecting continuing operations.
  *Foreign
        Currency*
  All
        non-US operations of the Company are translated into US 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 US dollars while a significant portion
        of
        expenses are denominated in Canadian dollars and US dollars, and to a lesser
        extent Hong Kong dollars, Swedish Kronas, Pounds Sterling and Chinese Renminbi.
        Based on the 2004 distribution of revenues and cash flows, a one percent
        change
        in the Canadian dollar relative to the US dollar is estimated to affect revenues
        by $nil and expenses by $65,000.
  *Impact
        of Governmental Policies and Other Factors on Operations and
        Investments*
  Zi
        Corporation operates primarily in Canada, the United States of America, China
        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, 2004 Zi had cash and cash equivalents of $12.9 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, 2003 Zi had cash and cash equivalents of $2.4 million.
        At
        December 31, 2002, Zi had cash, cash equivalents and short-term investments
        of $3.4 million.
  *Cash
        Requirements Outlook*
  During
        the past three years, the Company’s cash requirements have been met through
        revenues from operations, private placements of common shares and warrants
        and
        the exercise of common share purchase warrants and options.
  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, 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 instalments due under a litigation settlement and fund
        the
        e-Learning business segment.
  
 46
  Capital
        requirements in 2005 include costs to carry Oztime until its divestiture
        and
        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 meets its current obligations.
  On
        December 19, 2003, the Company borrowed $1.0 million through the issuance
        of a
        demand loan payable. The note payable bore interest at the prime rate (4.5
        percent at December 31, 2003) plus one percent payable monthly. The facility
        is
        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 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
        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 the $2.4 million
        net
        loss, adjusted for non-cash items of $4.3 million offset by an increase
        of
        $0.6 million of 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 accrued settlement costs and the increase in accounts
        receivable relates to the signing of a significant customer contract in the
        fourth quarter of 2004. 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 the decrease in net loss, adjusted
        for
        non-cash items of $13.3 million offset by an increase of $1.6 million
        of 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
        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 payment
        of
        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.
  Cash
        applied to operations in 2002 increased to $13.0 million from
        $5.1 million in 2001. The $7.9 million year over year increase
        in cash
        applied to operations was due to the increase in net loss, adjusted for non-cash
        items of $8.2 million and offset by $0.3 million of cash generated
        from non-cash working capital.
   47
  In
        2002,
        non-cash working capital generated $1.2 million in cash. This was
        due to
        the increase in accounts payable at December 31, 2002 of $2.3 million
        partially offset by an increase in accounts receivable of $1.1 million.
        The
        increase 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 2002 over the same quarter of the prior
        year.
  *Financing
        Activities*
  The
        Company has financed its operating and investing activities during the last
        three years principally as follows:
  **Year**
              
              **Method
                  of financing**
              
              **Amount**2004
              
              issuance
                  of common shares pursuant to a private placement and exercise of
                  stock
                  options
                settlement
                  of notes payable
              
              $
                  12.2 million
                $
                  (1.0) million2003
              
              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) million2002
              
              issuance
                  of common shares pursuant to exercise of stock options
                issuance
                  of demand note payable
              
              $
                  0.7 million
                $
                  3.3 million
 
 
 *Investing
        Activities*
  In
        2004,
        cash used in investing activities was $1.9 million, as compared to
        $0.4 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.
  In
        2002,
        cash generated from investing activities was $2.7 million, as compared
        to
        $8.2 million used in investing activities in 2001. Adjusted for short-term
        investments, cash used in investing activities was $2.7 million in
        2002
        compared to $2.8 million in the prior year.
  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 dramatically
        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.
  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.
  The
        decrease of $0.1 million in 2002 over 2001 cash used in investing
        activities is due to a $1.5 million increase in acquisitions and
        dispositions of subsidiaries and a $0.4 million increase in the purchase
        of
        capital assets, offset by a $2.0 million decrease in software development
        costs and $0.1 million increase in other long-term liabilities.
  
 48
   *Commitments
        and Contractual Obligations*
  At
        December 31, 2004, Zi has no long-term debt or long-term liabilities
        other
        than capital lease obligations and deferred inducements received upon entering
        into new office leases. During 2004, 2003 and 2002, we entered into leases
        for
        computer equipment with payment terms over three years. The obligation,
        including the current portion, totalled $29,059 at December 31, 2004.
        See
        Item 6 for contractual obligation disclosure related to employee compensation.
        The future minimum lease payments under the capital leases are as
        follows:
  2005
              
              $
              19,1972006
              
              
              8,0492007
              
              
              1,813Total
                  minimum lease payments
              
              
              29,059Amount
                  representing interest
              
              
              3,540Amount
                  included in current liabilities
              
              
              16,445$
              9,074
 
  *Financial
        Instruments*
  At
        December 31, 2004, Zi had cash and cash equivalents of $12.9 million.
        Surplus funds are held primarily in US dollars and are converted into Canadian
        dollars, Hong Kong dollars and Chinese renminbi as required by 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
  ***C.*** ***Research
        and Development, Patents and Licenses, etc*** **.**
  The
        Company’s intellectual property may be grouped into the following product areas:
        eZiText, and 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.
   49
  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.
  Due
        to
        the nature of Zi’s acquired intellectual property, values have not been
        specifically assigned to patents, licenses, domain names, etc. acquired prior
        to
        2001, and are generally classified as “goodwill”.
  Expenditures
        for product research and development costs, including deferred amounts
        (including the former Zi Services business unit) and for acquired IP during
        the
        past three years are as follows:
  **R &
                  D($000’s)**
              
              **Goodwill**2004
              
              $
              4,012
              
              
              nil2003
              
              $
              2,336
              
              
              nil2002
              
              $
              4,493
              
              
              nil
 
 Research
        and development expenditures will depend upon our available capital resources
        during the year ending December 31, 2005, and will primarily relate
        to our
        research and development efforts on our eZiText and Qix technology. We may
        also
        expend additional resources on research and development of related or
        complementary technologies, including our recently purchased patents relating
        to
        handwriting recognition (see note 19 “Subsequent Events” to the Company’s
        consolidated financial statements).
   50
  ***D.*** ***Trend
        Information***
  *Revenues
        and Expenses*
  For
        the
        years ended December 31, 2002, 2003 and 2004 our revenue by geographical
        market and category consisted of:
  
  **Revenue****(3)****License
                  and implementationfees**
              
              **Software
                  andother**
              
              **Total****2004**
              
              
              Canada(1
              )
              **$**
              **5,884,396**
              
              **$**
              **8,120**
              
              **$**
              **5,892,516**China
              
              
              **5,207,579**
              
              
              **496,093**
              
              
              **5,703,672**USA(2
              )
              
              **1,806,863**
              
              
              —
              
              
              **1,806,863**Total
              
              **$**
              **12,898,838**
              
              **$**
              **504,213**
              
              **$**
              **13,403,051**2003
              
              
              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
              
              $
              10,603,0682002
              
              
              Canada(1
              )
              $
              2,315,344
              
              $
              1,638,898
              
              $
              3,954,242China
              
              
              1,368,614
              
              
              296,411
              
              
              1,665,025USA(2
              )
              
              2,796,980
              
              
              —
              
              
              2,796,980Total
              
              $
              6,480,938
              
              $
              ,935,309
              
              $
              8,416,247
 Notes:
  (1)
                The
                    actual geographic markets for the products licensed under licensing
                    agreements between OEMs and Zi Corporation of Canada, Inc. are
                    in Asia,
                    North America and Europe.
 
 (2)
                The actual geographic markets for products licensed
                  under
                  licensing agreements between OEMs and Zi Corporation of America,
                  Inc. are
                  in Asia and the United States.
 
 (3)
                The
                    Company discontinued the operations of its Zi Services business
                    unit in
                    December 2002. Revenues of Zi Services for 2002 were $153,030.
                    All Zi
                    Services revenues would be included in China’s geographical
                    segment.
  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.
   51
  Zi’s
        technology generated a 146 percent increase in revenue from continuing
        operations in 2002 over that in 2001. License and implementation fees increased
        $3.2 million to $6.5 million in 2002, or 99 percent
        over 2001.
        The increase is due primarily to the increase in size of our eZiText customer
        base through increased global demand, with 47 licensees contributing
        to
        revenue in 2002, compared to 34 licensees in 2001 and 30 of these
        customers
        paying royalties in 2002 compared to 14 in 2001. We expect that customer
        applications will to continue to increase through the growth in global demand
        but be partially offset by an industry wide trend of decreasing per unit
        royalty
        amounts.
  Our
        revenue comes from our OEM customers. 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.
        A
        number of our new OEM customers’ and existing OEM customers’ products are now
        being sold outside of Asia including 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
        include revenue from the 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
        2004,
        gross margin from continuing operations increased $2.8 million to
        $12.9 million, or 27 percent over the 2003 level. Cost of sales
        includes the allocation of research and development expenditures associated
        with
        projects carried out to modify existing products to meet specific customer
        requirements. As a percentage of revenue from continuing operations, gross
        margin from continuing operations 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
        as opposed to services based. This reflects the increased royalty-generating
        eZiText 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 product line. As the new products, Decuma handwriting
        recognition software and Qix will also be royalty based, we expect the trend
        of
        a high gross margin related to sales to continue.
  SG&A
        from continuing operations 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 restricted stock units 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
        from continuing operations decreased $3.2 million or 28 percent to
        $8.1 million in 2003 over 2002. The decrease is partially attributable
        to
        the reduction of $2.1 million realized through the disposal of MLG
        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.
  
 
  Prior
        to
        2003, our SG&A costs had increased year over year for the prior
        three years. SG&A from continuing operations increased
        $4.8 million or 73 percent to $11.4 million in 2002
        over 2001.
        The increase is partially attributable to SG&A of $2.1 million from the
        acquired Magic Lantern operations. As well, SG&A increased due to severance
        costs from downsizing of operations throughout 2002, higher sales commissions
        and withholding taxes and allowance for potentially uncollectible customer
        accounts
  As
        a
        result of the reductions that we have made in SG&A costs, we anticipate that
        the Company will continue to keep these 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 increasingly positive impact
        on
        future operating results. The acquisition of Decuma AB’s handwriting recognition
        and the associated operating costs of running a Swedish subsidiary will add
        to
        SG&A costs in 2005 but as this products acceptance in the market and its
        integration into Zi’s other product lines is complete, we expect revenue growth
        from new and existing customers.
  Product
        research and development expense from continuing operations 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 dramatically new
        and improved 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 from continuing operations 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 finance further 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 2004 level depending
        on
        the availability of capital and resources required by specific revenue
        generating opportunities.
  Depreciation
        and amortization from continuing operations decreased in 2004 by
        $0.5 million or 33 percent to $0.9 million from $1.4 million
        in 2003. The decrease is due to the decrease in remaining unamortized eZiText
        related capitalized software development costs and decreased depreciation
        related to unamortized leasehold improvements. Depreciation and amortization
        from continuing operations decreased in 2003 by $0.8 million or
        38 percent to $1.4 million from $2.2 million in 2002.
        The
        decrease is due to lower remaining unamortized eZiText related capitalized
        software development costs and decreased depreciation related to decreased
        unamortized leasehold improvements. Prior to 2003, depreciation and amortization
        from continuing operations increased in 2002 by $0.1 million or
        4 percent to $2.2 million from $2.1 million in 2001.
        Given the
        increase in capitalized software development costs and capital assets, we
        anticipate that our depreciation and amortization expense will increase
        moderately in 2005.
  
 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 at its 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.
   53
  Litigation/Indemnification
  There
        has
        been no determination of whether we will be required to indemnify Alcatel
        and
        Ericsson with respect to patent infringement claims against them. Both patent
        infringement claims allege they are related to our eZiText technology, our
        principal product. In 2004, we derived approximately 6 percent of
        our total
        revenues from our licenses with Ericsson and Alcatel. In the event our
        technology is found to infringe on the patents of others in these legal
        proceedings, the Company would have to defend itself under the indemnification
        provisions of the licence agreements.
  We
        have
        also undertaken considerable expense in actively protecting our intellectual
        property and defending against alleged infringement claims by Tegic
        Communications Inc. (“Tegic”). We have incurred substantial costs related to
        patent infringement litigation in the sum of $60,000 for 2004 (2003 - $289,000;
        2002 - $6.9 million of which approximately $4.5 million was for settlement
        costs) for defense and settlement of such claims.
  On
        December 4, 2003, the Company commenced action against Morrison & Foerster
        LLP (“MoFo”) in the Superior Court of the State of California, County of San
        Francisco claiming (i) professional negligence based on MoFo's failure to
        exercise reasonable care, skill and diligence in representing the Company
        in the
        defence of Asian Communication Pty Ltd and Tegic Communications Inc. (“Tegic”)
        v. Zi Corporation and Zi Corporation of America, Inc. (a patent infringement
        lawsuit) and (ii) reimbursement of the payments made to MoFo in connection
        with
        the defense of this lawsuit, which payments are alleged to exceed the reasonable
        value of MoFo's services and costs advanced. MoFo has filed, as part of its
        defence to the Company's action, a cross complaint against the Company for
        unpaid legal fees and costs. Although the Company believes that it will prevail
        in this action, in 2002, the Company accrued $1,061,617 in the consolidated
        financial statements representing the previously billed fees and costs.
        Accordingly, the Company believes that any further exposure from this action
        is
        limited to accrued interest and costs.
  The
        $9.0 million damages judgement awarded to Tegic was settled pursuant
        to a
        written settlement agreement with AOL dated December 6, 2002 and a
        consent
        judgement dated December 20, 2002. Settlement costs were included
        as part
        of legal and litigation costs as at December 31, 2002, including the
        final
        scheduled instalment of $0.75 million, which was paid on January 2,
        2004.
  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.
   54
  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 judgement 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.** **Off-Balance
          Sheet Arrangement**
  The
          Company did not have any off—balance sheet arrangements at December 31,
          2004.
  **F.** **Tabular
          Disclosure of Contractual Obligations**
  Zi
        has no
        long-term debt or long-term liabilities other than capital lease obligations
        at
        December 31, 2004. During 2004, 2003 and 2002, we entered into leases
        for
        computer equipment with payment terms over three years. The obligation,
        including the current portion, totalled $29,059 at December 31, 2004.
        The
        future minimum lease payments under the capital leases are as
        follows:
  2005
              
              $
              19,1972006
              
              
              8,0492007
              
              
              1,813Total
                  minimum lease payments
              
              
              29,059Amount
                  representing interest
              
              
              3,539Amount
                  included in current liabilities
              
              
              16,445$
              9,075
 
  See
        Item
        6 for contractual obligation disclosure related to employees.
  The
        Company rents premises and equipment under operating leases, which expire
        at
        various dates up to June 2007. Annual rentals under these leases for each
        of the
        next five years are as follows:
   55
   2005
              
              $
              618,6802006
              
              
              538,4072007
              
              
              194,7112008
              
              
              —2009
              
              
              —Total
              
              $
              1,351,798
 
  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 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.
 
 G. Safe
          Harbour
  Not
          applicable.
  **Item 6**  **Directors,
          Senior Management and Employees**
  ***A.*** ***Directors
          and Senior Management***
  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, 2005:
   56
   **Name**
              
              **Position
                  or office within Corporation**Michael
                  E. Lobsinger
                Calgary,
                  Alberta, Canada
              
              Chairman
                  of the Board and DirectorDerrick
                  R. Armstrong(3)
                Calgary,
                  Alberta, Canada
              
              Director
                  and
                Corporate
                  SecretaryThompson
                  MacDonald(1)(3)
                Calgary,
                  Alberta, Canada
              
              DirectorAngus
                  Michael Roderick Mackenzie(1)(2)
                Englefield
                  Green, Surrey, U.K.
              
              DirectorHoward
                  R. Balloch(3)
                Beijing,
                  China
              
              DirectorChairman,
                Oztime
                  SubsidiaryH. Donald
                  Hyde(1)(2)
                Calgary,
                  Alberta, Canada
              
              DirectorDonald
                  Moore
                Miami,
                  Florida, U.S.A.
              
              DirectorRichard
                  Tingle
                Calgary,
                  Alberta, Canada
              
              DirectorMike
                  D. Donnell
                Denver,
                  Colorado, U.S.A.
              
              President
                  and Chief Executive OfficerDale
                  Kearns
                Calgary,
                  Alberta, Canada
              
              Chief
                  Financial OfficerMilos
                  Djokovic
                Denver,
                  Colorado, U.S.A.
              
              Chief
                  Operating Officer and Chief Technology OfficerGlen
                  Morgan
                Dallas,
                  Texas, U.S.A.
              
              Senior
                  Vice President, Global Sales and Marketing
 **Note** **s:**
  (1)Member
        of the Audit Committee during 2004.
 (2)Member
        of the Compensation Committee during 2004.
 (3)Member
        of the Corporate Governance Committee during 2004.
  MICHAEL E.
        LOBSINGER was 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. Prior to joining the Company,
        Mr. Lobsinger was an entrepreneur with experience in real estate
        development and the oil and gas industry. 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.
  DERRICK R.
        ARMSTRONG has been a director and secretary of the Company since 1993.
        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 Veteran
        Resources 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.
  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. Mr. Mackenzie was the Director of Jefferies Pacific
        Limited, Hong Kong, from 1994 to 1997 and is the Chairman of Mayfair Cellars
        Group, London and of Tasmanian Vineyards Pty. Mr. Mackenzie has served
        as
        director of three of our Bermuda subsidiaries since July 2000 and as director
        of
        Magic Lantern Group, Inc., a distributor of educational media that is traded
        on
        the American Stock Exchange, since November 2002. He is also a Director of
        The
        Lindsell Train Investment Trust PLC since 2000.
   57
  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 was
        appointed a director of Magic Lantern Group, Inc. in November 2002.
  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. Mr. Hyde was appointed to the Board of Magic
        Lantern Group, Inc. in November 2004.
  DONALD
        MOORE was elected to the Board 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 Fowler White Burnett P.A.
  RICHARD
        TINGLE, Q.C. was elected to the Board in January 2005. Since 1992 Mr. Tingle
        is
        a lawyer with Tingle Merret LLP (formerly Tingle & Associates).
  MIKE
        D.
        DONNELL was named President and Chief Operating Officer of the Company on
        July
        25, 2003 and was appointed as Chief Executive Officer on November 19, 2003.
        Mr.
        Donnell is a veteran of the telecommunications industry with eighteen years
        of
        experience. Prior to joining Zi, Mr. Donnell held senior positions with such
        companies as Cellular One, San Francisco where he was the chief executive
        officer and PageNet where he was the president.
  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 has been a certified management accountant since
        1985.
  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 August 2004, Mr. Djokovic
        was
        employed with Accenture, a management consulting firm, in which was he was
        responsible for that firm’s customer relationship technology
        strategy.
   GLEN
        MORGAN was appointed Senior Vice President Global Sales and Marketing in
        May
        2004. Mr. Morgan served as Executive Vice President and
        Managing Director for Plano, Texas-based Mobility Ventures Group, a wireless
        telecommunications company focused on acquisition and management strategies
        for
        operators, enterprises and vendors. Prior to Mobility Ventures Group, Mr.
        Morgan
        served as Senior Vice President, Sales for i3Mobile (NASD: IIIM), a leading
        provider of wireless information services to the industry.
   58
   (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 1 st day of
        January and July of each year. In light of increased responsibilities required
        to be undertaken by directors of public companies, the Board has instructed
        the
        Compensation Committee to make recommendations for increases in director
        compensation by the 2005 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 the 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, 2004, 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 Executive
        Officer of the Corporation. See “Compensation of Executive Officers” for details
        on stock options granted to Mr. Lobsinger.
  (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, 2004,
        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, 2004 (the “ **Named
        Executive Officers** ”).
   59
  *Summary
        compensation table*
  **Annual
                  Compensation****(6)**
              
              **Long-Term
                  Compensation****Awards**
              
              **Payouts****Name
                  and principal position**
              
              **Year**
              
              **Salary**
                **($US)**
              
              **Bonus**
                **($US)**
              
              **Other
                  annual compensation**
                **($US)**
              
              **Securities
                  under options/**
                **SARs
                  granted**
                **(#)**
              
              **Restricted
                  shares or restricted stock units (“RSUs”)**
                **(#)**
              
              **LTIP
                  payouts**
                **($US)**
              
              **All
                  other compensation**
                **($US)**Michael E.
                  Lobsinger(1)
                Chairman
              
              
              2004
                2003
                2002
              
              
              159,478
                354,821
                322,230
              
              
              180,427
                23,145
                38,212
              
              
              Note(5)
                Note(5)
                Note(5)
              
              
              450,000
                250,000
                nil
              
              
              250,000
                128,571
                nil
              
              
              nil
                nil
                nil
              
              
              nil
                nil
                nilMichael
                  D. Donnell(2)
                Chief
                  Executive Officer
              
              
              2004
                2003
              
              
              296,875
                99,808
              
              
              100,000
                nil
              
              
              Note(5)
                Note(5)
              
              
              nil
                740,000
              
              
              nil
                nil
              
              
              nil
                nil
              
              
              nil
                nilGary
                  Mendel(3)
                Vice
                  President, Sales and Marketing
              
              
              2004
                2003
                2002
              
              
              103,125
                165,000
                165,000
              
              
              54,587
                38,844
                25,000
              
              
              Note(5)
                Note(5)
                Note(5)
              
              
              10,000
                37,500
                10,000
              
              
              nil
                nil
                nil
              
              
              nil
                nil
                nil
              
              
              nil
                nil
                nilDale
                  Kearns(4)
                Chief
                  Financial Officer
              
              
              2004
                2003
                2002
              
              
              87,388
                81,190
                107,440
              
              
              57,644
                19,215
                nil
              
              
              46,067(8)
                26,136(8)
                nil
              
              
              100,000
                100,000
                nil
              
              
              nil
                3,906
                nil
              
              
              nil
                nil
                nil
              
              
              nil
                nil
                nilGlen
                  Morgan(7)
                Senior
                  Vice President, Global Sales and Marketing
              
              
              2004
              
              
              105,692
              
              
              nil
              
              
              nil
              
              
              100,000
              
              
              nil
              
              
              nil
              
              
              nil
  **Note** **s:**
  (1)On
        January 1, 2000 Mr. Lobsinger was appointed Chairman and Chief
        Executive Officer of the Corporation. On November 19, 2003, Mr Lobsinger
        resigned as Chief Executive Officer. In 2003, Mr. Lobsinger agreed
        to defer
        CDN$220,407 of his 2003 salary, included as part of his annual compensation,
        payable to him under his employment agreement 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.
 (2)Michael
        Donnell was appointed President and Chief Operating Officer on July 23, 2003
        and
        Chief Executive Officer on November 19, 2003.
 (3)Gary
        Mendel was appointed Vice President, Sales and Marketing on May 22,
        2001
        and resigned from his employment with the Corporation on August 13,
        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% of the salary
        and
        bonus of the respective Named Executive Officer.
 (6)For
        2004 compensation, all Canadian dollar denominated compensation was converted
        to
        US dollars at 0.7685, being the average conversion rate for 2004.
 (7)Glen
        Morgan was appointed Senior Vice President, Global Sales and Marketing on
        May
        31, 2004.
 (8)Mr.
        Kearns provided services during 2003 and 2004 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, 2004.
 
 60
   **Name**
              
              **Securities
                  under Options/SARs granted**
                **(#)**
              
              **Percent
                  of total Options/SARs granted to employees in financial
                  year****(1)**
              
              **Exercise
                  or base price**
                **($/Security)**
              
              **Market
                  value of Securities underlying Options/SARs/ RSUs on the date of
                  grant**
                **($/Security)**
              
              **Expiration
                  date**Michael
                  E. Lobsinger(2)
              
              
              700,000
              
              
              33.2
              %
              
              Note(2
              )
              
              Note(2
              )
              
              Note(2
              )Gary
                  Mendel(3)
              
              
              10,000
              
              
              0.5
              %
              
              Note(3
              )
              
              Note(3
              )
              
              Note(3
              )Michael
                  D. Donnell(4)
              
              
              nil
              
              
              nil
              
              
              Note(4
              )
              
              Note(4
              )
              
              Note(4
              )Dale
                  Kearns(5)
              
              
              100,000
              
              
              4.7
              %
              
              Note(5
              )
              
              Note(5
              )
              
              Note(5
              )Glen
                  Morgan(6)
              
              
              100,000
              
              
              4.7
              %
              
              Note(6
              )
              
              Note(6
              )
              
              Note(6
              )
  Notes:
 (1)During
        the year, stock options and RSU’s exercisable into a total of
        2,105,500 Common Shares were granted to directors, officers, and employees
        of the Company.
 (2)During
        the year, the Corporation issued the following stock options and RSU’s to Mr.
        Lobsinger: options to acquire 400,000 Common Shares at CDN$3.60 and 250,000
        RSU’s to acquire Common Shares, both expiring March 25, 2009 (which were issued
        pursuant to an amendment to Mr. Lobsinger’s employment entered into in respect
        of his resignation as chief executive officer and under which Mr. Lobsinger
        waived future contractual entitlements to stock option grants) and options
        to
        acquire 50,000 Common Shares at CDN$2.60 expiring September 16, 2009. 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 2004.
 (3)During
        the year, the Corporation issued the following stock options to Mr. Mendel:
        options to acquire 10,000 Common Shares at CDN $3.60 expiring March 25, 2007.
        The market value of the Common Shares at the date of the grant was the same
        as
        the exercise price for all the options granted to Mr. Mendel in
        2004..
 (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 100,000 Common Shares at CDN$3.60 expiring March 25, 2009.
        The market value of the Common Shares at the date of the grant was the same
        as
        the exercise price for all the options granted to Mr. Kearns in
        2004.
 (6)During
        the year, the Corporation issued the following stock options to Mr. Morgan:
        options to acquire 100,000 Common Shares at CDN$3.10 expiring March 25, 2009.
        The market value of the Common Shares at the date of grant was the same as
        the
        exercise price for all the options granted to Mr. Morgan in 2004.
 
 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, 2004.
  **Aggregated
        Option/SAR and RSU exercises during the most recently completed financial
        year
        and financial year-end option/SAR values**
 
 **Name**
              
              **Securitiesacquired
                  onexercise**
                **(#)**
              
              **Aggregate
                  valuerealized****(1)**
                **($US)**
              
              **UnexercisedOptions/SARS/RSUs
                  asat December 31, 2004exercisable/**
                **unexercisable**
              
              **Value
                  of unexercisedin-the-MoneyOptions/SARs/RSUs
                  atDecember 31, 2004****(2)****exercisable/**
                **Unexercisable
                  ($US)**Michael E.
                  Lobsinger
              
              
              650,000
              
              
              709,235
              
              
              Exercisable1,378,571
                Unexercisablenil
              
              
              Exercisable5,840,501
                UnexercisablenilGary
                  Mendel
              
              
              37,500
              
              
              51,077
              
              
              Exercisablenil
                Unexercisablenil
              
              
              Exercisablenil
                UnexercisablenilMichael
                  D. Donnell
              
              
              nil
              
              
              nil
              
              
              Exercisable453,332
                Unexercisable286,668
              
              
              Exercisable1,657,902
                Unexercisable1,237,772Dale
                  Kearns
              
              
              110,000
              
              
              467,362
              
              
              Exercisable133,333
                Unexercisable66,667
              
              
              Exercisable78,423
                Unexercisable282,309Glen
                  Morgan
              
              
              33,333
              
              
              150,654
              
              
              Exercisablenil
                Unexercisable66,667
              
              
              Exercisablenil
                Unexercisable286,403
  **Note** **s:**
  (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, 2004 and the exercise
        price.
   61
  ***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, 2004
        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, 2004
        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
        US$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 becomes payable upon
        such
        termination.
   62
  The
        Corporation entered into an employment agreement with Gary Mendel effective
        May 22, 2001. Mr. Mendel was appointed Vice President, Sales
        and
        Marketing of the Corporation. The terms of the agreement provided that
        Mr. Mendel be paid US$165,000 per annum and provide for a bonus of
        up to
        50% of annual salary based upon the performance of mutually agreed milestones,
        payable in cash or stock options as follows: 50% to be paid in cash or options
        at the discretion of the employee and 50% at the discretion of the reporting
        manager. The bonus will be payable bi-annually. Options will be valued based
        on
        current pricing models. The Corporation agreed, subject to regulatory approvals,
        to grant Mr. Mendel stock options to purchase 60,000 Common Shares
        in the
        capital of the Corporation.
        The Corporation may terminate Mr. Mendel’s employment upon 90 days’ written
        notice, or payment of three
        months base salary. In the event of a change of control of the Corporation,
        Mr. Mendel may, at his discretion, terminate the agreement. In addition,
        his options will all become immediately exercisable and he will have 90 days
        to
        exercise those options. Mr. Mendel was required to execute a
        Confidentiality and Non-Competition agreement. Mr. Mendel resigned his position
        with the Corporation on July 13, 2004.
  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 US$225,000 per annum. The
        Corporation may terminate Mr. Donnell’s employment upon payment of three
        month’s salary. 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 23, 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
        US$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.
   63
  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. 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. The Corporation agreed,
        subject to regulatory approvals, to grant Mr. Kearns’ stock options to purchase
        60,000 Common Shares in the capital of the Corporation. Pursuant to Mr. Kearns’
        employment contract, in the event of a change of control of the Corporation,
        all
        of his options would 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 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 US$230,000
        per annum. The Corporation may terminate Mr. Djokovic’s employment upon payment
        of up to six months’ base salary. 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 would 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 provide for Mr. Morgan to
        be
        paid a base salary of US$180,000 per annum. The Corporation may terminate
        Mr.
        Morgan’s employment upon payment of three months’ base salary if terminated
        during the first 18 months of employment and six months’ base salary thereafter.
        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.
  (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, 2002, 2003 and 2004:
   64
   **2004**
              
              **2003**
              
              **2002**Options
                  outstanding, beginning of year
              
              
              5,474,904
              
              
              5,135,700
              
              
              5,874,852Granted
              
              
              2,105,500
              
              
              2,342,532
              
              
              306,666Cancelled
              
              
              (1,524,666
              )
              
              (1,667,701
              )
              
              (741,218
              )Exercised
              
              
              (1,143,766
              )
              
              (335,627
              )
              
              (304,600
              )Options
                  outstanding, end of year
              
              
              **4,911,972**
              
              
              **5,474,904**
              
              
              **5,135,700**
 
  (d) Other
          Compensation
  During
        the Corporation’s fiscal year ended December 31, 2004, 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
        US$125,708.
  A
        management fee was paid by the Corporation to a consulting firm owned by
        an
        officer amounting to CDN$60,000 during the fiscal year ended December 31,
        2004.
  A
        management fee was paid by the Corporation to a consulting firm owned by
        a
        director amounting to US$30,000 during the fiscal year ended December 31,
        2004.
  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.
  ***B.*** ***Board
        Practices***
  (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
        immediately 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 are 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 four times in 2003 and all members attended
        all
        of the meetings.
   65
  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 reviews
        the
        independence and performance of its auditors and 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*
  During
        2004, the Compensation Committee consisted of Michael Mackenzie, as Chairman,
        Rod Love and Donald Hyde. Mr. Love resigned in November 2004. Donald Moore
        was
        selected to serve on the Compensation Committee in March 2005. All three
        members
        are considered unrelated and independent directors. 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 Restricted Stock Units
        (“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.
   66
  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
        a
        combination of financial and non-financial criteria, including 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 2004, the Board approved up to a combined total of $250,000 in cash bonuses
        to be paid to three executives in respect of 2004. 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.
  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
        February 28, 2005 in respect of 2004 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 *Item 6 -
        Compensation of Executive Officers* .
        Except
        as described herein, there are no agreements or other remuneration arrangements
        with any of our directors.
  *Corporate
        Governance and Nominating Committee*
  During
        2004, this Committee had three members;. Derrick Armstrong, who was the Chairman
        of the Committee, Thompson MacDonald and Howard Balloch. In 2005, Richard
        Tingle
        joined the Corporate Governance Committee and Derrick Armstrong resigned.
        Howard
        Balloch assumed the Chairmanship of the Committee. The Corporation had adopted
        a
        charter for this committee which has been posted on its website. 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 one time in 2004 and, in view of its
        size,
        communicated informally from time to time.
   67
  The
        Company’s approach to corporate governance with reference to the TSE Guidelines
        is set out in the Company’s Management Information Circular. See
        Exhibit 10.1.
  ***C.*** ***Employees***
  As
        of
        March 23, 2005, we had 119 regular, full-time employees:
  **ZI
                  TECHNOLOGY****Asia**
              **North
                  America**
              **Europe**
              **Total**Sales &
                  Marketing
              5
              4
              3
              12Technical
              4
              24
              9
              37Admin/Corp
              6
              14
              3
              23**ZI
                  TECHNOLOGY TOTAL**
              **15**
              **42**
              **15**
              **72**
 
 **OZTIME****Asia**
              **North
                  America**
              **Europe**
              **Total**Sales &
                  Marketing
              9
              1
              -
              10Technical
              32
              -
              -
              32Admin/Corp
              5
              -
              -
              5**OZTIME
                  TOTAL**
              **46**
              **1**
              **-**
              **47**
 
 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,
        2003 we
        had 104 regular, full time employees; at December 31, 2002, we had
        103 regular, full-time employees; and at December 31, 2001,
        we had
        168 regular, full-time employees. We believe we enjoy good relationships
        with our employees.
   68
  ***D.*** ***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, 2005.
  **Name**
              
              **Number
                  of Shares Beneficially Owned***
              
              **Percentage
                  of**
                **Class****Michael E.
                  Lobsinger
              
              
              5,819,613(1
              )
              
              12.2
              %Derrick R.
                  Armstrong
              
              
              274,900(2
              )
              
              0.6
              %Howard R.
                  Balloch
              
              
              325,350(3
              )
              
              0.7
              %H.
                  Donald Hyde
              
              
              100,000(4
              )
              
              0.2
              %Thompson
                  MacDonald
              
              
              80,000(5
              )
              
              0.2
              %Angus
                  Michael Roderick Mackenzie
              
              
              525,000(6
              )
              
              1.1
              %Donald
                  P. Moore
              
              
              50,200(7
              )
              
              0.1
              %Richard
                  Tingle
              
              
              50,000(8
              )
              
              0.1
              %Mike
                  D. Donnell
              
              
              513,333(9
              )
              
              1.1
              %Dale
                  Kearns
              
              
              166,672(10
              )
              
              0.4
              %Milos
                  Djokovic
              
              
              76,667(11
              )
              
              0.2
              %
   **Notes:**
 
 *
                Includes options and restricted stock units
                  exercisable
                  within 60 days of March 23, 2005. Except as noted to the
                  contrary, in
                  notes 1 to 11 below all grant prices are expressed in Canadian
                  dollars.
 
 **
                Based
                    upon the number of outstanding Common Shares, as of March 23,
                    2005.
  (1)Based
        upon the number of outstanding 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
        1,378,571 share options and RSU’s. The share options and RSU’s include:
        200,000 options granted December 28, 2000 at a grant price
        of $10.05
        and expire December 28, 2005; 50,000 options granted January 1,
        2001 at a grant price of $9.20 and expire January 1, 2006;
        50,000 options granted December 3, 2001 at a grant price of
        $7.96 and
        expire December 3, 2006; 50,000 options granted January 1,
        2003
        at a grant price of $4.40 and expire January 1, 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 at a grant
        price of nil and expire on March 25, 2009, 50,000 options at a grant price
        of
        $2.60 and expire on September 16, 2009.
  (2)
        In
        the case of Mr. Armstrong, this comprises 194,900 common shares
        held
        directly or beneficially by Mr. Armstrong and 80,000 share
        options.
        This does not include 10,000 common shares held pursuant to a spousal
        RRSP.
        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 at a grant price of
        $2.60
        and expire on September 16, 2009.
  (3)
        In
        the case of Mr. Balloch, this comprises 350 common shares held
        directly or beneficially by Mr. Balloch and 225,000 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 at a grant price of $2.60 and expire on
        September 16, 2009.
   69
  (4)
        In
        the case of Mr. Hyde, this comprises 100,000 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.
  (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, 50,000 options at a grant price of $2.60 and expire
        on
        September 16, 2009.
  (6)
        In
        the case of Mr. Mackenzie, this comprises 200,000 common shares
        held
        directly or beneficially by Mr. Mackenzie and 325,000 share
        options.
        The share options include: 100,000 options granted July 26,
        2000 at a
        grant price of $13.50 and expire July 26, 2005; 125,000 options
        granted June 8, 2001 at a grant price of $12.23 and expire June 8,
        2006; 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.
  (7)
        In
        the case of Mr. Moore, this comprises 50,000 share options: 50,000
        options
        at a grant price of $2.60 and expire on September 16, 2009.
  (8)
        In
        the case of Mr. Tingle, this comprises 50,000 share options: 50,000
        options
        at a grant price of $7.79 and expire on January 10, 2010.
  (9)
        In
        the case of Mr. Donnell, this comprises 513,333 share options: 250,000 share
        options granted July 24, 2003 at a grant price of $4.94 and expire July 24,
        2008; 263,333 options granted November 17, 2003 at a grant price of $3.50
        and
        expire November 17, 2008.
  (10)
        In
        the case of Mr. Kearns, this comprises 6 common shares held directly or
        beneficially by Mr. Kearns and 166,666 share options, 60,000 share options
        granted April 1, 2001 at a grant price of $10.71 and expire April 1, 2006;
        60,000 options granted December 6, 2001 at a grant price of $8.25 and expire
        December 6, 2006, 46,666 options granted March 25, 2004 at a grant price
        of
        $3.60 and expire March 25, 2009.
  (11)
        In
        the case of Mr. Djokovic, this comprises 76,667 share options: 76,667 options
        granted October 26, 2004 at a grant price of US$3.40 and expire October 26,
        2009.
  (b)  Option
        Plans
  ***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 RSUs 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 RSUs may be granted, either alone or in addition to, in tandem with
        or in
        substitution for any other Options or RSUs 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”).
   70
  RSUs
        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.
  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 in this prospectus 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
        RSUs. 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 RSUs theretofore granted
        under
        the Plans.
  ***Necessary
        Approvals***
  The
        ability of the Options or RSUs 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 RSUs 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.
   71
  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% 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.
  A
        comparative chart highlighting the significant terms of each of the Plans
        is as
        follows:
  **1993**
                **Plan**
              
              **1995**
                **Plan**
              
              **1996**
                **Plan**
              
              **1998**
                **Plan**
              
              **1999**
                **Plan**
                **(as
                  amended in 2000 and 2002)****Eligible
                  participants**
              
              Directors,
                  officers, employees, consultants and their associates.
              
              Directors,
                  officers, employees, consultants and their associates.
              
              Directors,
                  officers, employees, consultants and their associates.
              
              Directors,
                  officers, employees, consultants and their associates.
              
              Directors,
                  officers, employees, consultants and their associates.**Number
                  of securities issued/issuable**
              
              Not
                  to exceed the maximum number of shares permitted under the rules
                  of any
                  regulatory body having jurisdiction.
              
              Not
                  to exceed 1,430,000 Common Shares.
              
              Not
                  to exceed 2,600,000 Common Shares.
              
              Not
                  to exceed 1,300,000 Common Shares.
              
              Not
                  to exceed 4,960,000 Common Shares and 500,000 RSUs.**Maximum
                  percentage available to insiders**
              
              Not
                  to exceed the maximum number of shares permitted under the rules
                  of any
                  regulatory body having jurisdiction.
              
              Not
                  to exceed 10% of the outstanding issue.
              
              Not
                  to exceed 10% of the outstanding issue.
              
              Not
                  to exceed 10% of the outstanding issue.
              
              Not
                  to exceed 10% of the outstanding issue.**Maximum
                  number of securities to any one entity**
              
              Not
                  to exceed the maximum number of shares permitted under the rules
                  of any
                  regulatory body having jurisdiction.
              
              Not
                  to exceed 5% of the outstanding issue.
              
              Not
                  to exceed 5% of the outstanding issue.
              
              Not
                  to exceed 5% of the outstanding issue.
              
              Not
                  to exceed 5% of the outstanding issue.**Method
                  for determining the exercise price**
              
              Determined
                  by the Board or Committee, but shall not be less than the price
                  permitted
                  by any regulatory body.
              
              Determined
                  by the Board or Committee, but shall not be less than the price
                  permitted
                  by any regulatory body.
              
              Determined
                  by the Board or Committee, but shall not be less than the price
                  permitted
                  by any regulatory body.
              
              Determined
                  by the Board or Committee, but shall not be less than the price
                  permitted
                  by any regulatory body.
              
              Determined
                  by the Board or Committee, but shall not be less than the price
                  permitted
                  by any regulatory body.**Method
                  for determining the purchase price**
              
              Determined
                  by the Board or Committee at the time any option is granted but
                  shall not
                  be lower than the Market Price.
              
              Determined
                  by the Board or Committee at the time any option is granted but
                  shall not
                  be lower than the Market Price.
              
              Determined
                  by the Board or Committee at the time any option is granted but
                  shall not
                  be lower than the Market Price.
              
              Determined
                  by the Board or Committee at the time any option is granted but
                  shall not
                  be lower than the Market Price.
              
              Determined
                  by the Board or Committee at the time any option is granted but
                  shall not
                  be lower than the Market Price.**Vesting
                  of stock options**
              
              Determined
                  by the Board or Committee.
              
              Determined
                  by the Board or Committee.
              
              Determined
                  by the Board or Committee.
              
              Determined
                  by the Board or Committee.
              
              Determined
                  by the Board or Committee.**Term
                  of stock options**
              
              Fixed
                  by the Board or Committee.
              
              Fixed
                  by the Board or Committee, subject to a 10 year maximum.
              
              Fixed
                  by the Board or Committee, subject to a 10 year maximum.
              
              Fixed
                  by the Board or Committee, subject to a 10 year maximum.
              
              Fixed
                  by the Board or Committee, subject to a 10 year maximum.**Causes
                  of cessation of entitlement**
              
              Resignation
                  of Participant status or death.
              
              Resignation
                  of Participant status or death.
              
              Resignation
                  of Participant status or death.
              
              Resignation
                  of Participant status or death.
              
              Resignation
                  of Participant status or death.**Assignability**
              
              Not
                  transferable or assignable.
              
              Not
                  transferable or assignable.
              
              Not
                  transferable or assignable.
              
              Not
                  transferable or assignable.
              
              Not
                  transferable or assignable.**Procedure
                  for amending**
              
              Subject
                  to regulatory approval, the Committee or Board may suspend, terminate,
                  amend or revise the Plan.
              
              Subject
                  to regulatory approval, the Committee or Board may suspend, terminate,
                  amend or revise the Plan.
              
              Subject
                  to regulatory approval, the Committee or Board may suspend, terminate,
                  amend or revise the Plan.
              
              Subject
                  to regulatory approval, the Committee or Board may suspend, terminate,
                  amend or revise the Plan.
              
              Subject
                  to regulatory approval, the Committee or Board may suspend, terminate,
                  amend or revise the Plan.
   72
  **Item 7
        -** **Major
        Shareholders and Related Party Transactions**
  ***A.*** ***Major
        Shareholders***
  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.
   73
   **Name
                  and municipality**
              **Beneficial
                  number**
                **of
                  shares held**
              **Percentage
                  of total**
                **voting
                  rights**Marty
                  Steinberg, Receiver
                Miami,
                  Florida
              18,720,508
              40.5Michael
                  E. Lobsinger(1)
                Calgary,
                  Alberta
              4,441,042
              9.6
  **Note** **s:**
  (1)
              Marty
                  Steinberg has represented to the Corporation that he is the court
                  appointed Receiver of Lancer Management Group LLC, and related
                  entities to
                  Lancer Management Group LLC and responsible person for other related
                  parties that are currently debtors in possession under a Chapter 11
                  case pending before United States courts. Marty Steinberg is a
                  lawyer with
                  and represented by the law firm Hunton & Williams LLP of Miami,
                  Florida. The information provided herein is based upon filings
                  made on the
                  SEDI insider trading reporting system in Canada and on a Schedule
                  13D (the
                  “Schedule 13D”) filed on December 11, 2003 with the U.S. Securities and
                  Exchange Commission by Marty Steinberg, Esq., as Receiver (the
“Receiver”)
                  of Lancer Management Group, LLC, Lancer Management Group II, LLC,
                  Lancer
                  Offshore, Inc., Lancer Partners, LP, LSPV, Inc., LSPV, LLC, Omnifund,
                  Ltd,
                  G.H. Associates, Inc., and Alpha Omega Group (the “Receivership
                  Entities”). In the Schedule 13D the Receiver states that due to the poor
                  condition of the records of the Receivership Entities he does not
                  represent the truthfulness or accuracy of the Schedule 13D and
                  the
                  Corporation takes no responsibility for the information provided
                  herein
                  based on the Schedule 13D. The Schedule 13D was amended on January
                  28,
                  2005.
 
 (1)
              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.
 
  The
        Company’s major shareholders hold common shares, which shares do not carry
        different voting rights than any other shares.
  Based
        on
        a report from Olympia Trust Company, as at December 31, 2004, there were
        196  registered
        shareholders in the United States that held 25,817,683 common shares or 57.1
        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.*** ***Related
        Party Transactions***
  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, 2004 to March 23,
        2005,
        other than the following:
  January
        1, 2005 to March 23, 2005
  During
        the Corporation’s period from January 1, 2005 to March 23, 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
        $27,432.
  A
        management fee was paid by the Corporation to a consulting firm owned by
        an
        officer amounting to $8,133 during the period from January 1, 2005 to March
        23,
        2005.
   74
  January 1,
        2004 to December 31, 2004
  During
        the Corporation’s fiscal year ended December 31, 2004, 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
        $125,708.
  A
        management fee was paid by the Corporation to a consulting firm owned by
        an
        officer amounting to $46,067 during the fiscal year ended December 31,
        2004.
  A
        management fee was paid by the Corporation to a consulting firm owned by
        a
        director amounting to $30,000 during the fiscal year ended December 31,
        2004.
  ***C.*** ***Interests
        of Experts and Counsel***
  Not
        applicable.
  **Item 8
        -** **Financial
        Information**
  ***A.*** ***Consolidated
        Statements and Other Financial Information***
  See *Item 18 -
        Financial Statements* .
  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 **.** While
        we
        have not been made party to the claims, these customers have executed licenses
        with the Company for the use of eZiText on their products, which licenses
        contain third party intellectual property infringement indemnities. As a
        result,
        these claims may have significant consequences for the Company to the extent
        that such claims may relate to the implementation and use of eZiText on products
        sold in the People’s Republic of China and to the extent that our indemnity
        under our license agreement may be applicable.
  *(i)*
              *Dalian
                  Hanpu Applied Technology Co., Ltd., Hu Xianhua & Hu Bin v.
                  Ericsson (China) Co., Ltd. and Beijing Ericsson Mobile Telecommunication
                  Co., Ltd., (the “First Dalian Ericsson Action”).*The
                  First Dalian Ericsson Action is in the Higher People’s Court (the “High
                  Court”) in Beijing, China. The Court served Beijing Ericsson Mobile
                  Telecommunication Co., Ltd. on August 16, 2000, and Ericsson
                  (China)
                  Co., Ltd. with the plaintiffs’ complaint on August 17, 2000. The
                  complaint alleges that Ericsson (China) Co. Ltd. and Beijing Ericsson
                  Mobile Telecommunication Co., Ltd. infringed the plaintiffs’ intellectual
                  property rights, namely Chinese patent ZL96120693.4, “Keyboard Assignment
                  of Stroke Input and its Screen Prompt.” On August 18, 2000, Ericsson
                  sent Zi Corporation a request for indemnification pursuant to the
                  license
                  agreement between Ericsson Mobile Communications AB and Zi Corporation
                  of
                  Canada, Inc. The Company and its affiliates have not been named
                  as a party
                  in the First Dalian Ericsson Action.
  *(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 Higher People’s Court in which the First Dalian Ericsson
                  Action is being tried. The plaintiffs’ complaint was filed with the 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 RMB1000
                  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. Ericsson
                  is
                  actively defending this appeal.
   75
  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 actively 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.
  To
        date,
        the two cases remain in the hands of the Beijing High People’s Court. Ericsson
        has requested a schedule from the Beijing High People’s Court. The Company is
        not aware of any response from Beijing High People’s Court to Ericsson’s request
        for a timetable or any other actions taken by any of the parties involved
        in
        this matter.
  Furthermore,
        Ericsson made a separate application to the PRC Patent Office seeking
        invalidation of the HuBin Patent. 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.
        We are
        awaiting advice with respect to the status of this matter.
  *(iii)*
              *Dalian
                  Hanpu Applied Technology Co., Ltd., Hu Xianhua & Hu Bin v.
                  Alcatel Suzhou communication Co., Ltd and Another (the “Dalian Alcatel
                  Action”).*The
                  Dalian Alcatel Action is also in the Lower Court. On April 5,
                  2001,
                  the Company received a notice from Alcatel Suzhou Communication
                  Co., Ltd.
                  that Alcatel Suzhou Communication Co., Ltd, and Yanshaqiro Trading
                  Branch
                  of Beijing Yingcong Science and Trade Center have been made parties
                  to a
                  patent infringement claim in the PRC (the “Alcatel/Hu Bin Claims”) filed
                  in the Lower Court for infringement of Chinese patent ZL96120693.4
                  (the
                  same patent in both of the First Dalian Ericsson Action and the
                  Second
                  Dalian Ericsson (Panda) Action). On April 19, 2001 Alcatel
                  sent Zi
                  Corporation of Canada, Inc. a request for indemnification pursuant
                  to the
                  license agreement between Alcatel Business Systems and Zi Corporation
                  of
                  Canada, Inc. Zi responded denying the applicability of the indemnity
                  and
                  we have not received any answering response from Alcatel. The Company
                  and
                  its affiliates have not been named as a party in the Dalian Alcatel
                  Action.
   76
  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. Alcatel is actively 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.
  *(iv)*
              *Zi
                  Corporation, an Alberta, Canada corporation, and Zi Corporation
                  of
                  America, Inc., a Nevada corporation v. Morrison & Foerster
                  LLP*,*a
                  limited liability partnership, and Does 1-100*,
                  inclusive (the” MoFo” Malpractice Action). An action against Morrison
                  & Foerster LLP was commenced on behalf of the Company by its
                  litigation counsel, Foley Bezek, LLP (“F&B”), in the Superior Court of
                  the State of California, County of San Francisco claiming (i) professional
                  negligence based on MoFo’s failure to exercise reasonable care, skill and
                  diligence in representing the Company in the defence of Asian
                  Communication Pty Ltd and Tegic Communications Inc. v. Zi Corporation
                  and
                  Zi Corporation of America, Inc. (the Tegic California patent infringement
                  lawsuit described more fully at*Item
                  3 - Risk Factors - Tegic Lawsuit Settlement*and (ii) reimbursement of the payments made to MoFo in connection
                  with the
                  defense of*Tegic
                  v. Zi Corporation*,
                  which payments are alleged to exceed the reasonable value of MoFo’s
                  services and costs advanced. MoFo has filed, as part of its defence
                  to the
                  Company’s action, a cross complaint against Zi Corporation for payment
                  of
                  legal fees incurred and reimbursement of out-of-pocket costs advanced
                  in
                  the defence of*Tegic
                  v. Zi Corporation*(in addition to legal fees and costs already paid by the Company
                  to MoFo
                  in the amount of US$1,061,616.81). The likelihood of net gain or
                  loss on
                  the complaint by Zi Corporation against MoFo and the cross-complaint
                  by
                  MoFo against the Company is not determinable at this
                  time.
  Dividend
        Policy
  To
        date,
        we have not paid any dividends on shares, and do not anticipate doing so
        in the
        foreseeable future. The declaration of dividends on our common shares is
        within
        the discretion of our board of directors and will depend upon, among other
        factors, earnings, capital requirements, and the operating and financial
        condition of the Company.
   77
  ***B.*** ***Significant
        Changes***
  Not
        applicable
  **Item 9
        -** **The
        Offer and Listing**
  ***A.*** ***Offer
        and Listing Details - Stock Price History***
  Our
        common shares are traded on the Toronto Stock Exchange under the symbol “ZIC”
        and on the NASDAQ National Market under the symbol “ZICA”. The following tables
        set forth, for the periods indicated, high and low sale prices of our common
        shares as reported on the Toronto Stock Exchange and on the NASDAQ National
        Market.
   78
  **Toronto
        Stock Exchange (in CDN$):**
  **Period**
              
              **High**
              
              **Low**February
                  2005
              
              $
              9.15
              
              $
              6.65January
                  2005
              
              $
              7.85
              
              $
              6.30December
                  2004
              
              $
              8.69
              
              $
              3.56November
                  2004
              
              $
              4.66
              
              $
              3.23October
                  2004
              
              $
              5.20
              
              $
              4.03September
                  2004
              
              $
              4.26
              
              $
              2.57Quarter
                  ended December 31, 2004
              
              $
              8.69
              
              $
              3.23Quarter
                  ended September 30, 2004
              
              $
              4.26
              
              $
              2.57Quarter
                  ended June 30, 2004
              
              $
              3.85
              
              $
              2.78Quarter
                  ended March 31, 2004
              
              $
              4.03
              
              $
              3.17Quarter
                  ended December 31, 2003
              
              $
              4.20
              
              $
              2.95Quarter
                  ended September 30, 2003
              
              $
              5.60
              
              $
              2.88Quarter
                  ended June 30, 2003
              
              $
              5.09
              
              $
              2.39Quarter
                  ended March 31, 2003
              
              $
              5.48
              
              $
              2.75Year
                  ended December 31, 2004
              
              $
              8.69
              
              $
              2.57Year
                  ended December 31, 2003
              
              $
              5.60
              
              $
              2.39Year
                  ended December 31, 2002
              
              $
              11.29
              
              $
              2.35Year
                  ended December 31, 2001
              
              $
              14.50
              
              $
              7.36Year
                  ended December 31, 2000
              
              $
              59.25
              
              $
              4.75
   **NASDAQ
        (in US$):**
 **Period**
                  
                  **High**
                  
                  **Low**February
                      2005
                  
                  $
                  7.45
                  
                  $
                  5.41January
                      2005
                  
                  $
                  6.89
                  
                  $
                  5.10December
                      2004
                  
                  $
                  7.55
                  
                  $
                  3.00November
                      2004
                  
                  $
                  3.84
                  
                  $
                  2.65October
                      2004
                  
                  $
                  4.13
                  
                  $
                  3.28September
                      2004
                  
                  $
                  3.35
                  
                  $
                  2.02Quarter
                      ended December 31, 2004
                  
                  $
                  7.55
                  
                  $
                  2.65Quarter
                      ended September 30, 2004
                  
                  $
                  3.35
                  
                  $
                  2.00
  Quarter
                        ended June 30, 2004
                    
                    $
                    2.89
                    
                    $
                    2.03Quarter
                        ended March 31, 2004
                    
                    $
                    3.05
                    
                    $
                    2.42Quarter
                        ended December 31, 2003
                    
                    $
                    3.11
                    
                    $
                    2.25Quarter
                        ended September 30, 2003
                    
                    $
                    4.08
                    
                    $
                    2.11Quarter
                        ended June 30, 2003
                    
                    $
                    3.82
                    
                    $
                    1.62Quarter
                        ended March 31, 2003
                    
                    $
                    3.47
                    
                    $
                    1.82Year
                        ended December 31, 2004
                    
                    $
                    7.55
                    
                    $
                    2.00Year
                        ended December 31, 2003
                    
                    $
                    4.08
                    
                    $
                    1.62Year
                        ended December 31, 2002
                    
                    $
                    7.04
                    
                    $
                    2.27Year
                        ended December 31, 2001
                    
                    $
                    9.44
                    
                    $
                    4.00Year
                        ended December 31, 2000
                    
                    $
                    40.88
                    
                    $
                    3.13
   79
  ***B.*** ***Plan
          of Distribution***
  Not
          applicable.
  ***C.*** ***Markets***
  Our
        common shares are listed on the Toronto Stock Exchange and NASDAQ National
        Market Exchange. At December 31, 2004, the Company had
        45,225,190 common shares outstanding, with no par value.
  ***D.*** ***Selling
          Shareholders***
  Not
        applicable.
  ***E.*** ***Dilution***
  Not
        applicable.
  ***F.*** ***Expenses
          of the Issue***
  Not
        applicable.
  **Item 10
        -** **Additional
        Information**
  ***A.*** ***Share
          Capital***
  Not
        applicable.
  ***B.*** ***Memorandum
          and Articles of Association***
  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 *Business
        Corporations Act* ,
        in the
        absence of any such restrictions, a corporation has the capacity, rights,
        powers
        and privileges of a natural person, and has the capacity to carry on business,
        conduct its affairs and exercise its power in any jurisdiction outside Alberta
        to the extent that the laws of that jurisdiction permit. For additional
        information regarding our incorporation, see *Item 4 -
        Information on the Company - History and Development of the
        Company* .
   80
  *Directors*
  A
        director of our Company need not be a shareholder. In accordance with the
        Alberta *Business
        Corporations Act* ,
        at
        least half of our directors must be residents of Canada. The Alberta *Business
        Corporations Act* requires
        that a person must be at least 18 years of age, be of sound mind and
        not be
        bankrupt or a dependent adult or formal patient under the *Dependent
        Adults Act* or *Mental
        Health Act* ,
        or the
        subject of an order under *The
        Mentally Incapacitated Persons Act* in order
        to serve as a director. Neither our articles of incorporation or by-laws,
        nor
        the Alberta *Business
        Corporations Act* ,
        impose
        any mandatory retirement requirements for directors.
  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 half of the
        directors present are resident Canadians. Business cannot be transacted at
        a
        directors’ meeting without 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 *Business
        Corporations Act* .
        The
        Alberta *Business
        Corporations Act* prohibits such a director from voting on any resolution to approve the contract
        or transaction unless the contract or transaction:
  §
              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*Business
                  Corporations Act*,
                  give a guarantee on behalf of our Company to secure performance
                  of an
                  obligation of any person;
 §
              mortgage,
                  hypothecate, pledge or otherwise create a security interest in
                  all or any
                  property of the Company owned or subsequently acquired to secure
                  any
                  obligation of the Company; and
 §
              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.
  *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.
   81
  Subject
        to the prior rights of the holders of preferred shares of the Company, the
        holders of common shares are entitled to received 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 *Business
        Corporations Act* does not
        impose restrictions upon our board of directors issuing preferred shares
        of the
        type authorized by our articles of incorporation. Our board of directors
        may
        fix, before issuing, the number of preferred shares of each series, the
        designation, rights, privileges, restrictions and conditions attaching to
        the
        preferred shares of each series, including the rate or amount of dividends
        or
        the method of calculating dividends, the dates of payment of dividends, the
        redemption purchase and/or conversion price and terms and conditions of
        redemption, purchase and/or conversion and any sinking fund or other provisions,
        the whole to be subject to the sending of articles of amendment in prescribed
        form and the issuance of a certificate of amendment.
  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 *Business
        Corporations Act* .
        No
        preferred shares are currently outstanding. There is no present intention
        to
        issue any preferred chares.
  *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.
   82
  *Shareholder
        Meetings*
  An
        annual
        meeting of shareholders is held each year, 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 (5%) percent 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
        the
        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 *Business
        Corporations Act* permits
        a liquidator appointed by the shareholders, during the continuance of a
        voluntary winding-up, to call and attend meetings of the shareholders. In
        circumstances where a court orders a meeting of shareholders, the court may
        direct how the meeting may be held, including the parties entitled, or required,
        to attend the meeting.
  Our
        articles of incorporation states 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 *Investment
        Canada Act* (the
“ICA”). The ICA requires a non-Canadian making an investment which would result
        in the acquisition of control of a Canadian business (i.e. the gross value
        of
        the assets of which exceed a certain monetary threshold) to identify, notify,
        or
        file an application for review with the Investment Review Division of Industry
        Canada (“IRD”).
  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.
   83
  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.
  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.
              An
                  investment to establish a new Canadian business;
                  and
  2.
              An
                  investment to acquire control of a Canadian business that is not
                  reviewable pursuant to the Act.
  The
        following investments by a non-Canadian are subject to review under the
        ICA:
  1.
              An
                  investment is reviewable if there is an acquisition of a Canadian
                  business
                  and the asset value of the Canadian business being acquired equals
                  or
                  exceeds the following thresholds:
  (a)
              For
                  non-World Trade Organization (“WTO”) investors, the threshold is
                  CDN$5 million for a direct acquisition and CDN$50 million
                  for an
                  indirect acquisition; the CDN$5 million threshold will apply
                  however
                  for an indirect acquisition if the asset value of the Canadian
                  business
                  being acquired exceeds 50% of the asset value of the global
                  transaction;
  (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 2005 is CDN$250 million. Pursuant to Canada’s
                  international commitments, indirect acquisitions by or from WTO
                  investors
                  are not reviewable;
   84
  (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.
              Notwithstanding
                  the above, any investment which is usually only notifiable, including
                  the
                  establishment of a new Canadian business, and which falls within
                  a
                  specific business activity, including the publication and distribution
                  of
                  books, magazines, newspapers, film or video recordings, audio or
                  video
                  music recordings, or music in print or machine-readable form may
                  be
                  reviewed if an Order-in-Council directing a review is made and
                  a notice is
                  sent to the Investor within 21 days following the receipt
                  of a
                  certified complete notification.
  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.
  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.
   85
  *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.
  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.*** ***Material
          Contracts***
  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.
              Settlement
                  Agreement with AOL - See*Item 3 -
                  Risk Factors - Risks Related to Settlement of the Tegic
                  Lawsuit*and Exhibit 4.17. Settlement Agreement made December 6,
                  2002
                  between America Online, Inc., Zi Corporation and Zi Corporation
                  of
                  America, Inc.
  2.
              Consent
                  Judgement 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.
  3.
              Employment
                  Agreement dated July 23, 2003, between Zi Corporation and Mike
                  Donnell.
  4.
              Form
                  of Subscription Agreement pursuant to a $2,000,000****private
                  placement of 1,000,000 units at $2.00 per unit, each unit
                  consisting
                  of one common share and one-half of one common share purchase warrant.
                  Each full warrant entitles the holder to acquire one additional
                  common
                  share until May 31, 2006 upon payment of $2.25. The private placement
                  was
                  completed on June 19, 2003
                  (1,000,000 units).
  5.
              Amending
                  Agreement dated March 31, 2004, (re Employment Agreement dated
                  December
                  31, 1999, between Zi Corporation and Michael
                  Lobsinger).
  See
        also
        the exhibits to this Annual Report.
   86
  The
        Company has also entered into employment agreements with certain executive
        officers of the Company. See *Item 6 -
        Directors - Senior Management and Employees* .
  ***D.*** ***Exchange
          Controls*** ******
  The
        Company is aware of no governmental laws, decrees or regulations, including
        foreign exchange controls, in Canada which restrict the export or import
        of
        capital or that 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 *The
        Canada - US Income Tax Convention* (1980),
        as amended.
  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.
  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 *Item 10 -
        Additional Information - Limitations on Rights to Own
        Securities* .
  ***E.*** ***Taxation*** ******
  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 *Canada -
        US Income Tax Convention* (1980),
        as amended (“the Convention”), provides for a 15 percent withholding tax on
        dividends paid to all individuals and corporate residents of the United States
        qualifying for treaty benefits. Dividends paid to any non-resident company
        that
        beneficially owns at least 10 percent of the voting stock of the payer
        company are subject to withholding tax at 5 percent.
  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 *Income
        Tax Act* (Canada)
        and no relief is afforded under any applicable tax treaty. The shares of
        the
        Company would be taxable Canadian property of a non-resident shareholder
        if the
        non-resident shareholder used the shares in carrying on a business in Canada.
        The shares of the Company would also be taxable Canadian property of a
        non-resident shareholder if at any time during the five year period immediately
        preceding the disposition, not less than 25 percent of the issued
        shares of
        any class of the Company belonged to the particular shareholder or persons
        with
        whom the shareholder did not deal at arms length.
  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 US 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 US
        Holder. In addition, this discussion does not cover any state, local or foreign
        tax consequences. See “ *Certain
        Canadian Income Tax Consequences* ”
        above.
   87
  The
        following discussion is based upon the  *Internal
        Revenue Code of 1986* ,
        as
        amended to the date hereof (the “Code”), existing and proposed Treasury
        Regulations, published Internal Revenue Service (“IRS”) rulings, published
        administrative positions of the IRS and court decisions that are currently
        applicable, any or all of which could be materially and adversely changed,
        possibly on a retroactive basis, at any time. This discussion does not consider
        the potential effects, both adverse and beneficial, of any recently proposed
        legislation which, if enacted, could be applied, possibly on a retroactive
        basis, at any time.
  **This
        discussion is of a general nature only and is not exhaustive of all US 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.**
  US
        Holders
  As
        used
        herein, a “US Holder” means a holder of the Company’s common shares who is a US
        citizen or individual income tax resident of the United States under US 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 US federal income tax purposes
        regardless of its source or a trust if a US court is able to exercise primary
        supervision over the trust’s administration and one or more US persons have
        authority to control all substantial decisions of such trust. This summary
        does
        not address the tax consequences to, and a US 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 US 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 US 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 US 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
  US
        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 US 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 US 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 US
        federal income tax purposes .
        Such
        Canadian tax withheld may be credited, subject to certain limitations, against
        the US Holder’s United States federal income tax liability or, alternatively,
        may be deducted in computing the US Holder’s United States federal taxable
        income by those who itemize deductions. (See more detailed discussion at
        “ *Foreign
        Tax Credit* ”
        below.)
        To the extent that distributions exceed current or accumulated earnings and
        profits of the Company, they will be treated first as a return of capital
        up to
        the US Holder’s adjusted basis in the common shares and thereafter as gain from
        the sale or exchange of the common shares. Preferential tax rates for long-term
        capital gains are applicable to a US Holder which is an individual, estate
        or
        trust. There are currently no preferential tax rates for long-term capital
        gains
        for a US Holder which is a corporation . Dividends
        paid on the Company’s common shares generally
        will not be
        eligible for the dividends received deduction provided to corporations receiving
        dividends from certain United States corporations .
   88
  In
        the
        case of foreign currency received as a dividend that is not converted by
        the
        recipient into US dollars on the date of the receipt, a US Holder will have
        a
        tax basis in the foreign currency equal to its US 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 US 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 US backup withholding tax rules will be allowed
        as a
        refund or a credit against the US Holder’s US federal income tax liability,
        provided the required information is furnished to the IRS.
  Foreign
        Tax Credit
  A
        US
        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 US 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 US Holder during
        that year.
  The
        operation of the
        foreign tax credit for
        any
        particular US 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 US Holder’s United States income tax liability that the US 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 US Holders, “financial
        services income” for these purposes.
  Disposition
        of Common Shares
  A
        US
        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 US Holders who are individuals, estates or
        trusts . At
        present, there are no preferential tax rates applicable to US 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 US 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 US 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.
   89
  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 “US Person” means a citizen or income tax resident of the United States
        as determined under US 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 US 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, US 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 US
        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 US Holder selling or exchanging common shares
        to
        be treated as ordinary income rather
        than capital gain.
  Passive
        Foreign Investment Company
  As
        a
        foreign corporation with US 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, US 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% 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
        US
        income tax rate plus an interest charge to
        reflect the benefit
        of tax deferral .
   90
  However,
        if the US 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 US 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 US 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, US 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 US
        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 US Shareholders’
        income on a current basis, regardless of distributions. Such US
        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 US tax on their pro rata shares of the CFC’s earnings
        invested in US property . In
        certain circumstances, a foreign
        tax credit may apply
        to reduce
        the US 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.*** ***Dividends
          and Paying Agents***
  Not
        applicable.
  ***G.*** ***Statement
          by Experts***
  Not
        applicable.
  ***H.*** ***Documents
          on Display***
  Public
        documents are available for inspection at the Company’s head offices located at
        2100, 840 - 7 th Avenue
        S.W., Calgary, AB T2P 3G2, and, for certain documents, on the Internet
        at
        www.sedar.com and at www.edgar.com.
   91
  The
        Company is subject to the information requirements of the *Securities
        Exchange Act of 1934* ,
        as
        amended (the “Exchange Act”), and, to the extent required of Canadian companies,
        files periodic reports and other information with the Securities and Exchange
        Commission. All such reports and information may be read and copied at the
        public reference facilities listed below. The Company intends to give its
        shareholders annual reports containing audited financial statements and a
        report
        thereon from its independent chartered accountants and quarterly reports
        for the
        first three quarters of each fiscal year containing unaudited interim financial
        information.
  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.*** ***Subsidiary
          Information***
  Not
        applicable.
  **Item 11-** **Quantitative
        and Qualitative Disclosure About Market Risk**
  ***A.*** ***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. 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.
   92
  *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, 2004, 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.
  ***B.*** ***Foreign
          Currency*** ******
  *Foreign
          Exchange Rate Risk*
  The
          foreign operations of the Company are translated into US 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
          and Chinese renminbi. Based on the 2004 distribution of revenues and cash
          flows,
          a one percent change in the Canadian dollar relative to the U.S. dollar
          is
          estimated to affect revenues by $nil and expenses by $65,000 based upon
          the
          exchange rate on December 31, 2004 of CDN$1.202 to the
          US$1.00.
  **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**
  At
          December 31, 2004, the Company identified a “material weakness” in our 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
          stock based compensation expense over the variety of vesting periods of
          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 has 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. The Company plans to design and implement control
          procedures to ensure timely and ongoing review is carried out to incorporate
          ongoing changes to stock option grants which effect measurement criteria
          used to
          determine stock compensation expense in the second quarter of 2005.
  As
          of
          December 31, 2004, 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
          not
          effective due to the material weakness, as discussed above, 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.
  During
          the fiscal year ended December 31, 2004, there were no changes in the Company’s
          internal control over financial reporting that have materially affected,
          or are
          reasonably likely to materially affect the Company’s internal control over
          financial reporting.
  93
  **Item 16**- **[Reserved]**
  **Item
        16A - Audit committee financial expert**
  As
        an
        Alberta corporation with operations principally outside of the United States,
        it
        is considered a “foreign private issuer” for the purposes of filings with the
        SEC and with the NASDAQ National Market, on which the Company’s common shares
        trade in the United States. Under applicable SEC regulations, an issuer must
        disclose if it has an “audit committee financial expert” on its audit committee
        if it is required to have such an expert by the listing rules applicable
        to it.
        The NASDAQ has adopted rules which will implement the audit committee financial
        expert requirement applicable to foreign private issuers such as the Company,
        which will be effective on July 15, 2005. Accordingly, the Company is not
        presently subject to the audit committee financial expert
        requirement.
 
 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.
        As
        noted previously, the Company has recently converted its reporting from Canadian
        GAAP to US GAAP. Mr. Hyde is qualified as an expert in Canadian GAAP and
        has an
        understanding of US GAAP. 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.
   94
  **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 2004 and 2003. Audit fees paid were $95,691 for 2004 and $83,854
        for
        2003.  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 $3,092 for 2004 and $29,158 for 2003. 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
        2004,
        we paid Deloitte & Touche LLP $7,922 for tax related services. In 2003, we
        paid Deloitte & Touche LLP $10,777 for tax related services.
  All
        Other
        Fees
  We
        did
        not purchase any other services from Deloitte & Touche LLP in 2004 or
        2003.
  Our
        Audit
        Committee has adopted a policy and procedures for the approval of audit and
        non-audit services rendered by our independent auditors, 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.
  **Item
        16D - Exemption from the Listing Standards for Audit
        Committees**
  Not
        applicable
 
 **Item
        16E - Purchases of Equity Securities by the Issuer and Affiliated
        Purchasers**
  Not
        applicable
 
 95
 
 **PART
        III**
  **Item 17**- **Financial
        Statements**
  Not
        applicable
  **Item 18**- **Financial
        Statements**
  See
        attached
  96
 
 **Item 1** **9**- **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 this annual report to be signed
        on
        its behalf.
  **ZI
                CORPORATION**Per:
              /s/ *Dale
                Kearns*Dale
                KearnsChief Financial
                OfficerDate:March
                31, 2005
   Per:
              /s/ *Michael
                Donnell*Michael
                DonnellPresident
&
                Chief Executive OfficerDate:March
                31, 2005
   97
  
 **ANNUAL
          REPORT ON FORM 20-F**
 **for
          the year ended**
 **December 31,
          2004**
  **EXHIBIT
          INDEX**
  **ExhibitNo.
                      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.4.3
                  Employment
                      Agreement dated, between Zi Corporation and Mike Donnell.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.4.7
                  Employment
                      Agreement between Zi Corporation and Glen Morgan.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.)
   
   **ExhibitNo.
                      Item**
                  **Description
                      of Exhibit**
 8.1
                  List
                      of Subsidiaries (included in Item 4)11.1
                  Zi
                      Corporation Code of Ethics12.1
                  Section 302
                      Certification by Dale Kearns, Chief Financial Officer dated
                      March 31,
                      2005.12.2
                  Section 302
                      Certification by Mike Donnell, Chief Executive Officer dated
                      March 31,
                      2005.13.1
                  Section
                    906 Certification by Dale Kearns, Chief Financial Officer dated
                    March 31,
                    2005.13.2
                  Section
                    906 Certification by Mike Donnell, Chief Executive Officer, dated
                    March
                    31, 2005.99.1
                  Audit
                      Committee Charter99.2
                  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 for December 31,
                    2003.


**Management’s
      Report**




The
        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 judgements.
        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 external auditors 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 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)Mike
                  Donnell
                Dale
                  KearnsPresident
& Chief
                  Executive Officer
                Chief
                  Financial
                  OfficerMarch
                  11,
                  2005
 
 F-1
  **Report
        of Independent Registered Chartered Accountants**
   To
        the Shareholders of Zi Corporation
  We
        have audited the consolidated balance sheets of Zi Corporation as at December
        31, 2004 and 2003 and the consolidated statements of loss, shareholders’ equity
        and cash flows for each of the years in the three year period ended December
        31,
        2004. 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,
        2004 and 2003 and the results of its operations and its cash flows for each
        of
        the years in the three year period ended December 31, 2004 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.
  (signed) 
                       “Deloitte & Touche LLP”Independent
                    Registered Chartered AccountantsCalgary,
                    Alberta, CanadaMarch
                    11,
                    2005
  **Comments
        By Auditor on Canada-United States of America Reporting
        Differences**
 
 The
        standards of the Public Company Accounting Oversight Board (United States)
        require the addition of an explanatory paragraph (following the opinion
        paragraph) when there has been a restatement of the financial statements
        as
        described in notes 2 and 16 to the consolidated financial statements. Our
        report
        dated March 11, 2005, is expressed in accordance with Canadian reporting
        standards, which do not require a reference to such conditions and events
        in the
        auditors’ report when these are adequately disclosed in the financial
        statements.
  The
        standards of the Public Company Accounting Oversight Board (United States)
        also
        require the addition of an explanatory paragraph (following the opinion
        paragraph) when there are changes in accounting principles that have a material
        effect on the comparability of the Company’s financial statements, such as the
        change described in note 2, to the consolidated financial statements. Our
        report
        is expressed in accordance with Canadian reporting standards which do not
        require a reference to such changes in accounting principles in the auditors’
        report when the change is properly accounted for and adequately disclosed
        in the
        financial statements.
  (signed) 
                     “Deloitte & Touche LLP”Independent
                  Registered Chartered AccountantsCalgary,
                  Alberta, CanadaMarch
                  11,
                  2005
   F-2
  **Consolidated
                    Balance Sheets**As
                    at December 31
                
                2004
                
                2003(All
                    amounts in United States of America dollars except share
                    amounts)
                
                
                (restated
                    - see note 2)AssetsCurrent
                    assetsCash
                    and cash equivalents
                
                $
                12,889,335
                
                $
                2,366,885Accounts
                    receivable, net of allowance of $154,108 (2003 - $507,640)
                
                
                5,570,869
                
                
                4,020,264Accounts
                    receivable from related party(note 13)
                
                
                43,629
                
                
                33,187Prepayments
                    and deposits
                
                
                414,994
                
                
                399,767Total
                    current assets
                
                
                18,918,827
                
                
                6,820,103Notes
                    receivable(note
                    3)
                
                
                —
                
                
                2,000,000Capital
                    assets - net(note 5)
                
                
                1,087,957
                
                
                1,277,755Intangible
                    assets - net(note 6)
                
                
                1,692,087
                
                
                587,720Investment
                    in significantly influenced company(notes
                    3 and 10)
                
                
                —
                
                
                —$
                21,698,871
                
                $
                10,685,578Liabilities
                    and shareholders’ equityCurrent
                    liabilitiesAccounts
                    payable and accrued liabilities (note 17)
                
                $
                3,081,280
                
                $
                4,099,307Deferred
                    revenue
                
                
                2,704,105
                
                
                1,099,573Notes
                    payable (note 7)
                
                
                —
                
                
                1,000,000Current
                    portion of other long-term liabilities (note 8)
                
                
                71,969
                
                
                73,572Total
                    current liabilities
                
                
                5,857,354
                
                
                6,272,452Other
                    long-term liabilities(note 8)
                
                
                92,361
                
                
                132,0335,949,715
                
                
                6,404,485Contingent
                    liabilities, commitments and guarantees(notes 12 & 14)Shareholders’
                    equityShare
                    capital(note 9)Unlimited
                    number of Class A, 9% convertible, preferred shares authorizedand
                    no shares issued or outstanding
                
                
                —
                
                
                —Unlimited
                    number of common shares, no par value, authorized,45,225,190
                    (2003 - 39,371,560) issued and outstanding
                
                
                106,025,634
                
                
                93,957,652Additional
                    paid-in capital
                
                
                2,114,190
                
                
                601,744Accumulated
                    deficit
                
                
                (91,927,031
                )
                
                (89,538,832
                )Accumulated
                    other comprehensive loss
                
                
                (463,637
                )
                
                (739,471
                )15,749,156
                
                
                4,281,093$
                21,698,871
                
                $
                10,685,578See
                  accompanying
                  notes to consolidated financial statements.
  (signed)
                (signed)Michael
                    E. Lobsinger
                Donald
                    HydeChairman
                    of the Board
                Director
   F-3
  **Consolidated
          Statements of Loss**
  Years
                    ended December 31
                
                2004
                
                2003
                
                2002(All
                    amounts in United States of America dollars except share
                    amounts)
                
                
                (restated
                    - see note 2)
                
                (restated
                    - see note
                    2)RevenueLicense
                    and implementation fees
                
                $
                12,898,838
                
                $
                9,918,998
                
                $
                6,480,938Other
                    product revenue
                
                
                504,213
                
                
                684,070
                
                
                1,935,30913,403,051
                
                
                10,603,068
                
                
                8,416,247Cost
                    of salesLicense
                    and implementation fees
                
                
                362,562
                
                
                349,824
                
                
                251,613Other
                    product costs
                
                
                109,252
                
                
                85,711
                
                
                803,424471,814
                
                
                435,535
                
                
                1,055,037Gross
                    margin
                
                
                12,931,237
                
                
                10,167,533
                
                
                7,361,210Operating
                    expensesSelling
                    general and administrative
                
                
                (9,281,365
                )
                
                (8,137,551
                )
                
                (11,371,764
                )Litigation
                    and legal(note
                    12)
                
                
                (833,197
                )
                
                (886,860
                )
                
                (7,511,908
                )Product
                    research and development
                
                
                (2,350,141
                )
                
                (2,098,735
                )
                
                (2,780,180
                )Depreciation
                    and amortization(note
                    6)
                
                
                (926,886
                )
                
                (1,380,265
                )
                
                (2,226,572
                )Impairment
                    of note receivable(note
                    3)
                
                
                (2,000,000
                )
                
                —
                
                
                —Impairment
                    of goodwill(note
                    6)
                
                
                —
                
                
                —
                
                
                (1,258,889
                )Impairment
                    of intangible assets(note
                    6)
                
                
                —
                
                
                —
                
                
                (1,457,405
                )Operating
                    loss before undernoted
                
                
                (2,460,352
                )
                
                (2,335,878
                )
                
                (19,245,508
                )Interest
                    on capital lease obligation
                
                
                (25,558
                )
                
                (9,856
                )
                
                (88,614
                )Other
                    interest expense
                
                
                (30,839
                )
                
                (608,858
                )
                
                (125,976
                )Interest
                    income and other income
                
                
                128,550
                
                
                23,483
                
                
                182,360Equity
                    interest in loss of significantly influenced company (note
                    10)
                
                
                —
                
                
                —
                
                
                (220,687
                )Loss
                    from continuing operations before income taxes
                
                
                (2,388,199
                )
                
                (2,931,109
                )
                
                (19,498,425
                )Income
                    taxes
                
                
                —
                
                
                —
                
                
                —Loss
                    from continuing operations
                
                
                (2,388,199
                )
                
                (2,931,109
                )
                
                (19,498,425
                )Discontinued
                    operations(note 4)Loss
                    from discontinued operations
                
                
                —
                
                
                —
                
                
                (5,707,850
                )Net
                    loss
                
                $
                (2,388,199
                )
                $
                (2,931,109
                )
                $
                (25,206,275
                )Basic
                    and diluted loss from continuing operations per share(note
                    9)
                
                $
                (0.06
                )
                $
                (0.08
                )
                $
                (0.52
                )Loss
                    from discontinued operations per share
                
                
                —
                
                
                —
                
                
                (0.15
                )Basic
                    and diluted loss per share(note
                    9)
                
                $
                (0.06
                )
                $
                (0.08
                )
                $
                (0.67
                )Weighted
                    average common shares
                
                
                41,373,309
                
                
                38,719,786
                
                
                37,767,000Common
                    shares outstanding, end of period
                
                
                45,225,190
                
                
                39,371,560
                
                
                37,914,250
 See
          accompanying notes to consolidated financial statements.
   F-4
  **Consolidated
          Statements of Shareholders’ Equity**
  Common
                    shares issued
                
                
                
                
                
                AccumulatedShares
                
                Amount
                
                Additional
                      paid-in capital
                
                Accumulated
                        deficit
                
                other
                            comprehensive income (loss)
                
                Totalcomprehensive
                        loss(All
                    amounts in United States of America dollars except share
                    amounts)
                
                
                
                
                (restated
                    - see note 2)
                
                
                
                (restated
                    - see note 2)
                
                
                
                
                (restated
                    - see note 2)Balance
                    - December 31, 2001
                
                
                37,544,650
                
                $
                89,930,636
                
                $
                34,873
                
                $
                (61,401,448
                )
                $
                (1,060,565
                )Issued
                    on exercise of stock options
                
                
                304,600
                
                
                720,904
                
                
                —
                
                
                —
                
                
                —Issued
                    pursuant to acquisition ofMagic
                    Lantern less shares held in escrow
                
                
                65,000
                
                
                324,057
                
                
                —
                
                
                —
                
                
                —Issued
                    stock purchase warrants with debt
                
                
                —
                
                
                —
                
                
                154,065
                
                
                —
                
                
                —Loss
                    from continuing operations
                
                
                —
                
                
                —
                
                
                —
                
                
                (19,498,425
                )
                
                —
                
                $
                (19,498,425
                )Loss
                    from discontinued operations
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,707,850
                )
                
                —
                
                
                (5,707,850
                )Other
                    comprehensive income fromforeign
                    currency translation adjustment
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                158,641
                
                
                158,641Balance
                    - December 31, 2002
                
                
                37,914,250
                
                $
                90,975,597
                
                $
                188,938
                
                $
                (86,607,723
                )
                $
                (901,924
                )
                $
                (25,047,634
                )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 attachedstock
                    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 sharepurchase
                    warrants
                
                
                100,000
                
                
                271,161
                
                
                —
                
                
                —
                
                
                —Loss
                    from continuing operations
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,931,109
                )
                
                —
                
                $
                (2,931,109
                )Other
                    comprehensive income fromforeign
                    currency translation adjustment
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                162,453
                
                
                162,453Balance
                    - 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 toconsultant
                    re private placement
                
                
                —
                
                
                (141,048
                )
                
                141,048
                
                
                —
                
                
                —Issued
                    on exercise of sharepurchase
                    warrants
                
                
                1,073,500
                
                
                2,851,188
                
                
                —
                
                
                —
                
                
                —Issued
                    stock options to non-employee
                
                
                —
                
                
                —
                
                
                685,631
                
                
                —
                
                
                —Loss
                    from continuing operations
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,388,199
                )
                
                —
                
                $
                (2,388,199
                )Other
                    comprehensive income fromforeign
                    currency translation adjustment
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                275,834
                
                
                275,834Balance
                    - December 31, 2004
                
                
                45,225,190
                
                $
                106,025,634
                
                $
                2,114,190
                
                $
                (91,927,031
                )
                $
                (463,637
                )
                $
                (2,112,365
                )
 See
          accompanying notes to consolidated financial statements.
   F-5
  **Consolidated
          Statements of Cash Flow**
  Years
                    ended December 31
                
                2004
                
                2003
                
                2002(All
                    amounts in United States of America dollars)
                
                
                
                (restated
                    - see note 2)
                
                (restated
                    - see note 2)Net
                    cash flow from (used in) operating activities:Net
                    loss from continuing operations
                
                $
                (2,388,199
                )
                $
                (2,931,109
                )
                $
                (19,498,425
                )Items
                    not affecting cash:Loss
                    on dispositions of capital assets
                
                
                9,899
                
                
                2,415
                
                
                146,418Depreciation
                    and amortization
                
                
                926,886
                
                
                1,380,265
                
                
                2,226,572Impairment
                    of note receivable
                
                
                2,000,000
                
                
                —
                
                
                —Impairment
                    of goodwill
                
                
                —
                
                
                —
                
                
                1,258,889Impairment
                    of intangible assets
                
                
                —
                
                
                —
                
                
                1,457,405Non-cash
                    interest expense
                
                
                —
                
                
                95,344
                
                
                —Non-cash
                    compensation expense
                
                
                685,767
                
                
                516,353
                
                
                —Non-cash
                    consultant compensation expense
                
                
                685,631
                
                
                —
                
                
                —Equity
                    in net loss of significantly influenced company
                
                
                —
                
                
                —
                
                
                220,687Decrease
                    (increase) in non-cash working capital (note 17)
                
                
                (989,769
                )
                
                (370,608
                )
                
                1,202,139Cash
                    flow from (used in) operating activities
                
                
                930,215
                
                
                (1,307,340
                )
                
                (12,986,315
                )Cash
                    flow from (used in) financing activities:Proceeds
                    from issuance of common shares, net of issuance costs
                
                
                12,209,030
                
                
                2,937,228
                
                
                720,904Settlement
                    of note payable
                
                
                (1,000,000
                )
                
                (3,300,000
                )
                
                —Issuance
                    of note payable
                
                
                —
                
                
                1,000,000
                
                
                3,250,450Payment
                    of capital lease obligations
                
                
                —
                
                
                (96,223
                )
                
                (104,900
                )Cash
                    flow from financing activities
                
                
                11,209,030
                
                
                541,005
                
                
                3,866,454Cash
                    flow from (used in) investing activities:Short-term
                    investments
                
                
                —
                
                
                —
                
                
                5,385,172Purchase
                    of capital assets
                
                
                (178,258
                )
                
                (133,297
                )
                
                (922,171
                )Proceeds
                    from capital dispositions
                
                
                —
                
                
                2,772
                
                
                32,305Software
                    development costs
                
                
                (1,661,974
                )
                
                (237,618
                )
                
                (452,573
                )Other
                    deferred costs
                
                
                (52,397
                )
                
                (47,622
                )
                
                152,339Acquisition
                    of subsidiaries net of bank indebtedness
                
                
                —
                
                
                —
                
                
                (1,194,494
                )Sale
                    of subsidiary net of cash given up
                
                
                —
                
                
                —
                
                
                (350,669
                )Cash
                    flow from (used in) investing activities
                
                
                (1,892,629
                )
                
                (415,765
                )
                
                2,649,909Cash
                    flow used by discontinued operations
                
                
                —
                
                
                —
                
                
                (2,290,319
                )Effect
                    of foreign exchange rate changes on cash and cash
                    equivalents
                
                
                275,834
                
                
                162,453
                
                
                158,641Net
                    cash inflow (outflow)
                
                
                10,522,450
                
                
                (1,019,647
                )
                
                (8,601,630
                )Cash
                    and cash equivalents, beginning of year
                
                
                2,366,885
                
                
                3,386,532
                
                
                11,988,162Cash
                    and cash equivalents, end of year
                
                $
                12,889,335
                
                $
                2,366,885
                
                $
                3,386,532Non-cash
                    financing activityEquipment
                    acquired under capital lease
                
                $
                29,188
                
                $
                —
                
                $
                21,678Acquisition
                    of subsidiary
                
                $
                —
                
                $
                —
                
                $
                324,057Components
                    of cash and cash equivalentsCash
                
                $
                5,867,700
                
                $
                2,366,885
                
                $
                3,386,532Cash
                    equivalents
                
                $
                7,021,635
                
                $
                —
                
                $
                —Supplemental
                    cash flow informationCash
                    paid for interest
                
                $
                56,397
                
                $
                523,370
                
                $
                87,576Cash
                    paid for income taxes
                
                $
                —
                
                $
                —
                
                $
                —
 See
          accompanying notes to consolidated financial statements.
 F-6
  **Notes
        to the Consolidated Financial Statements**
  For
        the years ended December 31, 2004, 2003 and 2002 (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. Through its e-Learning
        business segment which includes Oztime, English Practice 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.
  **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 (“US 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, 2003, 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 US GAAP. Management elected to report in conformity with US
        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. Effective March 31, 2004, the Company initiated reporting
        its
        consolidated financial statements in US dollars, with comparative periods
        restated to US dollars.
  As
        part of the preparation of US GAAP consolidated financial statements, certain
        additional disclosures, as compared to the previously issued Canadian GAAP
        consolidated financial statements, were required. As part of the additional
        disclosures, the Company re-established the previously reduced December 31,
        1997
        stated capital. The stated capital was reduced by the December 31, 1996 deficit
        of $24,339,036, as allowed under Canadian GAAP but not under US GAAP. The
        result
        has no effect on shareholders’ equity as at December 31, 2004, 2003 and 2002. In
        addition, costs of start-up activities and organizational costs are expensed
        as
        incurred under US GAAP. Previously capitalized start-up costs recorded in
        1999,
        related to the start-up of Beijing Oz Education Network Ltd., and the related
        amortization expense recognized in subsequent years, have been excluded and
        these costs were expensed in the year they were incurred.
  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 US GAAP requirements, including comparative
        disclosures.
  Note
        16 includes explanations of material differences to Canadian GAAP, a
        reconciliation of net loss under US GAAP to net loss using Canadian GAAP
        for all
        periods presented, relevant Canadian GAAP disclosure not already reflected
        in
        these consolidated financial statements and the consolidated statements of
        loss
        and cash flows as previously presented under Canadian GAAP for the year ended
        December 31, 2002.
  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. 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 does not have ownership in any variable interest entities.
  Foreign
        currency translation
  Zi
        Corporation’s functional currency, on a stand-alone basis, is the United States
        dollar. For the United States, Chinese and Hong Kong subsidiaries’, their
        functional currencies are the US dollar, Chinese renminbi and the Hong Kong
        dollar, respectively. The balance sheet accounts of the Company’s foreign
        operations for which the local currency is the functional currency are
        translated into US 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.
   F-7
  Use
        of estimates
  The
        preparation of these consolidated financial statements and related disclosures
        in conformity with US 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
        future 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.
  Cash
        and cash equivalents
  The
        Company considers all balances with banks and highly liquid investments with
        original maturities of three months or less 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 adopted SFAS No. 142 “Goodwill and Other Intangible Assets” in 2002. 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:
  Acquired
                    software licenses
                3
                    yearsPatents
                    acquired
                11 yearsSoftware
                    development costs
                3 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 in accordance
        with SFAS No. 142. The Company evaluated its goodwill and intangible assets
        for
        impairment at September 30, 2002 and determined that an impairment charge
        was
        necessary (note 6).
  Impairment
        of long-lived assets
  In
        August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        144. SFAS No. 144 established a single model for the impairment of long-lived
        assets and broadens the presentation of discontinued operations to include
        a
        component of the entity. SFAS No. 144 is effective for years beginning after
        December 15, 2001.The Company adopted SFAS No. 144 in 2002. 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 intangible 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. The Company evaluated its remaining intangible assets
        at
        September 30, 2004 and determined that no impairment had occurred.
  F-8
  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.
  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.
  Revenue
        from Oztime product contracts recorded in other product revenue is 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.
  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. Future 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 future 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.
  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, 2004,
        2003
        and 2002 as they were anti-dilutive. Common shares held in escrow that are
        subject to future performance level criteria are excluded in the calculation
        of
        loss per share (nil in 2004, 35,000 in 2003, 75,000 in 2002).
  Comprehensive
        loss
  SFAS
        No. 130, “Reporting Comprehensive Income”, establishes standards for the
        reporting and display of comprehensive income and its components in
        general-purpose financial statements. 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.
   F-9
 
  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 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, 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:
     2004
              
              2003
              
              2002(restated
                  - see note 2)
              
              (restated
                  - see note 2)Net
                  loss from continuing operations:
              
              
              
              Restated
                  (1)As
                  reported
              
              $
              (2,388,199
              )
              $
              (2,931,109
              )
              $
              (19,498,425
              )Stock
                  compensation expense
              
              
              (3,901,903
              )
              
              (4,317,459
              )
              
              (6,076,291
              )Pro
                  forma
              
              
              (6,290,102
              )
              
              (7,248,568
              )
              
              (25,574,716
              )Loss
                  from discontinued operations:
              
              
              —
              
              
              —
              
              
              (5,707,850
              )Pro
                  forma net loss:
              
              $
              (6,290,102
              )
              $
              (7,248,568
              )
              $
              (31,282,566
              )Net
                  loss per common share from continuing operations:As
                  reported, basic and diluted
              
              $
              (0.06
              )
              $
              (0.08
              )
              $
              (0.52
              )Stock
                  compensation expense, basic and diluted
              
              
              (0.09
              )
              
              (0.11
              )
              
              (0.16
              )Pro
                  forma, basic and diluted
              
              $
              (0.15
              )
              $
              (0.19
              )
              $
              (0.68
              )Loss
                  per share from discontinued operations
              
              
              —
              
              
              —
              
              
              (0.15
              )Net
                  loss per common share basic and diluted
              
              $
              (0.15
              )
              $
              (0.19
              )
              $
              (0.83
              )Stock
                  options and RSU’s issued during period
              
              
              2,105,500
              
              
              2,342,532
              
              
              306,666Weighted
                  average exercise price
              
              $
              2.27
              
              $
              2.50
              
              $
              5.60Weighted
                  average fair value of stock options granted during the
                  period
              
              $
              1.19
              
              $
              1.39
              
              $
              2.75
  (1)
                      At
                          December 31, 2004, the Company’s stock based compensation expense has been
                          reallocated to better reflect the variety of vesting periods
                          of 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 has restated the 2003 stock compensation
                          expense
                          and appropriate related balances as
                          follows:
 F-10
   2003(restated - see note 2)Pro
                    forma net loss as previously stated
                
                $
                (6,441,613
                )Stock
                    compensation expense as previously stated
                
                
                3,510,504Restatement
                    of stock compensation expense
                
                
                (4,317,459
                )Restated
                    pro forma net loss
                
                $
                (7,248,568
                )Pro
                    forma net loss per share as previously stated, basic and
                    diluted
                
                $
                (0.17
                )Restatement
                    of stock compensation expense, basic and diluted
                
                
                (0.02
                )Restated
                    pro forma net loss per share, basic and diluted
                
                $
                (0.19
                )
 
 
 2004
              
              2003
              
              2002Risk
                  free interest rate
              
              
              3.60
              %
              
              3.80
              %
              
              3.94
              %Expected
                  life in years
              
              
              3.7
              
              
              3.8
              
              
              3.0Expected
                  dividend yield
              
              
              0
              %
              
              0
              %
              
              0
              %Expected
                  volatility
              
              
              52
              %
              
              65
              %
              
              70
              %
   Recent
        accounting pronouncements
  In
        December 2004, FASB issued SFAS No. 123R “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. 123R permits public companies to choose between the following
        two
        adoption methods:
  1.
                  A
                      “modified prospective” method in which compensation cost is recognized
                      beginning with the effective date (a) based on the requirements
                      of SFAS
                      No. 123R for all share-based payments granted after the effective
                      date and
                      (b) based on the requirements of SFAS No. 123 for all awards
                      granted to
                      employees prior to the effective date of SFAS No. 123R that
                      remain
                      unvested on the effective date,
                      or
  2.
              A
                  “modified retrospective” method which includes the requirements of the
                  modified prospective method described above, but also permits entities
                  to
                  restate based on the amounts previously recognized under SFAS No.
                  123 for
                  purposes of pro forma disclosures either (a) all prior periods
                  presented
                  or (b) prior interim periods of the year of
                  adoption.
  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. The impact of the adoption of SFAS No. 123R cannot be predicted
        at this
        time because it will be depend on levels of share-based payments granted
        in the
        future. Accordingly, the adoption of SFAS No. 123R’s fair value method will have
        a significant impact on the Company’s results of operations, although it will
        have no impact on the Company’s overall financial position.
  The
        Company has not yet completed the analysis of the ultimate impact that this
        new
        pronouncement will have on the results of operations, nor the method of adoption
        for this new standard.
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, an amendment of
        ARB No. 43. This statement amends Accounting Research Bulleting (“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.
  F-11
  In
        January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),
“Consolidation of Variable Interest Entities, an Interpretation of ARB No.
        51.”
        FIN 46 requires certain variable interest entities (entities where the equity
        investors in the entity do not have the characteristics of a controlling
        financial interest or do not have sufficient equity at risk for the entity
        to
        finance its activities without additional subordinated financial support
        from
        other parties) to be consolidated by the primary beneficiary of the entity.
        The
        adoption of FIN 46R did not have a material impact upon the Company’s financial
        position, cash flows or results of operations.
  In
        March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus
        on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairments and Its
        Application to Certain Investments.” EITF No. 03-01 provides a three-step
        impairment model for determining whether an investment is other-than-temporarily
        impaired and requires the recognition of such impairments as an impairment
        loss
        equal to the difference between the investment’s cost and fair value at the
        reporting date. The guidance is effective during the first quarter of fiscal
        2005. The Company does not believe that the adoption of EITF No. 03-01 will
        have
        a significant effect on its financial position, results of operations or
        cash
        flows.
  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
        - Magic Lantern Communications Ltd. (“Magic Lantern”)
  Effective
        March 18, 2002, the Company indirectly acquired all of the issued and
        outstanding shares of Magic Lantern. Magic Lantern is a Canadian education
        content provider with two subsidiaries: Tutorbuddy Inc., which is wholly
        owned;
        and Sonoptic Technologies Inc. (“STI”), which is 75 percent owned. The remaining
        25 percent of STI is held by Provincial Holdings Ltd. (“PHL”) and is subject to
        a redemption agreement.
  Magic
        Lantern was acquired for cash consideration of $1,172,667, and 100,000 common
        shares of Zi with a value of $498,549 based on the Company’s closing share price
        on the date of the agreement. Of the Zi common shares issued, 35,000 shares
        were
        placed in escrow subject to future performance obligations. In addition,
        there
        were acquisition costs amounting to $103,903 to effect the business
        combination.
  At
        December 31, 2002, it was determined that the performance obligations attached
        to the 35,000 shares placed in escrow would most likely not be met. These
        escrowed shares were originally included in the determination of the purchase
        price at the purchase date. As a result, the purchase price was adjusted
        by
        $174,492 to reflect the exclusion of the escrowed shares and the resulting
        negative goodwill was allocated to the assets purchased. The purchase price
        was
        allocated as follows:
  Net
                    assets acquired:Bank
                    indebtedness
                
                $
                (21,826
                )Non-cash
                    working capital
                
                
                33,446Notes
                    payable
                
                
                (554,832
                )Capital
                    assets
                
                
                1,029,233Software
                    development costs
                
                
                290,569Distribution
                    agreements
                
                
                824,037$
                1,600,627
  Disposition
            - Magic Lantern Communications Ltd
  On
            November 7, 2002, the Company completed the sale of the 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
            comprise 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 Magic Lantern Group, Inc. (“MLG”).
  Under
            the agreement, Zi received a 45 percent equity interest in MLG, consisting
            of
            29,750,000 shares, and a three-year promissory note of MLG in the amount
            of
            $3,000,000, at the interest rate of 5 percent per annum, due in full
            November 7,
            2005. The note consideration was subject to adjustment based on the MLG’s
            performance for the first year after the sale. The performance criteria
            stipulated under the agreement were not met. The purchase price was reduced
            as
            MLG revenues for the performance period were less than the required $5,000,000.
            As a result of the shortfall, $1,000,000 was offset against the principal
            amount
            of the MLG promissory note reducing it to $2,000,000.
 F-12
  The
            Company accounted for the sale at the date of closing by recognizing
            its
            interest in the net assets of MLG acquired and 55 percent of the promissory
            note
            received, excluding the note’s contingent portion of $1,000,000. The Company’s
            $2,220,687 book value for Magic Lantern at November 7, 2002, consisting
            of
            patents, distribution agreements, capital and current net assets, upon
            closing
            of the transaction resulted in a note receivable and an investment in
            shares, in
            the amount of $2,000,000 and $220,687 respectively, with no gain recognized.
            A
            nominal value has been ascribed to the MLG stock consideration received.
  Net
                    assets disposed:Cash
                
                $
                350,669Non-cash
                    working capital
                
                
                34,451Capital
                    assets
                
                
                1,018,209Deferred
                    development costs
                
                
                548,354Distribution
                    agreements & other
                
                
                774,286Notes
                    payable
                
                
                (505,282
                )$
                2,220,687
  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 was provided for. The Company believes in MLG’s continued
        viability, but MLG is currently under a going concern qualification and subject
        to its ongoing operating cash requirements, continued operating losses and
        other
        debt, to which the Company is subordinate. Due to these factors and the absence
        of private placements originally anticipated by MLG to occur in the fourth
        quarter of 2004, it is probable that MLG will 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.
  4.
                  Discontinued
                      Operations
  Through
        the Company’s discontinued Zi Services business segment, Zi provided specialized
        product development and customized solutions in BluetoothTM, VoIP and man-machine
        interface design to the telecommunications industry.
  On
        June 30, 2002, the Board of Directors of the Company approved the adoption
        of a
        plan to dispose of its Zi Services business segment, the telecom engineering
        division of the Company. Accordingly, the results of operations of these
        businesses were accounted for on a discontinued basis as at June 30, 2002.
        On
        July 1, 2002, the Company announced that it had signed a letter of intent
        to
        sell Zi Services. On October 31, 2002 the letter of intent expired and the
        sale
        was not executed. Management determined that the carrying value of Zi Services,
        consisting of deferred software development costs of $1,965,345, goodwill
        of
        $477,396, capital assets of $32,697 and net current assets of $200,558 were
        no
        longer recoverable. As a result, the Company recognized a charge of $2,675,996
        in 2002. As at December 31, 2002, the Company sold the remaining assets of
        this
        business segment and no longer carries on any related business
        activities.
  Year
                    ended December 31, 2002
                
                (restated - see note 2)Revenue
                
                $
                153,030Operating
                    loss
                
                $
                (5,707,850
                )
 **5.**
                  **Capital Assets**
 
 Cost
                
                Accumulatedamortization
                
                Net
                      book value2004Computer
                    and office equipment
                
                $
                3,041,544
                
                $
                2,188,900
                
                $
                852,644Leasehold
                    improvements
                
                
                527,452
                
                
                292,139
                
                
                235,313$
                3,568,996
                
                $
                2,481,039
                
                $
                1,087,9572003            
                    (restated - see note 2)Computer
                    and office equipment
                
                $
                2,788,800
                
                $
                1,834,204
                
                $
                954,596Leasehold
                    improvements
                
                
                839,049
                
                
                515,890
                
                
                323,159$
                3,627,849
                
                $
                2,350,094
                
                $
                1,277,755
   F-13
  Included
        in computer and office equipment are assets under capital lease totalling
        $494,130 (2003 -$428,489) and related accumulated amortization of $334,052
        (2003
        - $257,654).
  **6.**
              **Intangible
                  Assets**
  Cost
                
                Accumulatedamortization
                
                Net
                      book value2004Patent
                
                $
                547,709
                
                $
                298,155
                
                $
                249,554Software
                    development costs
                
                
                8,281,828
                
                
                6,839,295
                
                
                1,442,533$
                8,829,537
                
                $
                7,137,450
                
                $
                1,692,0872003             (restated
                    - see note 2)Patent
                
                $
                605,234
                
                $
                318,788
                
                $
                286,446Software
                    development costs
                
                
                11,963,682
                
                
                11,662,408
                
                
                301,274Acquired
                    software licenses
                
                
                58,346
                
                
                58,346
                
                
                —$
                12,627,262
                
                $
                12,039,542
                
                $
                587,720
  During
        2004, $1,661,974 (2003- $237,618) of software development costs were deferred
        and are being amortized using the straight-line method over a three-year
        economic life. Amortization in 2004 includes $510,167 and $47,440 of
        amortization of development costs and patents, respectively (2003
        - $861,309 and $59,822, respectively).
  In
        accordance with SFAS No.142, the Company tested for impairment of goodwill
        at
        September 30, 2002, using a projected discounted cash flow model, and recorded
        an impairment charge of $1,258,889 in the year. This charge was in respect
        to
        remaining goodwill associated with the purchase of the Chinese e-Learning
        business, in light of the disposition of a significant portion of its e-Learning
        business segment through the sale of Magic Lantern and limitations for funding
        e-Learning businesses future development and growth.
  Goodwill(restated
                  - see note
                  2)Net
                    book value - December 31, 2001
                
                $
                1,258,889Impairment
                    - September 30, 2002
                
                
                (1,258,889
                )Net
                    book value - December 31, 2002
                
                $
                —
  The
        Company evaluated its other intangible assets at September 30, 2004 and
        determined that no impairment had occurred. The Company had reviewed the
        carrying value of its other intangible assets and determined that the deferred
        software development costs related to the Company’s China based e-Learning
        business at September 30, 2002, using a projected discounted cash flow model,
        were not recoverable in light of limitations for funding its future development
        and growth and recorded a charge of $1,457,405.
  The
        following is the estimated amortization expense of intangible assets for
        each of
        the next five years:
 2005
                
                $
                652,0962006
                
                
                619,6702007
                
                
                320,1412008
                
                
                49,7922009
                
                
                14,396Total
                
                $
                1,656,095
 **7.**
              **Notes
                  Payable**
  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 (4.5
        percent at December 31, 2003) plus one percent payable monthly. The facility
        is
        secured by a first security interest in 5,000,000 shares of MLG, held by
        the
        Company. On July 20, 2004, the Company repaid, in full, this demand note.
        As at
        December 31, 2004, the amount drawn on the facility is nil (December 31,
        2003 -
        $1,000,000) and the facility remains available for the Company’s future
        use.
  On
        December 5, 2002, the Company borrowed $3,300,000 (before deduction for fees
        and
        expenses) through the issuance of a note payable. The note payable, with
        interest at 12 percent per annum and payable monthly, was due March 5, 2003,
        extended to April 30, 2003 and subsequently to May 7, 2003, at which time
        it was
        settled in full. The lender was issued 100,000 share purchase warrants upon
        funding, which were exercisable at one common share to one share purchase
        warrant for a price of CDN$3.62 per share (note 9). A commitment fee of $300,000
        was paid upon funding. The first extension terms included a four percent
        extension fee of $130,800 paid upon funding. The note was secured through
        a
        general security agreement, a limited recourse guarantee by a private company
        owned by an officer of the Company at the time who is also a director of
        the
        Company and a share pledge agreement by the Company which pledged and granted
        a
        first security interest in 29,750,000 shares of MLG, held by the
        Company.
  F-14
  On
        May 7, 2003, the Company entered into a new 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, 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 at the time who is also a director of the Company
        and
        a share pledge agreement by the Company which pledges and granted a first
        security in 29,750,000 shares of MLG, held by the Company.
  **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, 2004 were $25,519 (2003 -
        $25,435). The current portion at December 31, 2004 was $16,445 (2003 -
        $22,095).
  The
        future minimum lease payments under the capital leases are as
        follows:
  2005
                
                $
                19,1972006
                
                
                8,0492007
                
                
                1,813Total
                    minimum lease payments
                
                
                29,059Amount
                    representing interest
                
                
                3,540Amount
                    included in current liabilities
                
                
                16,445$
                9,074
 Inducements
        for leasehold improvements received by the Company upon entering into new
        leases
        as at December 31, 2004 were $138,811 (2003 - $180,170). The current portion
        at
        December 31, 2004 was $55,524 (2003 - $51,477).
  **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, 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 has 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 are exercisable immediately and expire, if unexercised
        two years from the date of issue. At December 31, 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 recognize as part of
        common share issue costs $141,048, calculated by using the Black-Scholes
        option
        pricing model to arrive at net proceeds. 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, 2003, the Company had 0.5 million share purchase warrants
        outstanding. 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, 2004, these 0.5 million 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 2002, the Company allocated $154,065
        which
        represents the equity value of the warrants issued with the debt, calculated
        by
        using the Black-Scholes option pricing model. In June 2003, the Company issued
        100,000 shares through the exercise of these 100,000 share purchase warrants.
  F-15
  Stock
        options and restricted stock units
  At
        December 31, 2004, 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
        2004,
        250,000 (2003 - 162,532) RSU’s were granted and issued without performance
        criteria attached and at no cost to the grantee. At December 31, 2004, 378,571
        (2003 - 128,571) 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 of $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 has 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 11,615,000 common shares for issuance under
        the
        plan of which 500,000 are issuable as RSU’s. At December 31, 2004, the Company
        had 830,652 common shares (87,468 of which are reserved for RSU’s) remaining
        reserved for possible future allocation under the plan.
  Stock
        option and RSU activity and related information for the three years ended
        December 31, 2004 is as follows:
  2004
                
                2003
                
                2002(restated
                    - see note 2)
                
                (restated
                    - see note 2)Shares
                        under options and RSU’s
                
                Weighted
                        average exercise price
                
                Shares
                        under options and RSU’s
                
                Weighted
                        average exercise price
                
                Shares
                      under options
                
                Weighted
                        average exercise priceOutstanding,beginning
                    of year
                
                
                5,474,904
                
                $
                5.18
                
                
                5,135,700
                
                $
                5.65
                
                
                5,874,852
                
                $
                5.92Granted
                
                
                2,105,500
                
                
                2.27
                
                
                2,342,532
                
                
                2.50
                
                
                306,666
                
                
                5.60Exercised
                
                
                (1,143,766
                )
                
                (2.00
                )
                
                (335,627
                )
                
                (2.08
                )
                
                (304,600
                )
                
                (2.37
                )Forfeited
                    or expired
                
                
                (1,524,666
                )
                
                (7.78
                )
                
                (1,667,701
                )
                
                (3.48
                )
                
                (741,218
                )
                
                (9.10
                )Outstanding,
                    end of year
                
                
                4,911,972
                
                $
                4.28
                
                
                5,474,904
                
                $
                5.18
                
                
                5,135,700
                
                $
                5.65Exercisable,
                    end of year
                
                
                4,102,142
                
                $
                4.54
                
                
                4,683,732
                
                $
                5.55
                
                
                4,671,129
                
                $
                5.54Weighted-average
                    fair value of stock options and RSU’s granted during the
                    year
                $
                1.19
                
                
                
                
                $
                1.39
                
                
                
                
                $
                2.75
  The
          following table summarizes the exercise price ranges of outstanding and
          exercisable stock options as of December 31, 2004:
 Total
                                stock options and RSU’s
                                outstanding
                            
                            
                            
                            
                            Stock
                                options and RSU’s exercisableRange
                                of exercise prices
                            
                            
                            Number
                              outstandingDecember 31, 
                              2004
                            
                            
                            Weightedaverage
                              remainingcontractual
                              life
                            
                            
                            Weighted
                              averageexercise price
                            
                            
                            Number
                                exercisable
                                December
                                  31, 2004
                            
                            
                            Weighed
                                average
                                exercise
                                  price$
                                    1.75–$4.16
                            
                            
                            3,643,972
                            
                            
                            3.7
                                years
                            
                            $
                            2.54
                            
                            
                            2,845,642
                            
                            $
                            2.46$
                                    4.33–$8.91
                            
                            
                            513,000
                            
                            
                            1.3
                                years
                            
                            
                            7.80
                            
                            
                            511,500
                            
                            
                            7.81$
                                9.70 –  $12.52
                            
                            
                            755,000
                            
                            
                            1.3
                                years
                            
                            
                            10.28
                            
                            
                            745,000
                            
                            
                            10.25$
                                  1.75 –  $12.52
                            
                            
                            4,911,972
                            
                            
                            3.1
                                years
                            
                            $
                            4.28
                            
                            
                            4,102,142
                            
                            $
                            4.54
 Escrowed
        shares
  Pursuant
        to the acquisition of English Practice Inc. (“EPI”) on June 15, 2000 and to the
        terms of an amended purchase agreement, the Company had placed
        in escrow 40,000 common shares subject to release based upon performance
        obligations. The performance obligations were not met under the terms of
        the
        amended purchase agreement and were subsequently cancelled in 2003. Pursuant
        to
        the acquisition of Magic Lantern (note 3), the Company had placed in escrow
        35,000 common shares 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.
  F-16
  **10.**
              **Equity Interest in Significantly Influenced
                  Company**
  The
        Company holds a 43.6 percent (as calculated from MLG’s Form 10-Q dated November
        10, 2004) interest in MLG, a related party, received upon the disposition
        of the
        Magic Lantern on November 7, 2002 (note 3). The Company’s proportionate share of
        the loss from MLG operations for the year ended December 31, 2004 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 September 30, 2004 is the sum
        of $2,863,000 and will be used to offset the Company’s proportionate share of
        MLG’s future income upon MLG’s return to profitability. At December 31, 2004,
        the Company held 29,750,000 shares of MLG which, at that date’s closing price of
        $0.45 per share, results in a market value of $13,387,500 for this investment.
        This market value may not be representative of the fair value of this
        investment.
  **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:
  2004
                
                2003
                
                2002(restated
                    - see note 2)
                
                (restated
                    - see note 2)Combined
                    basic federal, provincial and state income tax rate
                
                36.6%
                
                39%
                
                39%Expected
                    combined Canadian federal and provincial tax recovery based on
                    above
                    rates
                
                $
                (874,081
                )
                $
                (1,392,979
                )
                $
                9,984,134
                )Enacted
                    tax rate adjustment differences
                
                
                151,862
                
                
                172,549
                
                
                670,307Differences
                    in foreign statutory tax rates
                
                
                149,344
                
                
                (324,918
                )
                
                2,069,983Permanent
                    differences
                
                
                618,992
                
                
                338,079
                
                
                48,661Loss
                    on dissolution of subsidiaries
                
                
                1,159,877
                
                
                —
                
                
                —Impairment
                    of note receivable
                
                
                677,400
                
                
                —
                
                
                —Loss
                    on sale of Zi Services assets
                
                
                —
                
                
                —
                
                
                (871,903
                )Gain
                    on sale of Magic Lantern
                
                
                —
                
                
                —
                
                
                4,566,545Equity
                    loss in significantly influenced company
                
                
                —
                
                
                —
                
                
                85,154Unrecognized
                    recoveries on losses
                
                
                (2,619,798
                )
                
                (1,263,234
                )
                
                (2,389,187
                )Non-deductible
                    goodwill
                
                
                —
                
                
                —
                
                
                770,382Other
                
                
                (15,350
                )
                
                (195,908
                )
                
                (30,724
                )Valuation
                    allowance
                
                
                751,754
                
                
                2,666,411
                
                
                5,064,916Consolidated
                    income tax
                
                $
                —
                
                $
                —
                
                $
                —
 
 The
          components of future income taxes are as follows:
  December
                    31,
                
                2004
                
                2003
                
                2002(restated
                    - see note 2)
                
                (restated
                    - see note 2)Capital
                    assets
                
                $
                102,294
                
                $
                51,629
                
                $
                202,637Software
                    development costs
                
                
                (496,898
                )
                
                (96,645
                )
                
                98,226Patents
                
                
                17,033
                
                
                24,840
                
                
                40,151Share
                    issue costs
                
                
                181,667
                
                
                167,438
                
                
                294,222Other
                
                
                56,858
                
                
                8,801
                
                
                35,380Loss
                    carryforwards
                
                
                18,997,435
                
                
                14,353,867
                
                
                13,710,621Valuation
                    allowance
                
                
                (18,858,389
                )
                
                (14,509,930
                )
                
                (14,381,237
                )Net
                    future income tax asset
                
                $
                —
                
                $
                —
                
                $
                —
 The
        Company provided a full valuation allowance against the future 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.
  F-17
  At
        December 31, 2004, the Company and its subsidiaries (“the Group”) have
        non-capital losses of $26,215,758 and net capital losses of $5,490,077 which
        are
        available to reduce Canadian taxable income in future years.
  In
        China, our Zi Technology related subsidiary, Huayu Zi Software Technology
        (Beijing) Co. Ltd has taxable income in excess of loss carryforwards from
        prior
        years. The Company is applying for tax holidays with Chinese tax authorities
        that more than likely will result in no tax due for the years 2004 and 2005
        and
        50 percent of tax payable for the years 2006, 2007 and 2008. The amount of
        tax
        that would otherwise be payable in 2004 is $166,871 and has not been accrued.
  Operating
        loss carryforwards for each of the countries listed below will expire as
        follows:
 Year
                      of expiry
                  Canadian
                        non-capital losses2005
                  $
                  436,3452006
                  $
                  132,3712007
                  $
                  1,319,7792008
                  $
                  615,0282009
                  $
                  3,941,9292010
                  $
                  11,499,4032011
                  $
                  4,406,0472012
                  $
                  3,864,856Total
                  $
                  26,215,758Year
                      of expiry(Federal)
                  
                  US
                    non-operating losses2017
                  $
                  720,5532018
                  $
                  225,9662019
                  $
                  255,2002020
                  $
                  2,171,1802021
                  $
                  1,468,3552022
                  $
                  —2023
                  $
                  572,8192024
                  
                  5,747Total
                  
                  5,419,820
   Year
                      of
                      expiry(California)
                    US
                        non-operating
                      losses2010
                    $
                    1,194,1492011
                    $
                    807,5952012
                    $
                    —2013
                    $
                    343,6912014
                    $
                    5,747Total
                    $
                    2,351,182Year
                      of expiry
                    China
                      operating losses2007
                    $
                    565,2092008
                    $
                    1,634,7522009
                    $
                    777,8782010
                    $
                    2,487,927Total
                    $
                    5,465,766
  The
        Group also has non-capital losses for Hong Kong tax purposes of $34,013,846.
        These losses may be carried forward indefinitely.
  F-18
  **12.**
              **Contingent
                  Liabilities**
  On
        December 4, 2003, the Company commenced action against Morrison & Foerster
        LLP (“MoFo”) in the Superior Court of the State of California, County of San
        Francisco claiming (i) professional negligence based on MoFo's failure to
        exercise reasonable care, skill and diligence in representing the Company
        in the
        defense of Asian Communication Pty Ltd and Tegic Communications Inc. (“Tegic”)
        v. Zi Corporation and Zi Corporation of America, Inc. (a patent infringement
        lawsuit) and (ii) reimbursement of the payments made to MoFo in connection
        with
        the defense of this lawsuit, which payments are alleged to exceed the reasonable
        value of MoFo's services and costs advanced. MoFo has filed, as part of its
        defence to the Company's action, a cross complaint against the Company for
        unpaid legal fees and costs. Although the Company believes that it will prevail
        in this action, in 2002, the Company accrued $1,061,617 representing the
        previously billed fees and costs. Accordingly, the Company believes that
        any
        further exposure from this action is limited to accrued interest and
        costs.
  The
        $9 million damages judgement awarded to Tegic was settled pursuant to a written
        settlement agreement with AOL Time Warner dated December 6, 2002 and a consent
        judgement dated December 20, 2002. Settlement costs were included as part
        of
        legal and litigation costs and as at December 31, 2003 was $0.75 million,
        which
        was paid on January 2, 2004 to AOL.
  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:
  2004
                
                2003
                
                2002(restated
                    - see note 2)
                
                (restated
                    - see note 2)Legal
                    services provided by two law firms in which a director is and
                    was a
                    partner
                
                $
                125,708
                
                $
                110,373
                
                $
                145,567Due
                    from significantly influenced company
                
                $
                10,442
                
                $
                33,187
                
                $
                —Consulting
                    fees paid to a firm owned by a director
                
                $
                30,000
                
                $
                120,000
                
                $
                120,000Consulting
                    fees paid to a firm owned by an officer
                
                $
                46,067
                
                $
                26,136
                
                $
                4,539
 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.
  At
        the year-end, the amounts due from (to) related parties are as
        follows:
  2004
                
                2003
                
                2002(restated
                  - see note 2)
                
                (restated
                  - see note 2)Due
                    to law firm in which a director is a partner
                
                $
                (5,338
                )
                $
                (411
                )
                $
                (15,250
                )Due
                    from significantly influenced company
                
                $
                43,629
                
                $
                33,187
                
                $
                —Due
                    to companies owned by a director or officer
                
                $
                —
                
                $
                (10,000
                )
                $
                (10,000
                )
  In
            2002, a private company owned by an officer, who is also a director of
            the
            Company, guaranteed the note payable by the Company through a limited
            recourse
            guarantee and share pledge agreement (note 7).
  On
            November 7, 2002, the Company completed the sale of Magic Lantern to
            JKC Inc., a
            related party (note 3). The companies are related through a common significant
            shareholder.
  **14.**
                  **Commitments
                      and Guarantees**
 
 The
            Company rents premises and equipment under operating leases, which expire
            at
            various dates up to June 2007. The Company recorded rent expense for
            2004 of
            $480,575 (2003 - $747,023; 2002 - $1,274,582).
 Annual
                  rentals under
                  these leases for each of the next five years are as
                  follows:2005
                
                $
                618,6802006
                
                
                538,4072007
                
                
                194,7112008
                
                
                —2009
                
                
                —Total
                
                $
                1,351,798
   F-19
  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 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.
  **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
        Technology’s core technology product, eZiText, is a predictive text input
        solution that predicts words and/or phrases for use in messaging and other
        text
        applications in over 48 languages and dialects. By offering word candidates
        as
        text is being entered, eZiText increases the ease, speed and accuracy of
        text
        input on any electronic device for applications such as short messaging,
        e-mail,
        e-commerce and Web browsing. Revenues are reported under the contracting
        Zi
        subsidiary’s country of residence.
  Through
        its e-Learning business segment which includes Oztime, English Practice and
        an
        equity interest in Magic Lantern Group, Inc., 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.
  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 geographic segments through three reportable business
        segments:
 Revenue
                        
                        
                        
                        
                        
                        Operating
                          profit(loss), beforeLicense
                          and implementation fees
                        
                        Software
                          and
                            other
                        
                        Total
                        
                        Amortization
                        
                        Other
                          operatingexpenses
                        
                        interest
                          andother income2004Zi
                            Technology
                        
                        $
                        12,898,838
                        
                        $
                        —
                        
                        $
                        12,898,838
                        
                        $
                        709,064
                        
                        $
                        7,915,192
                        
                        $
                        4,274,582e-Learning
                        
                        
                        —
                        
                        
                        504,213
                        
                        
                        504,213
                        
                        
                        24,646
                        
                        
                        3,223,272
                        
                        
                        (2,743,705
                        )Other
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        193,176
                        
                        
                        3,798,053
                        
                        
                        (3,991,229
                        )Total
                        
                        $
                        12,898,838
                        
                        $
                        504,213
                        
                        $
                        13,403,051
                        
                        $
                        926,886
                        
                        $
                        14,936,517
                        
                        $
                        (2,460,352
                        )Interest
                            expense and interest and other income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        72,153Loss
                            from continuing operations before income taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (
                            2,388,199
                        )2003 
                            (restated - see note 2)Zi
                            Technology
                        
                        $
                        9,918,998
                        
                        $
                        —
                        
                        $
                        9,918,998
                        
                        $
                        1,124,047
                        
                        $
                        6,928,139
                        
                        $
                        1,866,812e-Learning
                        
                        
                        —
                        
                        
                        684,070
                        
                        
                        684,070
                        
                        
                        75,042
                        
                        
                        1,400,830
                        
                        
                        (791,802
                        )Other
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        181,176
                        
                        
                        3,229,712
                        
                        
                        (3,410,888
                        )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
                            from continuing operations before income taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (2,931,109
                        )2002 
                            (restated - see note 2)Zi
                            Technology
                        
                        $
                        6,480,938
                        
                        $
                        —
                        
                        $
                        6,480,938
                        
                        $
                        1,642,053
                        
                        $
                        5,474,457
                        
                        $
                        (635,572
                        )e-Learning
                        
                        
                        —
                        
                        
                        1,935,309
                        
                        
                        1,935,309
                        
                        
                        449,630
                        
                        
                        8,429,007
                        
                        
                        (6,943,328
                        )Other
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        134,889
                        
                        
                        11,752,406
                        
                        
                        (11,887,295
                        )Total
                        
                        $
                        6,480,938
                        
                        $
                        1,935,309
                        
                        $
                        8,416,247
                        
                        $
                        2,226,572
                        
                        $
                        25,655,870
                        
                        $
                        (19,466,195
                        )Interest
                            expense and interest and other income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (32,230
                        )Loss
                            from continuing operations before income taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (19,498,425
                        )
  F-20
  2004
                          
                          
                          
                          
                          
                          
                          
                          
                          2003(restated
                              - see note
                              2)Capital
                              assets
                          
                          
                          Other
                              assets
                          
                          
                          Identifiableassets
                          
                          
                          Capital
                              assets
                          
                          
                          Other
                              assets
                          
                          
                          IdentifiableassetsZi
                              Technology
                          
                          $
                          2,092,519
                          
                          $
                          6,375,647
                          
                          $
                          8,468,166
                          
                          $
                          1,057,310
                          
                          $
                          4,424,208
                          
                          $
                          5,481,518e-Learning
                          
                          
                          30,879
                          
                          
                          1,016,799
                          
                          
                          1,047,678
                          
                          
                          92,664
                          
                          
                          559,467
                          
                          
                          652,131Other
                          
                          
                          656,646
                          
                          
                          11,526,381
                          
                          
                          12,183,027
                          
                          
                          715,501
                          
                          
                          3,836,428
                          
                          
                          4,551,929Total
                          
                          $
                          2,780,044
                          
                          $
                          18,918,827
                          
                          $
                          21,698,871
                          
                          $
                          1,865,475
                          
                          $
                          8,820,103
                          
                          $
                          10,685,578
  The
        investment in significantly influenced subsidiary and its associated 2002
        equity
        loss of $220,687 have been included as part of the e-Learning business segment
        and as part of the Canadian geographic segment (note 10). Other includes
        non-cash compensation expense related to issuance of non-employee stock options
        and RSU’s in 2004 of $1,371,398 (2003 - $516,354; 2002 - $nil) and non-cash
        interest expense of $nil (2003 - $95,344; 2002 - $nil). All additions to
        software development costs of $1,661,974 in 2004 (2003 - $237,618) are part
        of
        Zi Technology operations.
  Revenue
                    
                    
                    
                    
                    
                    Operating
                      profit
                      (loss),
                        beforeLicense
                      and implementation fees
                    
                    Software
                      and other
                    
                    Total
                    
                    Amortization
                    
                    Other
                      operatingexpenses
                    
                    interest
                      andother income2004Canada
                    
                    $
                    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
                    
                    
                    1,721,412USA
                    
                    
                    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
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    72,153Loss
                        from continuing operations before income taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (
                        2,388,199
                    )2003 
                        (restated - see note 2)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
                    
                    
                    18,642USA
                    
                    
                    2,808,369
                    
                    
                    —
                    
                    
                    2,808,369
                    
                    
                    34,689
                    
                    
                    2,031,146
                    
                    
                    742,534Other
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    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
                        from continuing operations before income taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (2,931,109
                    )2002 
                        (restated - see note 2)Canada
                    
                    $
                    2,315,344
                    
                    $
                    1,638,898
                    
                    $
                    3,954,242
                    
                    $
                    1,477,856
                    
                    $
                    15,463,984
                    
                    $
                    (12,987,598
                    )China
                    
                    
                    1,368,614
                    
                    
                    296,411
                    
                    
                    1,665,025
                    
                    
                    707,468
                    
                    
                    7,093,291
                    
                    
                    (6,135,734
                    )USA
                    
                    
                    2,796,980
                    
                    
                    —
                    
                    
                    2,796,980
                    
                    
                    25,059
                    
                    
                    2,575,327
                    
                    
                    196,594Other
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    16,189
                    
                    
                    523,268
                    
                    
                    (539,457
                    )Total
                    
                    $
                    6,480,938
                    
                    $
                    1,935,309
                    
                    $
                    8,416,247
                    
                    $
                    2,226,572
                    
                    $
                    25,655,870
                    
                    $
                    (19,466,195
                    )Interest
                        expense and interest and other income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (32,230
                    )Loss
                        from continuing operations before income taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (19,498,425
                    )
  F-21
   2004
                        
                        
                        
                        2003(restated
                            - see note 2)Capital
                            assets
                        
                        Other
                            assets
                        
                        Identifiableassets
                        
                        Capital
                            assets
                        
                        Other
                            assets
                        
                        Identifiable
                            assetsCanada
                        
                        $
                        2,408,257
                        
                        $
                        15,920,950
                        
                        $
                        18,329,207
                        
                        $
                        1,354,833
                        
                        $
                        5,534,387
                        
                        $
                        6,889,220China
                        
                        
                        213,375
                        
                        
                        2,215,414
                        
                        
                        2,428,789
                        
                        
                        330,534
                        
                        
                        2,548,453
                        
                        
                        2,878,987USA
                        
                        
                        50,441
                        
                        
                        750,474
                        
                        
                        800,915
                        
                        
                        57,740
                        
                        
                        706,897
                        
                        
                        764,637Other
                        
                        
                        107,971
                        
                        
                        31,989
                        
                        
                        139,960
                        
                        
                        122,368
                        
                        
                        30,366
                        
                        
                        152,734Total
                        
                        $
                        2,780,044
                        
                        $
                        18,918,827
                        
                        $
                        21,698,871
                        
                        $
                        1,865,475
                        
                        $
                        8,820,103
                        
                        $
                        10,685,578
 In
        2004, two Zi Technology customers accounted 34 percent or $4,587,871 (2003
        - 26
        percent or $2,719,936; 2002 - 25 percent or $2,135,960) of the Company’s total
        revenue. Canada includes non-cash compensation expense related to issuance
        of
        non-employee stock options and RSU’s in 2004 of $1,371,398 (2003 - $516,354;
        2002 - $nil) and non-cash interest expense of $nil (2003 - $95,344; 2002
        -
        $nil). All additions to software development costs of $1,661,974 in 2004
        (2003 -
        $237,618) are part of Canadian operations.
   **16.**
              **Canadian Generally Accepted Accounting
                  Principles**
  The
        consolidated financial statements, prepared in accordance with US 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 the 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 Ltd. (“Oztime”) 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. US GAAP does not allow for
        such
        restatement. This reclassification has no effect on net shareholders’ equity as
        at December 31, 2002, 2003 and 2004.
  Shares
        outstanding used to compute per share figures under Canadian GAAP are as
        follows:
 2004
                
                2003
                
                2002Weighted
                    average number of shares
                
                
                41,373,309
                
                
                38,719,786
                
                
                37,767,000
 Foreign
        currency translation
  Under
        Canadian GAAP, the Company, on a consolidated basis, is required, for the
        years
        ended December 31, 2002, 2003 and 2004, to translate the accounts of its
        subsidiaries to US dollars using the temporal method. The accounts of the
        Company’s integrated operations in foreign subsidiaries are translated into US
        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 US GAAP.
  F-22
  Consolidated
        statement of loss
  The
        application of Canadian GAAP would have the following effects on net loss
        as
        reported:
  2004
                
                2003
                
                2002(restated
                  - see note 2)
                
                (restated
                  - see note 2)Restated
                    (2)Net
                    loss from continuing operations as reported in accordance with
                    US
                    GAAP
                
                $
                (2,388,199
                )
                $
                (2,931,109
                )
                $
                (19,498,425
                )Adjustments:Start-up
                    costs amortization
                
                
                —
                
                
                —
                
                
                (116,322
                )Fair
                    value of stock options issued
                
                
                (1,624,153
                )
                
                (1,679,224
                )
                
                —Foreign
                    exchange gain
                
                
                275,834
                
                
                162,453
                
                
                158,641Total
                    adjustments
                
                
                (1,348,319
                )
                
                (1,516,771
                )
                
                42,319Net
                    loss from continuing operations under Canadian GAAP
                
                $
                (3,736,518
                )
                $
                (4,447,880
                )
                $
                (19,456,106
                )Loss
                    from discontinued operations
                
                
                —
                
                
                —
                
                
                (5,707,850
                )Net
                    loss under Canadian GAAP
                
                $
                (3,736,518
                )
                $
                (4,447,880
                )
                $
                (25,163,956
                )Loss
                    from continuing operations per share under Canadian GAAP, basic
                    and
                    diluted
                
                $
                (0.09
                )
                $
                (0.12
                )
                $
                (0.52
                )Loss
                    from discontinued operations per share under Canadian GAAP
                
                
                —
                
                
                —
                
                
                (0.15
                )Loss
                    per share under Canadian GAAP, basic and diluted
                
                $
                (0.09
                )
                $
                (0.12
                )
                $
                (0.67
                )
  (2)
              At
                  December 31, 2004, the Company’s stock based compensation expense has been
                  reallocated to better reflect the variety of vesting periods of
                  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 has restated the 2003 stock compensation
                  expense
                  and appropriate related balances as
                  follows:
  2003(restated
                  - see note
                  2)Net
                    loss as previously stated
                
                $
                (5,021,508
                )Fair
                    value of stock options issued as previously stated
                
                
                2,252,852Restatement
                    of stock compensation expense
                
                
                (1,679,224
                )Restated
                    net loss
                
                $
                (4,447,880
                )Net
                    loss per share as previously stated, basic and diluted
                
                $
                (0.13
                )Restatement
                    of stock compensation expense, basic and diluted
                
                
                0.01Restated
                    net loss per share, basic and diluted
                
                $
                (0.12
                )
  Stock-based
        compensation
  Effective
        January 1, 2002, under Canadian GAAP, the Company was required to adopted
        Section 3870, “Stock-based Compensation and Other Stock-based Payments”, which
        recommends that awards to employees be valued using the fair value method
        of
        accounting. These rules also require that companies account for stock
        appreciation rights (“SARs”) and similar awards to be settled in cash or other
        assets, by measuring compensation expense on an ongoing basis, as the amount
        by
        which the quoted market price exceeds the exercise price at each measurement
        date.
  The
        Company has a stock-based compensation plan, which is described in note 9.
        Under
        Canadian GAAP, 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.
  Under
        the Canadian Institute of Chartered Accountants’ (“CICA’s) Handbook section
        3870, companies that elect a method other than the fair value method of
        accounting are required to disclose pro forma net income and earnings per
        share
        information, using a pricing model such as the Black-Scholes model, as if
        the
        fair value method of accounting had been used. These new rules do not apply
        to
        pre-existing awards except for those awards that call for settlement in cash
        or
        other assets.
  In
        September 2003, the CICA issued an amendment to CICA Handbook Section 3870
        “Stock-Based Compensation and Other Stock-Based Payments”. The amendment
        provides two alternative methods of transition to the fair-value method of
        accounting for stock-based employee compensation - prospective and retroactive
        methods. The Canadian amendment only applies to voluntary transitions before
        January 1, 2004. The Company adopted the fair-value method of accounting
        for
        stock options in the fourth quarter of 2003. The Company has adopted the
        fair-value based method prospectively, whereby compensation cost is recognized
        for all options granted on or after January 1, 2003.
  Under
        the fair value method, the pro forma effect on the Company’s net loss and net
        loss per share in 2002 is as follows:
  Compensation
                    Costs
                Year
                    ended December 31, 2002(restated
                    - see note
                    2)Net
                    loss under Canadian GAAP:
                
                $
                (25,163,956
                )Add:
                    Stock option expense
                
                
                (383,162
                )Net
                    loss under Canadian GAAP, pro forma
                
                $
                (25,547,118
                )Basic
                    net loss per share and pro forma
                
                $
                (0.68
                )
   F-23
  Consolidated
        balance sheets
  The
        application of Canadian GAAP would have the following effects on balance
        sheet
        items as reported:
  SHAREHOLDERS’
                    EQUITY
                
                2004
                
                2003
                
                2002(restated
                  - see note
                  2)
                
                (restated
                  - see note
                  2)Restated
                    (3)Shareholders’
                    equity under Canadian GAAP, beginning of year
                
                $
                2,601,869
                
                $
                3,654,888
                
                $
                27,619,818Share
                    capital issued and contributed surplus
                
                
                13,580,428
                
                
                3,394,861
                
                
                1,199,026Net
                    loss from continuing operations under US GAAP
                
                
                (2,388,199
                )
                
                (2,931,109
                )
                
                (19,498,425
                )Net
                    loss from discontinued operations under US GAAP
                
                
                —
                
                
                —
                
                
                (5,707,850
                )Adjustments
                    to net loss for the year under Canadian GAAP
                
                
                (1,348,319
                )
                
                (1,516,771
                )
                
                42,319Shareholders’
                    equity under Canadian GAAP, end of year
                
                $
                12,445,779
                
                $
                2,601,869
                
                $
                3,654,888
 (3)
              Per
                  discussion in footnote (2) above, 2003 Shareholders equity under
                  Canadian
                  GAAP has been restated from $2,028,241 to
                  $2,601,869.
  Canadian
        GAAP Comparative Consolidated Financial Statements
  The
        following financial statements for the years ended December 31, 2002 are
        as
        previously disclosed in accordance with Canadian GAAP and in Canadian
        dollars.
  CONSOLIDATED
          STATEMENTS OF LOSS AND DEFICIT
  Year
                    ended December 31
                
                2002RevenueLicense
                    and implementation fees
                
                $
                10,166,562Other
                    product revenue
                
                
                3,037,03513,203,597Cost
                    of salesLicense
                    and implementation fees
                
                
                394,749Other
                
                
                1,233,3121,628,061Gross
                    margin
                
                
                11,575,536Operating
                    expensesSelling
                    general and administrative
                
                
                (17,849,562
                )Litigation
                    and legal
                
                
                (11,794,981
                )Product
                    research and development
                
                
                (4,365,803
                )Depreciation
                    and amortization
                
                
                (3,879,913
                )Impairment
                    of goodwill
                
                
                (1,976,908
                )Impairment
                    of intangible assets
                
                
                (2,424,694
                )Foreign
                    exchange gain
                
                
                42,088Operating
                    loss before undernoted
                
                
                (30,674,237
                )Interest
                    on long term debt
                
                
                (139,046
                )Other
                    interest
                
                
                (439,765
                )Interest
                    income and other income
                
                
                286,429Equity
                    interest in loss of significantly influenced company
                
                
                (343,402
                )Loss
                    from continuing operations before income taxes
                
                
                (31,310,021
                )Income
                    taxes
                
                
                —Loss
                    from continuing operations
                
                
                (31,310,021
                )Discontinued
                    operationsLoss
                    from discontinued operations
                
                
                (9,077,079
                )Net
                    loss
                
                
                (40,387,100
                )Deficit,
                    beginning of year
                
                
                (50,994,973
                )Deficit,
                    end of year
                
                $
                (91,382,073
                )Basic
                    and diluted loss from continuing operations per share
                
                $
                (0.83
                )Loss
                    from discontinued operations per share
                
                
                (0.24
                )Basic
                    and diluted loss per share
                
                $
                (1.07
                )Weighted
                    average common shares
                
                
                37,767,000Common
                    shares outstanding, end of period
                
                
                37,914,250
 
  F-24
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS  Year
                    ended December 31
                
                2002Operating
                    activities:Net
                    loss
                
                $
                (31,310,021
                )Items
                    not affecting cash:Loss
                    (gain) on dispositions of capital assets
                
                
                330,194Depreciation
                    and amortization
                
                
                3,879,913Impairment
                    of goodwill
                
                
                1,976,908Impairment
                    of intangible assets
                
                
                2,424,694Interest
                    expense
                
                
                240,573Equity
                    in net loss of significantly influenced company
                
                
                343,402Funds
                    applied to operations
                
                
                (22,114,337
                )Decrease
                    in non-cash working capital
                
                
                1,896,595Cash
                    flow applied to operations
                
                
                (20,217,742
                )Financing
                    activities:Proceeds
                    from issuance of common shares
                
                
                1,117,446Issuance
                    of note payable
                
                
                5,127,910Payment
                    of capital lease obligations
                
                
                (143,080
                )6,102,276Investing
                    activities:Short-term
                    investments
                
                
                8,577,503Purchase
                    of capital assets
                
                
                (1,060,012
                )Proceeds
                    from capital dispositions
                
                
                50,964Software
                    development costs
                
                
                (978,161
                )Other
                    deferred costs
                
                
                (60,000
                )Acquisition
                    of subsidiaries net of bank indebtedness
                
                
                (1,884,433
                )Sale
                    of subsidiary net of cash given up
                
                
                (548,461
                )4,097,400Discontinued
                    operations
                
                
                (3,730,127
                )Net
                    cash (outflow) inflow
                
                
                (13,748,193
                )Cash
                    and cash equivalents, beginning of year
                
                
                19,090,964Cash
                    and cash equivalents, end of year
                
                $
                5,342,771Non
                    cash financing activityEquipment
                    acquired under capital lease
                
                $
                34,200Patent
                    acquired through share issuance
                
                $
                —Acquisition
                    of subsidiary
                
                $
                513,500Components
                    of cash and cash equivalentsCash
                
                $
                5,342,771Cash
                    equivalents
                
                $
                —Supplemental
                    cash flow informationCash
                    paid for interest
                
                $
                136,888Cash
                    paid for income taxes
                
                $
                —
  F-25
  New
        accounting standards
  The
        following guidelines issued by the CICA did not or are not expected to impact
        the Company:
  In
        late 2003, the of the CICA issued EIC-141, “Revenue Recognition”, EIC-142,
“Revenue Arrangements with Multiple Deliverables” and EIC-143, “Accounting for
        Separately Priced Extended Warranty and Product Maintenance Contracts”. The EIC
        guidelines provide interpretive guidance for applying the standards in Section
        3400 Revenue of the CICA Handbook and bring Canadian standards in line with
        U.S.
        standards. The new guidance had no impact on the Company as we report under
        US
        GAAP already.
  During
        2004, we adopted the new CICA Handbook sections 1100, “Generally Accepted
        Accounting Principles”, and 1400, “General Standards of Financial Statement
        Presentation”. These sections outline standards for fair presentation in
        financial reporting and describe what constitutes Canadian GAAP and its sources.
        The adoption of these standards had no significant impact on the Company’s
        consolidated financial statements.
  Section
        3063, “Impairment of Long-lived Assets” of the CICA Handbook became effective
        for our 2004 fiscal year. The standard provides guidance on recognizing,
        measuring and disclosing the impairment of long-lived assets and replaces
        the
        previous standard for write-downs of property, plant and equipment. The adoption
        of the standard had no significant impact to the Company.
  Section
        3461, “Employee Future Benefits” of the CICA handbook was amended in 2004 to
        require greater disclosure with respect to employer’s pension plans and other
        employer future benefit plans. The amendments to this standard do not include
        any changes to any of the recognition or measurement requirements. The adoption
        of these standards had no significant impact on the Company’s consolidated
        financial statements.
  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 variable interest
        entities (“VIE’s”). The new guidance had no impact on the Company as we report
        under US 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
              
              2004
              
              2003(restated
                - see note
                2)Trade
                  accounts payable
              
              $
              545,228
              
              $
              442,788Litigation
                  and legal
              
              
              1,120,130
              
              
              2,037,644Compensation
              
              
              1,011,397
              
              
              1,118,735Other
                  accrued liabilities
              
              
              404,525
              
              
              500,140Total
              
              $
              3,081,280
              
              $
              4,099,307
   F-26
  Non-cash
        working capital
  The
        following balances are included as part of
        non-cash working capital:
  Non-cash
                    working capital
                
                2004
                
                2003
                
                2002(restated
                  - see note 2)
                
                (restated
                  - see note 2)Accounts
                    receivable
                
                $
                (1,561,047
                )
                $
                (1,213,608
                )
                $
                (1,123,702
                )Work-in-progress
                    and inventory
                
                
                —
                
                
                97,455
                
                
                151,085Prepayments
                    and deposits
                
                
                (15,227
                )
                
                303,880
                
                
                (117,147
                )Accounts
                    payable and accrued liabilities
                
                
                (1,018,027
                )
                
                (151,974
                )
                
                2,271,409Deferred
                    revenue
                
                
                1,604,532
                
                
                593,639
                
                
                20,494(Decrease)
                    increase in non-cash working capital
                
                $
                (989,769
                )
                $
                (370,608
                )
                $
                1,202,139
 Loss
        per share
  In
        2004, anti-dilutive stock options, RSU’s, warrants and performance based
        escrowed shares of 6,374,836 have been excluded in the calculation of diluted
        loss per share (2003 - 6,014,904; 2002 - 5,310,700).
   **18.**
              **Reclassifications**
  Certain
        amounts have been reclassified to conform with the presentation adopted in
        the
        current year.
  **19.**
              **Subsequent
                  Events**
  In
        January 2005, the Company purchased the assets of Decuma AB (“Decuma”), a
        Swedish company specializing in developing and marketing handwriting recognition
        software. As part of the acquisition, the Company acquired Decuma’s intellectual
        property and customer agreements. The purchase price included 146,929 common
        shares with a value of $1.0 million and cash consideration of $175,254 less
        direct costs of the purchase.
  The
        estimated purchase price is allocated as follows:
  Net
                    assets acquired:Non-cash
                    working capital
                
                $
                (15,451
                )Capital
                    assets
                
                
                50,201Patents
                    and trademarks
                
                
                896,120$
                930,870
  F-27
  **REPORT
        OF INDEPENDENT REGISTERED CHARTERED** **ACCOUNTANT**
  
 
 To
        the Shareholders of Zi Corporation
 
 
 We
        have audited the consolidated financial statements of Zi Corporation (the ''Company'')
        as of December 31, 2004 and 2003, and for each of the three years in
        the period ended December 31, 2004, and have issued our reports thereon dated
        March
        11, 2005; such financial statements and reports are included in the 2004
        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, present fairly, in all material respects, the
        information set forth therein.
  
  (signed)
        “Deloitte & Touche LLP”
 
  Independent
        Registered Chartered Accountants
 Calgary,
        Alberta, Canada
 March
        11, 2005
 
  **Schedule
        11 - Valuation and Qualifying Accounts**
  Balance
                      at Beginning of Year
                  
                  Charged
                      to Costsand
                      Expenses
                  
                  Balance
                      atDeductions
                  
                  End
                      of YearAllowance
                      for Doubtful AccountsYear
                      Ended December 31, 2004
                  
                  $
                  507,
                      640
                  
                  $
                  68,844
                  
                  $
                  422,376
                  
                  $
                  154,108Year
                      Ended December 31, 2003
                  
                  $
                  247,062
                  
                  $
                  260,578
                  
                  
                  
                  
                  $
                  507,640Year
                      Ended December 31, 2002
                  
                  $
                  —
                  
                  $
                  247,062
                  
                  $
                  —
                  
                  $
                  247,062


F-28