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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)

£

OR

QANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For the fiscal year ended December 31, 2007

OR

£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

OR

£SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Date of event requiring this shell
company report...................

For the transition period from ___________________________ 
to _______________________

Commission file number 000-24018

|ZI CORPORATION                                                                                                
|--------------------------------------------------------------------------------------------------------------
|(Exact name of Registrant as specified
    in its charter) N/A (Translation of Registrants name into English)
|                                                                                                              
|Alberta, Canada                                                                                               
|(Jurisdiction of incorporation or
    organization)                                                           
|                                                                                                              
|2100, 840 - 7th Avenue
    S.W., Calgary, Alberta T2P 3G2                                                     
|(Address of principal executive
    offices)                                                                  
|                                                                                                              
|Securities registered
    or to be registered pursuant to Section 12(b) of the Act.                           

|                                                                                    |                            
|----------------------------------------------------------------------------------- | ---------------------------
|                                                                                    | Title of each class        
|                                                                                    | Common Shares, no par value
|                                                                                    |                            
|Securities
    registered or to be registered pursuant to Section 12(g) of the Act.
|                                                                                    |                            
|None                                                                               
|(Title of Class)                                                                   

SEC 1852 (03-07)

1

---

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

|None            
|----------------
|(Title of Class)

Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of December 31, 2007.

|50,557,957
|----------

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

£YesQNo

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

£  Yes            
Q  No

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

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

Q  Yes            
£  No

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

Large accelerated filer £            
Accelerated filer  £            
Non-accelerated filer Q

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

£
Item 17            
Q Item 18

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

£  Yes            
Q  No

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

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

£ 
Yes            
£  No

2

---

TABLE OF CONTENTS

|                                                                  |   
|----------------------------------------------------------------- | --
|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.                                       | 8 
|Currency and Exchange Rates                                       | 9 
|B. Capitalization and indebtedness.                               | 10
|C. Reasons for the offer and use of
    proceeds.                 | 10
|D. Risk factors.                                                  | 10
|Item 4 -Information on the Company                                | 19
|A. History and Development of the Company                         | 19
|Acquisition and Development of Input Technology                   | 20
|Acquisition and Divestiture of Archer Education
    Group Inc.    | 20
|Acquisition of Assets of Decuma AB                                | 21
|Intellectual Property Litigation                                  | 21
|Dispositions and Discontinued Operations                          | 22
|Acquisition of Zi Shares by the Lancer Funds                      | 22
|Principal Capital Expenditures and Divestiture                    | 24
|B. Business overview.                                             | 24
|Zi in General                                                     | 24
|Zi Technology Business Unit                                       | 24
|Description of eZiText and eZiType                                | 24
|Licensing of eZiText                                              | 26
|Description of Qix                                                | 26
|Description of Decuma Handwriting Recognition
    Solutions       | 27
|Geographic Segments                                               | 27
|C. Organizational Structure                                       | 28
|D. Property, plants and equipment.                                | 28
|Item 4A. Unresolved Staff Comments                                | 29
|Item 5. Operating and Financial Review and
    Prospects          | 29
|A. Operating results.                                             | 29
|Overview                                                          | 29
|Recent Developments:                                              | 31
|Critical Accounting Policies and Estimates                        | 32
|Principle of Consolidation                                        | 33
|Software Development Costs                                        | 33
|Revenue Recognition                                               | 33
|Stock-Based Compensation Plan                                     | 33
|Contingencies                                                     | 34
|Accounting for Income Taxes                                       | 34
|Recent accounting pronouncements                                  | 34
|Quarterly Overview                                                | 35
|Operating Results                                                 | 37
|Net Loss                                                          | 37

3

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|Revenue                                                                                                                                    | 37
|------------------------------------------------------------------------------------------------------------------------------------------ | --
|Selling, General and Administrative Expenses                                                                                               | 39
|Business taxes                                                                                                                             | 40
|Legal                                                                                                                                      | 40
|Product Research and Development Expense                                                                                                   | 41
|Depreciation and Amortization                                                                                                              | 42
|Interest and Other Income                                                                                                                  | 42
|Income Tax Expense                                                                                                                         | 42
|Discontinued Operations                                                                                                                    | 43
|Impact of Inflation and Changing Prices                                                                                                    | 43
|Impact of Governmental Policies and Other
    Factors on Operations and Investments                                                        | 44
|B. Liquidity and capital resources.                                                                                                        | 44
|Financial Condition and Liquidity                                                                                                          | 44
|Cash Requirements Outlook                                                                                                                  | 44
|Cash applied to Operating Activities                                                                                                       | 46
|Financing Activities                                                                                                                       | 46
|Investing Activities                                                                                                                       | 46
|Commitments and Contractual Obligations                                                                                                    | 46
|Transactions with Related Parties                                                                                                          | 47
|Capital Expenditure Commitments                                                                                                            | 47
|C. Research and development, patents and
    licenses, etc.                                                                                | 47
|D. Trend information.                                                                                                                      | 48
|Litigation/Indemnification                                                                                                                 | 48
|Subsequent Events                                                                                                                          | 49
|E. Off-balance sheet arrangements.                                                                                                         | 50
|F. Tabular disclosure of contractual
    obligations.                                                                                      | 50
|G. Safe harbor.                                                                                                                            | 50
|Item 6. Directors, Senior Management and
    Employees                                                                                     | 50
|A. Directors and senior management.                                                                                                        | 50
|B. Compensation.                                                                                                                           | 53
|(a) Compensation of Directors                                                                                                              | 53
|(b) Compensation of Executive Officers                                                                                                     | 53
|1. Summary Compensation                                                                                                                    | 53
|Summary compensation table                                                                                                                 | 53
|Stock Options                                                                                                                              | 54
|Aggregated Option/SAR and RSU exercises during
    the most recently completed financial year and financial year-end
    option/SAR values | 55
|Long-term Incentive Plans                                                                                                                  | 56
|Stock Appreciation Rights and Restricted Shares                                                                                            | 56
|Stock Option and SAR Repricing                                                                                                             | 56
|Pension and Retirement Plans and Payments made
    upon Termination of Employment                                                          | 56
|Employment Contracts                                                                                                                       | 57
|(c) Plans and Share Options                                                                                                                | 57
|C. Board practices.                                                                                                                        | 58
|(a) Board of Directors                                                                                                                     | 58
|Board Committees                                                                                                                           | 58
|Audit Committee                                                                                                                            | 58
|Compensation Committee                                                                                                                     | 58

4

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| | Corporate Governance Committee                                           | 59                                                          
| | ------------------------------------------------------------------------ | ------------------------------------------------------------
| | D.                                                                       | Employees.                                                  
| | E.                                                                       | Share ownership.                                            
| | (a)                                                                      | Share and Option
    Holdings                               
| | (b) Stock
    Incentive Plan                                             | 62                                                          
| | Purpose of Plan                                                          | 62                                                          
| | Eligibility                                                              | 62                                                          
| | Administration of the Plan                                               | 62                                                          
| | Amendment of the Plan                                                    | 63                                                          
| | Necessary Approvals                                                      | 63                                                          
| | Adjustment in Shares Subject to the Plan                                 | 63                                                          
| | Item 7.                                                                  | Major Shareholders
    and Related Party Transactions       
| | A.                                                                       | Major
    shareholders.                                     
| | B.                                                                       | Related party
    transactions.                             
| | C.                                                                       | Interests of
    experts and counsel.                       
| | Item 8.
    Financial Information                                        | 65                                                          
| | A.                                                                       | Consolidated
    Statements and Other Financial Information.
| | Legal
    Proceedings                                                    | 65                                                          
| | Dividend
    Policy                                                      | 67                                                          
| | B.                                                                       | Significant
    Changes.                                    
| | Item 9.
    The Offer and Listing.                                       | 67                                                          
| | A.                                                                       | Offer and
    listing details  Stock Price History         
| | B.                                                                       | Plan of
    distribution.                                   
| | C.                                                                       | Markets.                                                    
| | D.                                                                       | Selling
    shareholders                                    
| | E.                                                                       | Dilution.                                                   
| | F.                                                                       | Expenses of the
    issue.                                  
| | Item 10.
    Additional Information.                                     | 69                                                          
| | A.                                                                       | Share capital.                                              
| | B.                                                                       | Memorandum and
    articles of association.                 
| | Directors                                                                | 69                                                          
| | Common
    Shares                                                        | 70                                                          
| | Preferred Shares                                                         | 70                                                          
| | Changing
    Rights of Shareholders                                      | 71                                                          
| | Shareholder Meetings                                                     | 71                                                          
| | Limitations on Right to Own Securities                                   | 71                                                          
| | Change
    of Control                                                    | 73                                                          
| | Disclosure of Ownership                                                  | 73                                                          
| | C.                                                                       | Material
    contracts.                                     
| | D.                                                                       | Exchange
    controls.                                      
| | E.                                                                       | Taxation.                                                   
| | Material
    Canadian Income Tax Consequences                            | 74                                                          
| | Material
    United States Federal Income Tax Consequences               | 75                                                          
| | F.                                                                       | Dividends and
    paying agents.                            
| | G.                                                                       | Statement by
    experts.                                   
| | H.                                                                       | Documents on
    display.                                   
| | I.                                                                       | Subsidiary
    Information.                                 
| | Item
    11. Quantitative and Qualitative Disclosures About Market Risk. | 81                                                          
| |                                                                          |                                                             

5

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|(A) Quantitative information about market risk                                             | 81
|------------------------------------------------------------------------------------------ | --
|(B) Qualitative information about market risk                                              | 81
|Interest Rate Risk                                                                         | 81
|Foreign Exchange Rate Risk                                                                 | 82
|Item 12. Description of Securities Other than
    Equity Securities.                       | 82
|PART II                                                                                    | 82
|Item 13. Defaults, Dividend Arrearages and
    Delinquencies.                              | 82
|Item 14. Material Modifications to the Rights
    of Security Holders and Use of Proceeds. | 82
|Item 15. Controls and Procedures.                                                          | 82
|Item 16. [Reserved]                                                                        | 83
|Item 16A. Audit Committee Financial Expert.                                                | 83
|Item 16B. Code of Ethics.                                                                  | 83
|Item 16C. Principal Accountant Fees and
    Services.                                      | 83
|Audit Fees                                                                                 | 83
|Audit-Related Fees                                                                         | 83
|Tax Fees                                                                                   | 83
|All Other Fees                                                                             | 83
|Item 16D. Exemptions from the Listing Standards
    for Audit Committees.                  | 84
|Item 16E. Purchases of Equity Securities by the
    Issuer and Affiliated Purchasers.      | 84
|PART III                                                                                   | 84
|Item 17. Financial Statements.                                                             | 84
|Item 18. Financial Statements.                                                             | 84
|Item 19. Exhibits.                                                                         | 84
|EXHIBIT INDEX                                                                              | 85

6

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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", the "Company" or the "Corporation". Unless the
context otherwise indicates, use of "we", "us", "our" and like terms refers to
the Company.

Trademarks or trade names of Zi used in this document
include, but are not limited to: Zi, eZiText, eZiNet, eZiTap, eZiType, Qix,
Decuma and Zi Services. Each trademark, trade name or service mark of any
other company appearing in this document belongs to its holder.

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

In this document, cross-references relevant to the
information being requested may be 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 applicable United States and Canadian
securities laws. Shareholders can identify these forward-looking statements by
the use of words such as "expect", "anticipate", "estimate", "believe", "may",
"potential", "intends", "plans" and other similar expressions or statements that
an action, event or result "may", "could" or "should" be taken, occur or be
achieved, or the negative thereof or other similar statements. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by these forward-looking
statements. Such statements include, but are not limited to, our expectation
that revenues will increase as a result of our sale agreements and marketing
efforts related to our Qix product and our expectation that a major customer
will start shipping its products in 2008 with our Decuma product embedded, our
belief that we will have sufficient cash to fund our capital requirements and
our belief that we will be successful in unrestricting our restricted cash
balances related to our Chinese operations and that future cash receipts in our
Chinese operations will be unrestricted. These factors include, among others,
the following: our history of operating losses and uncertainty of future
profitability; financing and market risks associated with the ownership by the
receiver for the Lancer Group of funds (the "Receiver") of approximately 37
percent of the Corporations outstanding shares; risks associated with certain
legal disputes between the Company and the Receiver and the settlement thereof,
including disruption of the Corporations business and diversion of management
and financial resources; 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, product
obsolescence 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 defense of one of our licensees in the University of Texas patent
infringement lawsuit; risks associated with the settlement of a U.S. patent
infringement lawsuit; fluctuations in foreign exchange rates; uncertainties
associated with changes in government policy and regulation, particularly in the
Peoples Republic of China ("PRC" or "China"); uncertainties associated with the
Canadian Revenue Agencys audit of any of the Companys cross border
transactions; adverse changes in general business conditions in any of the
countries in which we do business; changes in our size and structure; the
effectiveness of our management and our strategic relationships; risks related
to possible defects in our products; risks associated with our ability to
attract and retain key personnel; uncertainties regarding our need for
additional capital; uncertainty regarding the fluctuations of our quarterly
results; risks related to our acquisitions of companies and technologies;
uncertainties relating to our status as a non-U.S. corporation; foreign currency
exchange risks; ability to enforce civil liabilities under U.S. securities laws
outside the United States; ability to maintain our listing on NASDAQ; risks
associated with us being considered a "passive foreign investment company" or a
"controlled foreign corporation" under the applicable provisions of the U.S. tax
code; ability to implement an inter-company royalty program in order to access
cash in our Chinese subsidiaries; contractual restrictions on announcing the
details of important licensing agreements; risks associated with our investments
and other risks and uncertainties described under "Item 3 - Key Information -
Risk Factors" and elsewhere in this report.



---



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.

The following table summarizes certain of our
selected financial information (stated in thousands of U.S. dollars) prepared in
accordance with U.S. GAAP. The information in the table was derived from the
more detailed financial statements for the fiscal year ended December 31, 2003
through the fiscal year ended December 31, 2007, 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 2003, 2004 and
2005, and the consolidated balance sheet information as of December 31, 2003,
2004, and 2005 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, 2003
throughout the fiscal year ended December 31, 2007.

|                                                             | 2007(2)                                              | 2006(2)   | 2005(2)     | 2004(2)     | 2003(2) 
|------------------------------------------------------------ | ---------------------------------------------------- | --------- | ----------- | ----------- | --------
|                                                             |                                                      |           | restated(1) | restated(1) |         
|                                                             |                                                      |           |             |             |         
|                                                             | (in thousands of U.S. dollars except per share data)
|Revenue from continuing operations                           | 13,111                                               | 11,836    | 10,614      | 12,899      | 9,919   
|Operating loss from continuing operations                    | (5,004)                                              | (8,945)   | (4,120)     | (1,717)     | (1,544) 
|Operating loss from continuing operations per share          | (0.10)                                               | (0.19)    | (0.09)      | (0.04)      | (0.04)  
|Net loss from continuing operations                          | (5,759)                                              | (9,750)   | (4,489)     | (2,008)     | (2,146) 
|Net loss from continuing operations per share                | (0.11)                                               | (0.21)    | (0.10)      | (0.05)      | (0.06)  
|Net loss                                                     | (5,127)                                              | (10,995)  | (5,317)     | (2,724)     | (2,931) 
|Basic and diluted net loss per share                         | (0.10)                                               | (0.24)    | (0.12)      | (0.07)      | (0.08)  
|Total assets                                                 | 15,695                                               | 14,547    | 22,405      | 21,699      | 10,686  
|Capital stock and additional paid-in capital                 | 120,255                                              | 113,736   | 111,480     | 108,140     | 94,559  
|Accumulated deficit and accumulated other comprehensive loss | (113,702)                                            | (108,918) | (98,158)    | (92,727)    | (90,278)
|Net assets                                                   | 6,503                                                | 4,818     | 13,322      | 15,413      | 4,281   
|Outstanding shares, in thousands                             | 50,558                                               | 46,689    | 46,273      | 45,225      | 39,372  

(1) Income tax expense for the year ended December 31, 2004,
previously reported as nil, has been restated to $336,161. As a result, the net
loss for the year ended December 31, 2004, previously reported as $2,388,199,
has been restated to $2,724,360. Similarly, net loss per share for the year
ended December 31, 2004, previously reported as $0.06, has been restated to
$0.07. In addition, the accumulated deficit as at December 31, 2004, previously
reported as $91,927,031, has been restated to $92,263,192. Comprehensive net
loss for the year ended December 31, 2004, previously reported as $2,112,365,
has been restated to $2,448,526.

(2) On March 27, 2007, the Company sold its minority interest
in its e-Learning business segment. The e-Learning business segment was
initially included in the Companys consolidated operating loss for all previous
periods. As a result of the sale, for the years ended December 31, 2007, 2006,
2005, 2004, and 2003 the e-Learning operating results have been reclassified to
discontinued operations.

8

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Currency and Exchange Rates

The following table sets out the exchange rates for
currencies expressed in terms of one U.S. 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):

|                                                                                                                                                                             |                     | Per One U.S. Dollar
    Year Ended December 31
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ----------------------------------------------
|Canadian dollar                                                                                                                                                              |                     | 2007                                          
|End of period                                                                                                                                                                |                     | 0.9913                                        
|Average for the period                                                                                                                                                       |                     | 1.0667                                        
|Chinese renminbi                                                                                                                                                             |                     |                                               
|End of period                                                                                                                                                                |                     | 7.2939                                        
|Average for the period                                                                                                                                                       |                     | 7.5737                                        
|Hong Kong dollar                                                                                                                                                             |                     |                                               
|End of period                                                                                                                                                                |                     | 7.8003                                        
|Average for the period                                                                                                                                                       |                     | 7.8024                                        
|Swedish krona                                                                                                                                                                |                     |                                               
|End of period                                                                                                                                                                |                     | 6.3980                                        
|Average for the period                                                                                                                                                       |                     | 6.7166                                        
|                                                                                                                                                                             |                     |                                               
|                                                                                                                                                                             |                     |                                               
|The following table sets out the high and low exchange rates
    for the currencies expressed in terms of one U.S. dollar in effect at the
    end of the following periods:
|                                                                                                                                                                             |                     |                                               
|                                                                                                                                                                             | Per One U.S. Dollar
|                                                                                                                                                                             | September           | October                                       
|Canadian dollar                                                                                                                                                              | 2007                | 2007                                          
|High for the month                                                                                                                                                           | 1.0545              | 0.9984                                        
|Low for the month                                                                                                                                                            | 0.9948              | 0.9447                                        
|Chinese renminbi                                                                                                                                                             |                     |                                               
|High for the month                                                                                                                                                           | 7.5610              | 7.5263                                        
|Low for the month                                                                                                                                                            | 7.5115              | 7.4820                                        
|Hong Kong dollar                                                                                                                                                             |                     |                                               
|High for the month                                                                                                                                                           | 7.7977              | 7.7760                                        
|Low for the month                                                                                                                                                            | 7.7624              | 7.7506                                        
|Swedish krona                                                                                                                                                                |                     |                                               
|High for the month                                                                                                                                                           | 6.9082              | 6.5289                                        
|Low for the month                                                                                                                                                            | 6.4447              | 6.3765                                        
|                                                                                                                                                                             |                     |                                               

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 24, 2007 as reported by the
United States Federal Reserve Bank of New York for the conversion of United
States dollars into Canadian dollars was CDN$1.0203 = US$1.00.

9

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B.
Capitalization and indebtedness.

Not applicable

C.

Not applicable

D.

We operate in a dynamic and rapidly changing
environment that involves numerous risks and uncertainties. Shareholders should
carefully consider the risks described below before purchasing our Companys
common shares. The occurrence of any of the following events could harm us. If
these events occur, the trading price of our Companys common shares could
decline, and shareholders may lose part or even all 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 operating losses totaled $5.1 million for our
fiscal year ended December 31, 2007, $11.0 million for our fiscal year ended
December 31, 2006, and $5.3 million for our fiscal year ended December 31, 2005.
As of December 31, 2007, our accumulated deficit was $113.7 million. We face
significant and potentially costly challenges in simultaneously pursuing key
research and development goals while attracting customers for our products and
services.

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

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

Our operations may have been, and could be in the
future, adversely affected by the Receiver for the Lancer Funds holding
approximately 37% of the Companys shares.

In August 2003, we became aware of information that
suggested a group of funds, including Lancer Partners LP and Lancer Offshore
Inc. (collectively, the "Lancer Funds" or "Lancer Entities"), had accumulated a
significant percentage of our outstanding common shares. This information
followed the appointment in July 2003 of the Receiver for the Lancer Funds who
was appointed as a result of a U.S. Securities and Exchange Commission (the
"SEC") enforcement proceeding which alleged securities law violations by the
management of the Lancer Funds. In December 2003, we learned through Lancer
Funds regulatory disclosure that the Lancer Funds believed their ownership
amounted to approximately 49 percent of our outstanding shares at the time. The
accumulation was done in apparent violation of U.S. and Canadian securities
laws, and without our knowledge or assistance. Based on the Receivers most
recent regulatory filings, the Receiver holds 18,718,008 of our common shares,
which amounts to 37% of our outstanding shares as of December 31, 2007. Certain
legal disputes arose between the Company and the Receiver, which were settled
pursuant to a settlement agreement signed in February 2007.

Prior to such settlement, the legal matters related
to the Receiver had or may have had adverse effects on our operations in a
number of ways:

- 



10

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Our
  customers and potential customers similarly raised concerns about the future
  management of the Company and our ability to live up to our contractual
  commitments.Our
  efforts to recruit highly qualified members of executive management and
  additional directors from our industry were hampered by the disputes between
  the Company and the Receiver.Scarce management resources were diverted from Company operations to
  addressing the foregoing concerns raised by our customers, employees,
  shareholders and potential acquisition candidates. 

Pursuant to the settlement agreement, the parties
discontinued, with prejudice, all litigation and regulatory proceedings of any
kind. In addition, the Receiver, and certain of our current and former directors
delivered mutual releases. For a more detailed description of such disputes, and
the settlement thereof seeItem 4  Information on the Company  History and
Development of the CompanyandItem 6A - Directors and senior management.
Uncertainties regarding the impact of possible
sales of our shares by the Receiver may negatively impact the market price for
our securities.

According to the Receivers filings with the SEC,
as of the date of this Report, the Receiver holds approximately 37 percent of
our outstanding shares. The Receiver has in the past, and may in the future,
announce an intention to sell shares in the open market. These announcements,
whether or not they are accompanied by contemporaneous sales, may have a
depressive effect on the market price for our securities.
We operate in a new and developing market and we
may not be able to sustain the rapid development required in our industry to
remain competitive.
The development of our input technology market
depends upon:the
  growth of third party applications incorporating our products and
  technologies;

the demand
  for new applications;

the ability
  of our products and technologies to meet and adapt to these needs; and

continuing
  price and performance improvements in hardware and software technology to
  reduce the cost and increase the performance of products incorporating our
  products and technologies.

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

The market for our products has been characterized
by:

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

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

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

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

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

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

11

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If the market for our products does not develop on
a continuing and sustainable basis, our financial position may be adversely
impacted and could include recording additional impairment charges on the value
of capitalized software development costs.
We operate in an intensely competitive environment
and we may not be able to compete successfully or gain market acceptance.
The software industry is intensely competitive and
is characterized by rapid technological advances, evolving industry standards,
price competition and technological obsolescence. Major Asian, European 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; Nuance; Nokia; Openwave;
Microsoft; Research in Motion, Eatoni, Abaxia, Mobease, Communications
Intelligence, PenReader, Vision Objects, TealPoint in Latin languages, PenPower,
HanWang, Guobi and Chinastar. Many of our competitors have longer operating
histories and have greater financial, technical, sales, marketing and other
resources. To a great extent, our ability to compete will depend on such factors
as product features, technical superiority, ease of use, price, quality,
technical support and services, product development capabilities, marketing,
distribution channels, and ability to meet delivery schedules. There can be no
assurance that our products and services can compete successfully or gain market
acceptance. Other companies 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.

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

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

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

We rely on large and small customers to adopt our
technology and our financial success may be affected if these customers 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 customers. Because we rely heavily on
third party integration of our technology into customer products, lead time to
revenue recognition can be longer than software products directly released into
consumer channels. Purchase of our products by customers often requires
significant expenditure of time and resources by the customers. 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.

12

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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 a technology provider for these customers, and
the failure to be selected by our customers would have a material adverse effect
on our sales. In addition, the resolution of a patent infringement claim with a
principal competitor restricts the Company and its affiliates from using and
selling certain no-longer distributed earlier versions of eZiText for
Latin-based languages in the United States. Furthermore, due to our
royalty-based revenue model, the failure of our key customers to achieve market
acceptance of products incorporating our software could have a material adverse
effect on our business, operating results and financial condition.
As well, the Company has invested money, time and
resources into the acquisition and development of Decuma and Qix technologies,
both of which are recent additions to the Zi portfolio of products. We may not
be successful in persuading new customers to license such technologies.
Potential customers may spend significant amounts of time evaluating our
technologies prior to their decision to license and deploy our products.
Furthermore, any customers who do license such technology may fail to achieve
market acceptance of products incorporating such technologies. Due to our
license-fee and royalty-based revenue models, any of the above-referenced
potential failures could have a material adverse effect on our business,
operating results and financial condition.
Due to these factors, our sales cycles are long and
unpredictable. As a result, our revenues may fluctuate from quarter to quarter
and we may be unable to adjust our expenses accordingly. This could cause our
operating results and stock price to fluctuate. Customers 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 customers deciding to cancel or change
their product plans. Our business would be adversely affected if a significant
customer reduces or delays orders or chooses not to deploy products
incorporating our technology.

Our customers
are subject to highly competitive demand and pricing structures for products and
services prevalent in the telecommunications industry. In 2007, 2006 and 2005 we
derived 33%, 37% and 34% 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 customers 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 customer licenses are at, or
approaching, the end of their license terms and it is uncertain whether we will
be successful in negotiating renewals with these customers.

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

- 



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

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

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

13

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For a summary of material legal proceedings related
to the Company, see  Item 8  Financial Information  A. Consolidated
Statements and Other Financial Information  Legal Proceedings.
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. As well, performance improvements in computing
capability of appliances that serve our market may make it easier for
competitors to replicate the appearance and functionality of our products
without impinging on certain technical elements of our intellectual property.
Accordingly, we may not be able to adequately protect our intellectual property.

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

As described in Item 4 - Information on the
Company - Intellectual Property Litigation, the Company and America Online
Inc. (including its affiliates) ("AOL") settled a judgment under U.S. based
litigation by a written settlement agreement dated December 6, 2002. Under the
settlement agreement, the Company consented to, among other things, an
injunction under a consent judgment which prohibits the sale or use in the
United States of earlier versions of the Companys eZiText product. Such earlier
versions of eZiText 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, Nuance Communications, Inc. (our principal competitor in the text input
market and acquirer of Tegic Communications, Inc., a former AOL subsidiary) and
others seek to protect their intellectual property in various countries and
jurisdictions through administrative proceedings and civil litigation. The
settlement of the AOL lawsuit dealt only with certain patent infringement claims
in the United States.

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 strain on our administrative,
operational and financial resources and increased demands on its internal
systems and procedures, particularly as this growth has been, and will likely
continue, on a global basis. In the event that our operations continue to grow,
or grow rapidly, there is a risk that our current administrative infrastructure,
systems and procedures may not be adequate to support our operations, or that
management may not be able to achieve the rapid, effective execution of the
product and business initiatives necessary to successfully penetrate the markets
for our products and services. If we are unable to manage future growth
effectively, our business, operating results and financial condition may be
materially adversely affected.

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

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

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

Our success will be dependent, in part, on the
performance of our personnel who develop our technology and manage our business.
We have personnel that we believe are competent in the development of our
technology, services and software related products and have endeavored 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, could have a materially adverse
effect upon our ability to grow and operate profitably. Likewise, failure to
retain the services of Milos Djokovic, President and Chief Executive Officer,
Blair Mullin, Chief Financial Officer, Roland Williams, Senior Vice President
Intellectual Property, Axel Bernstorff, Vice President of Global Sales, Brandon
Mensinga, Director  Qix, Corneil Goud, Director  Predictive Text, Weigen Qiu,
Director - R&D and Architecture and Blevins Tang, Director - Quality Assurance,
could have a materially adverse effect upon our ability to grow and operate
profitably. The Companys insurance coverage does not include key-man life
insurance for any of the above mentioned individuals.

14

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

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

Our global business may be materially adversely
affected by, among other things:

- 

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; and/ or

possible
  adverse tax consequences.

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

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

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

We may require capital to sustain our operations
and to finance the continued growth of operations. To date, we have raised
capital primarily through private placements of common shares. 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 and operations.

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

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

- 

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;

15

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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
  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 defense and resolution of patent infringement
  claims and other litigation the Company is involved in.

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

- 



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



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

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

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

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

16

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We are subject to foreign currency exchange risks;
accordingly, fluctuations in exchange rates could have a material effect on our
results of operations.
A significant portion of our expenses have been,
and will likely continue to be, incurred or generated in currencies other than
the U.S. dollar, principally, the Canadian dollar, Hong Kong dollar, Chinese
renminbi, Swedish krona, British pound and the Euro. Our results are reported in
U.S. dollars. Accordingly, fluctuations in exchange rates have a material effect
on our results of operations. In 2005, Chinese authorities re-valued the
renminbi and it is no longer pegged against the U.S. dollar. To date, we have
not engaged in foreign currency exchange rate hedging activities. If we
implement hedging techniques in the future with respect to foreign currency
transactions, there can be no assurance that we will be successful in such
hedging activities. Conversion of the Chinese renminbi to other currencies is
subject to approval by the government of China. Foreign exchange gains or losses
for the past three years have been: a gain of $293,079, a gain of $235,113 and a
loss of $114,108 in each of 2007, 2006 and 2005, respectively. These gains and
losses generally relate to balances on our balance sheet that are denominated in
currencies other than the U.S. dollar. It should be noted that our expenses are
significantly higher in 2007 compared to 2006 due to the depreciation of the U.S
dollar against other currencies in general, especially against the Canadian
dollar which has contributed most significantly to the increase in expenses. We
estimate that expenses have increased by approximately $900,000 in 2007 compared
to 2006 due to the depreciation of the U.S. dollar.
Acquisitions of companies or technologies may
result in disruptions to our business.

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

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

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

Further, the value per share 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.

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

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

17

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We are subject to examinations by taxation
authorities of the jurisdictions in which we operate in the normal course of
operations.
The Canada Revenue Agency ("CRA") commenced an
examination of the Companys international transfer pricing policies and
procedures and documentation for 2002 and 2003 in the second quarter of 2006.
The Company prepared a submission for the 2002 and 2003 taxation years, which
was submitted to CRA on July 10, 2007. The examination of the submission is
ongoing and is not expected to be completed until the end of 2008. In accordance
with FIN 48, the Company has included in its 2007 income tax a provision for
$652,278. This provision represents potential penalties, assuming that the
methodology used in the submission to the CRA with regard to the 2002 and 2003
taxation years is applied to all tax years that are currently open in Canada.
The ultimate resolution of this matter is uncertain, and the eventual outcome
may differ significantly should CRA not assess a penalty for the years currently
being audited, should the CRA not audit the other years that remain open, and if
they do, choose not to assess a penalty for those years. Once a final outcome is
determined, the Company will adjust its tax provision accordingly. In addition,
certain taxation years may become statute barred from audit in the future. The
Company will record a recovery of penalty provisions when the applicable
taxation year is statute barred.
The Company may lose its foreign private issuer
status in the future, which could result in significant additional costs and
expenses to the Company.

In order to maintain the Companys current status
as a "foreign private issuer," as such term is defined in Rule 405 under the
U.S. Securities Act of 1933, as amended, for U.S. securities law purposes, the
Company must not have any of the following: (i) a majority of its executive
officers or directors are U.S. citizens or residents, (ii) more than 50% of its
assets are located in the U.S., or (iii) the business of the Company is
principally administered in the U.S. The Company may in the future lose its
foreign private issuer status if it fails to meet any of the aforementioned
criteria.
The regulatory and compliance costs to the Company
under U.S. federal securities laws as a U.S. domestic issuer may be
significantly more than the costs the Company incurs as a Canadian "foreign
private issuer" (as such term is used under U.S. federal securities laws)
eligible to use the Multi-Jurisdictional Disclosure System ("MJDS"). If the
Company is not a foreign private issuer, it would not be eligible to use the
MJDS or other foreign issuer forms and would be required to file periodic and
current reports and registration statements on U.S. domestic issuer forms with
the U.S. Securities and Exchange Commission, which are more detailed and
extensive than the forms available to a foreign private issuer. In addition, the
Company may lose the ability to rely upon exemptions from NASDAQ corporate
governance requirements that are available to foreign private issuers. Further,
if the Company engages in capital raising activities after losing its foreign
private issuer status, there is a higher likelihood that investors may require
the Company to file resale registration statements with the SEC as a condition
to any such financing.
If the Company is characterized as a passive
foreign investment company, its shareholders may be subject to adverse U.S.
federal income tax consequences.

The Company has not made a determination as to
whether it is considered a "passive foreign investment company" (a "PFIC"), as
such term is defined in the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), for U.S. federal income tax purposes for the current tax year and any
prior tax years. A non-U.S. corporation generally will be considered a PFIC for
any taxable year if either (1) at least 75% of its gross income is passive
income or (2) at least 50% of the value of its assets (based on an average of
the quarterly values of the assets during a taxable year) is attributable to
assets that produce or are held for the production of passive income.
In general, if the Company is or becomes a PFIC,
any gain recognized on the sale of securities and any "excess distributions" (as
specifically defined in the Code) paid on the securities must be ratably
allocated to each day in a U.S. taxpayers holding period for the securities.
The amount of any such gain or excess distribution allocated to prior years of
such U.S. taxpayers holding period for the securities generally will be subject
to U.S. federal income tax at the highest tax applicable to ordinary income in
each such prior year, and the U.S. taxpayer will be required to pay interest on
the resulting tax liability for each such prior year, calculated as if such tax
liability had been due in each such prior year. See "Item 10.E - Material United
States Federal Income Tax Consequences."
The Company may be deemed to be a controlled
foreign corporation under the Code.
If more than 50% of the voting power of all classes
of shares or total value of the shares of the Company is owned, directly or
indirectly, by citizens or residents of the United States, United States
domestic partnerships and corporations or estates or trusts other than foreign
estates or trusts, each of whom owns 10% or more of the total combined voting
power of all classes of shares of the Company, the Company could be treated as a
"controlled foreign corporation," as such term is defined under Subpart F of the
Code. This classification would effect many complex results including the
required inclusion by such United States shareholders in income of their pro
rata shares of "Subpart F income" (as specifically defined by the Code) of the
Company.

18

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The Company has not made a determination as to
whether it is a controlled foreign corporation under the Code, and cannot give
any assurance that it would not be determined to be a controlled foreign
corporation under the Code now or in the future. See "Item 10.E - Material
United States Federal Income Tax Consequences."
The Company does not currently meet certain NASDAQ
bid requirements, and if we are unable to meet such requirements, our common
shares may be delisted from the NASDAQ Capital Market.

The Company received a NASDAQ Staff Deficiency
Letter dated January 30, 2008 stating that the bid price of Zi's common shares
has closed below US$1.00 per share for 30 consecutive days. As a result, in
accordance with NASDAQ Marketplace Rule 4310(c)(8) ("the Rule"), Zi is granted
180 calendar days, or until July 28, 2008, for the bid price of its common
shares to close at US$1.00 or more for a minimum of 10 consecutive business
days. If the Rule requirements cannot be demonstrated by July 28, 2008, but Zi
continues to meet the initial listing criteria, NASDAQ will provide an
additional 180 calendar days to meet the Rule requirements. If during the first
180 day compliance period, or if applicable, the second 180 compliance period,
Zi does not meet the Rule requirements by having a closing bid ofUS$1.00 or more
for a minimum of 10 consecutive business days, NASDAQ will provide written
notification that Zi's common shares will be delisted from The NASDAQ Capital
Market. If necessary, Zi would have the right to appeal the delisting notice to
a NASDAQ Listing Qualifications Panel. If Zis common shares are delisted from
NASDAQ, it may negatively affect the Companys share price and the ability of
the Companys shareholders to sell their shares.
Prior to being listed on the NASDAQ Capital Market,
the Companys common shares were traded on the NASDAQ Global Market. On August
10, 2007 the Company received a NASDAQ Staff Deficiency Letter indicating that
Zi was not in compliance with the stockholders' equity, market value of publicly
held shares and total asset and revenue requirements for continued listing on
The NASDAQ Global Market as set forth in NASDAQ Marketplace Rules 4450(a)(3),
4450(b)(1)(A) and 4450(b)(1)(B). The Company applied to have its listing of
common shares transferred to the NASDAQ Capital Market and such application was
duly approved. Trading of the Companys common shares on the NASDAQ Capital
Market commenced on September 5, 2007.
The Company may not be successful in implementing
an inter-company royalty program in order to access cash in our Chinese
Subsidiaries that is currently classified on our balance sheet as Restricted
Cash.

At December 31, 2007, the Company held the U.S.
dollar equivalent of $2,740,702 (December 31, 2006 - $2,160,495) in Chinese
renminbis ("RMB") through its principal Chinese subsidiary. Due to PRC
government regulations pertaining to the capitalization of Chinese companies,
these funds are not currently fully available to fund the non-Chinese operations
of the Company. We are in the process of establishing, with the Chinese
governments approval, an inter-company royalty program, which has received the
approval of some but not all applicable government departments. Based on the
advice of our professional advisors in China, we expect final approval in the
near future, the effect of which, if approved, will be that all cash held in our
Chinese subsidiaries, along with all other cash of the Company, will effectively
be available to fund the day-to-day operations of the Company. While we have
been advised by our professional advisors in China to expect final approval in
the near future, we cannot provide any assurances of this. Failure to make
available the restricted cash could affect cash flow and require additional
financing.
We may be contractually restricted from announcing
the details of important licensing agreements

From time to time, we may publicly announce the
signing of licensing agreements with our customers. However, to the extent
permitted by securities law and regulatory obligations, we are sometimes
contractually restricted from announcing many of the details of such licensing
agreements, or even from announcing the existence of such agreements, or the
name of the customer in such agreements. Failure to announce the existence of
certain agreements, or failure to announce certain details of such agreements,
including the name of the customer, may have a negative effect upon our stock
price.

19

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Item 4 -Information on the Company
A. History and Development of the Company

Our head and principal office is located at Suite
2100, 840 - 7th Avenue S.W., Calgary, Alberta, Canada T2P 3G2. Our
telephone number is (403) 233-8875 and our facsimile number is (403) 233-8878.
Our common shares are listed on the Toronto Stock Exchange under the symbol "ZIC"
and on the NASDAQ Capital Market under the symbol "ZICA".
We were incorporated
under the Business Corporations Act (Alberta) in Alberta, Canada on
December 4, 1987 as Cancom Ventures Inc. On August 30, 1989, 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. From 1994 to 1998, we provided limited translation services from our
office in Hong Kong for Chinese-to-English and English-to-Chinese using the
translation capability of the Chappell/Yates Translation Technology described
below. We discontinued translation services in 1998.
During 1996 and 1997, we offered consulting
services to companies in North America seeking to use the Internet to market
their products and services. This Internet consulting service ceased operations
in 1997.
From March 1997 to February 1998, we provided
Internet web development services in conjunction with carrying on our present
business.
Acquisition and Development of Input Technology
Effective November 1993, we acquired three licenses
relating to certain computer software, word processing software and language
translation technology known as the "Jiejing Input System", the "Zitong Input
System" and the "Chappell/Yates Translation Technology", respectively
(collectively, referred to as the "Jiejing Licenses").
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 forcomposing the characters are classified into different groups, each
identified by a code number. The string of code numbers representing each
character follows 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. The 352 Patent expires on April 28, 2009.
On December 25, 2001, Taiwanese patent No. NI139820
was issued to the Company. In January 2003, Chinese patent ZL99-1-00625.9,
"Method and Apparatus of Chinese Character Text Input," was issued to the
Company. These patents protect the unique implementation of our Chinese language
input technology on cellular phones and other wireless devices and, in
particular, protect those combinations of elements which are of particular help
to a user in improving the speed of text creation. The Company was also granted
an equivalent of this patent in Hong Kong as patent number HK1020216 on August
22, 2003. In addition, the Company has a number of patent applications pending
in the United States, Europe and Asia based on ideographic language input
networks and software utilities which use text as a key part of their operation.
The following is a partial list of certain U.S. patents which have been issued
to the Company, which further strengthen our competitive position: U.S. patent
No. 6,956,968 - "Database Engines for Processing Ideographic Characters and
Methods Therefor"; U.S. patent No. 6,955,602 - "Text Entry Within a Video Game";
U.S. patent No. 6,864,809 - "Korean Language Predictive Mechanism for Text Entry
By a User"; U.S. patent No. 6,801,659 - "Text Input System for Ideographic and
Non-Ideographic Languages"; U.S. patent No. 7,313,277 - "Method and Device for
Recognition of a Handwritten Pattern"; U.S. patent No. 7,256,769  "System and
Method for Text Entry on a Reduced Keyboard"; U.S. patent No. 7,139,430 
"Character Recognition"; U.S. patent No. 7,075,520  "Key Press Disambiguation
Using a Keypad of Multidirectional Keys"; and U.S. patent No. 6,711,290 
"Character Recognition". The Company has been granted, or has pending, foreign equivalents to many of the above mentioned U.S. patents.
Acquisition and Divestiture of Archer Education
Group Inc.

Archer was incorporated in February 2005 for the
purpose of acquiring a number of educational learning institutions in Canada. Zi
acquired 24.9 percent of Archers shares, through share subscription agreements
in 2005. Consequently, Zi became a related party to Archer.

20

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The Companys ownership of Archer increased
primarily by the sale of its Beijing Oztime Education & Network Technology Co.
Ltd. ("Oztime") and EnglishPractice Inc. ("EPI") subsidiaries to Archer. At
December 31, 2005, the Company held 53.2 percent of the outstanding shares of
Archer. Zi therefore, accounted for its investment in Archer as a purchase under
the purchase method of accounting. Zi included Archers results from December
21, 2005 (the date of acquisition) to December 31, 2005, and its assets and
liabilities, net of minority interest at December 31, 2005.
Under the sale agreements, Zi received 6,140,000
shares of Archer, including contingent consideration of 1,000,000 shares placed
in escrow and a RMB 1,000,000 note receivable. The release of the escrowed
shares was subject to performance criteria requiring revenues earned through
Oztime related operations, from the date of purchase to December 31, 2006, be
$2,950,000 or more. The Company determined there was uncertainty that Oztimes
revenues related to its operations would achieve the performance criteria and as
such the contingent consideration was not considered as part of the sale
proceeds. As at December 31, 2006, Oztime revenues earned did not reach the
required level and therefore the escrowed shares were cancelled.
On February 28, 2006, Archer raised additional
capital through private placements of common shares at which point Zis interest
in Archer was diluted to 49.9 percent. The Company deconsolidated the results of
Archer as of March 1, 2006, since it no longer absorbed a majority of the
entitys expected losses or residual returns, in the case of a variable interest
entity, and no longer had the ability to exert control over this subsidiary. The
Company accounted for its proportionate share of Archers net loss at December
31, 2006, using the equity method.
Through a further private placement of Archers
common shares and exercise of stock options from March to December 2006, the
Companys ownership of Archer was diluted to 42.2 percent. As the price of the
shares issued by Archer is in excess of the book value of the underlying share,
the Companys net investment in Archer increased resulting in a dilution gain to
Zi of $758,903 as of December 31, 2006.
On March 30, 2007, Zi announced the sale of all
Archer shares held by it, for CDN$736,800 in cash, or approximately US$632,601.
The book value of the Archer shares sold had previously been reduced to zero by
Zi; therefore, the Company recorded a gain on the sale in the first quarter of
2007 of US$632,601.
Acquisition of Assets of Decuma AB

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

Intellectual Property Litigation

In the course of its operating history, the Company
has been involved in several lawsuits, both as a plaintiff and as a defendant,
with its largest competitor in the field of text prediction, Tegic
Communications, Inc., which was a subsidiary of AOL and which was acquired by
Nuance Communications, Inc. in 2007 ("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").

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

21

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On September 4, 2002, the jury in this lawsuit found that
certain versions earlier than version 4.5 of the Companys eZiText product (the
"U.S. Restricted Versions") infringed Tegics U.S. patents and awarded Tegic $9
million in damages (the "Damages Award"). At a post-trial hearing held on
November 8, 2002, the presiding trial judge in this lawsuit upheld the jurys
damages verdict and denied the Companys motions to invalidate Tegics U.S.
patents and to set aside the Damages Award.
The Company settled all claims in this lawsuit with AOL by a
written settlement agreement dated December 6, 2002. As part of the settlement,
a Consent Judgment was entered on December 20, 2002. The settlement in relation
to the U.S. Restricted Versions of eZiText prohibits the sale or any use of such
products by the Company in the United States only. The sale, use and licensing
of such versions of the Companys eZiText product by the Company and its
affiliates in countries other than the United States is not affected. The
ability of the Company and its affiliates to sell, license and make use of its
eZiText product (all current versions) in all countries of the world, including
the United States, is not limited or restricted by the settlement.
(ii)
Asian
Communications Pty. Ltd. and Tegic Communications, Inc. v. Zi Corporation (Hong
Kong) Ltd. The Company was 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
For a discussion concerning dispositions and discontinued
operations relating to Oztime, EnglishPractice Inc., Telecom Technology
Corporation Limited and the Magic Lantern Group of Companies, see our previous
regulatory filings with the SEC, including our annual report on Form 20-F for
the year ended December 31, 2006.
Acquisition of Zi Shares by the Lancer Funds

The Company reported in its Form 20-F for the fiscal year
ended 2001, based on information provided by Lancer, that Lancer and its
affiliated companies held or controlled directly or beneficially Zi stock
totaling 3,675,100 shares, which represented approximately 9.67 percent
ownership in the Company. In the course of preparing the Form 20-F for the year
2002, management of the Company observed what appeared to be a concentration of
its shares held at a major brokerage firm. Through its attorneys, management
requested an update from Lancer concerning the level of Lancer ownership in the
Company, but despite several requests did not receive a response.

Accordingly, the Company reported in its Form 20-F for the
fiscal year ended 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.

In early July of 2003, a U.S. federal judge froze the assets
of certain Lancer Funds and appointed an attorney of the law firm of Hunton &
Williams, LLP as receiver for Lancer Management Inc., and related entities. The
Receiver filed an initial report on September 8, 2003 in the U.S. District Court
in Florida, noting, among other things, that numerous substantial investment
position discrepancies had been identified in many of the Lancer Funds'
holdings. The Receiver remained uncertain of the Lancer Funds' ownership
interest in many of those portfolio companies, including the Company. The
initial report also disclosed that the Receiver could apply to the court for
abatement of its obligation to make regulatory filings with the SEC or other
appropriate agencies. The Company offered assistance to the Receiver to
determine the extent of the Lancer Funds holdings in the Company, including the
provision of copies of its registered shareholder records and private placement
subscription details.

22

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In 2003, a statement of beneficial ownership on
Schedule 13D was filed by the Receiver with the SEC. According to the Schedule
13D, the Receiver reported that it owned, through four Lancer entities,
19,407,364 common shares of the Company, or approximately 49 percent of the
total issued and outstanding common shares of the Company.
Under the United
States Securities Act of 1933, as amended (the "Securities Act") the Receiver is
deemed to be an "affiliate" (as such term is defined in Rule 405 of the
Securities Act) of the Company and its holdings in the Company are therefore
subject to certain additional resale restrictions absent registration under the
Securities Act. Under Rule 144 promulgated under the Securities Act ("Rule
144"), 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. If resales are made
other than in reliance upon Rule 144, the volume limitation does not apply to
sales by the Receiver on the Toronto Stock Exchange; however, the Receiver must
still comply with the resale requirements set forth in Regulation S promulgated
under the Securities Act.
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. According to amendments to Schedule 13D,
the Receiver sold an aggregate 689,356 shares of Zi during January and February
2005. On February 10, 2005, the Receiver filed Form 45-102F1 in Canada stating
its proposal to sell 2,875,132 shares of Zi. On March 11, 2005, the Receiver
filed Form 45-102F1 in Canada stating its proposal to sell 2,674,040 shares of
Zi. No shares were sold in March 2005. On April 8, 2005, the Receiver filed Form
45-102F1 in Canada stating its proposal to sell up to 2,674,040 shares of Zi. On
April 18, 2005, the Receiver filed an intention to sell in the aggregate up to
2,674,040 common shares in the ninety days thereafter pursuant to Rule 144. No
shares were sold in April 2005. On May 6, 2005, the Receiver filed Form 45-102F1
in Canada stating its proposal to sell up to 2,674,040 shares of Zi.
Notwithstanding the Receivers filings concerning the possible sale of shares of
Zi, to the best of the Companys knowledge, no shares have been sold by the
Receiver since February 2005. According to the Receivers filings with the SEC,
as of the date of this Report, the Receiver holds approximately 37 percent of
our outstanding shares.
In July 2004, Zi completed a private placement for gross
proceeds of CDN$10 million. As a condition of the financing, the Receiver, among
others, agreed to a 150 day lock up of its shares. In return for this
consideration, the Company agreed, among other things, to appoint one director
to the Companys board as a nominee of the Receiver. The Company subsequently
appointed Donald Moore to the Board of Directors as the Receivers nominee.
In 2005, the Receiver contacted the Company to
request certain shareholder information with a view to calling a special meeting
of the Companys shareholders, the purpose of which would be to elect a slate of
directors proposed by the Receiver.
The Company sought the advice of legal counsel and
concluded, among other things, that it would not cooperate with the Receiver in
effecting what the Company believed was an unlawful takeover of the Company. In
its filings to the Court of Queens Bench of Alberta (the "Alberta Court"), the
Company cited Lancers failure to comply with Alberta laws regarding takeover
bids. The Alberta Court issued an interim order that, among other things,
prohibited the Receiver from requisitioning a shareholders meeting. The
Receiver brought a motion to contest the Alberta Courts jurisdiction and to
seek to have all related matters dealt with in a Florida Court. The Alberta
Court, in a decision dated January 31, 2006, denied the Receivers application
to change venue, citing the Alberta Court as the proper forum to consider
matters under theBusiness Corporations Act (Alberta) ("ABCA") and the Securities Act (Alberta)and refused to set aside its interim order against
the Receiver.
The Company brought a companion proceeding before
the Alberta Securities Commission (the "ASC") on December 5, 2005, seeking among
other things an order requiring the Receiver to either dispose of the Lancer
Funds' Zi shares or make a lawful takeover bid to all of Zi's shareholders. On
March 16, 2006, the ASC dismissed a motion by the Receiver to stay or dismiss
the ASC proceedings.
Separately, the Receiver instituted a contempt of
court hearing before the U.S. District Court for the Southern District of
Florida (the "Florida Court") claiming that the Companys filing before the
Alberta Court violated a case management order which mandated that all
proceedings against the Receiver be brought in the Florida Court. The Company
was not a party to any previous proceeding before the Florida Court and argued
that it was not subject to the case management order.
Zi had previously agreed to a U.S. venue for
resolving certain contractual issues with the Receiver and the Alberta Court
acknowledged that such agreement does not affect the Alberta Courts ability to
rule on matters under the ABCA and Alberta securities laws.
At the Companys annual general meeting of
shareholders held on December 22, 2006, the Receiver voted in favor of our
managements recommendation as to the composition of the Companys Board of
Directors. In February 2007, the Company and the Receiver entered into a
settlement agreement, which aimed to settle any and all outstanding claims and
issues between the Receiver, the Lancer Funds and the Corporation. Pursuant to
the settlement agreement, the Receiver and the Corporation agreed to immediately
discontinue, with prejudice, all litigation and regulatory proceedings of any
kind.

23

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In February 2006, Donald Moore, a director of the
Company nominated by the Receiver, brought an action against the Company and
Michael Lobsinger, who was the Chairman, President and CEO of the Company at
such time, under the ABCA, claiming that the Corporation had failed to make
certain records available to him as required by the ABCA and had denied him
access to other records that he believed to be entitled to under the ABCA. This
matter has been settled between the parties.
Principal Capital Expenditures and Divestiture

During the years ended December 31, 2004, 2005,
2006, 2007 and up to February 28, 2008 our principal capital expenditures
(divestitures) were as follows:

|                                             | Amount of Expenditure (Divestiture)
|-------------------------------------------- | -----------------------------------
|                                             | To February                        
|Description of Expenditure
    (Divestiture) |                                    
|Capitalized Software Development Costs       | $                                  
|Acquisition (Disposal)
    of Archer         |                                    
|Acquisition of Decuma                        |                                    
|Acquisition of Magic
    Lantern             |                                    
|Computer & office
    equipment              | $                                  

In January 2005, the Company acquired the assets of Decuma AB
for approximately U.S.$1.0 million, including fees and expenses. In the
remainder of 2008, the Companys planned principal capital expenditures will be
software development costs. The Company expects these expenditures will be
incurred primarily in Canada, China and Sweden. See Item 18 - Financial
Statements - Note 4 for a detailed description of the acquisitions. It is
our intent that these planned capital expenditures will be financed through
existing cash reserves and other working capital, ongoing revenues of the
company, and if necessary, through future financing activity.

Financing efforts in 2007.

In March 2007, the Company secured $6,000,712 in gross
proceeds from individual and institutional investors in a brokered private
placement in the United States and a non-brokered private placement in Canada.
The private placements resulted in the issuance of 3,776,848 units ("Units"),
with each unit comprised of one common share and two-fifths of one common share
purchase warrant, at a price of US$1.61 per Unit. The Warrants have a term of
five years and can be exercised commencing six months from the date of closing.
Each Warrant has an exercise price per common share of US$2.14.

B. Business overview.



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, eZiType, Decuma and Qix
business is carried on. Our core technology product, eZiText, and its companion
application, eZiType, are predictive text input solutions that predict words
and/or phrases for use in messaging and other applications needing text input.
eZiText supports 60 languages and dialects while eZiType supports 55. 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. Qix is a natural discovery
solution designed to assist users to easily find and use features, services and
content on a mobile phone. A real word request using the keypad is entered by
the user and Qix presents a list of meaningful and actionable suggestions based
on the word entry. See Item 4.B  Description of Qix.

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Zi Technology Business Unit
Description of
eZiText and eZiType
Although eZiText can be used in 60 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 of a mobile electronic device (for example, 5
keys or 8 keys on a cellular telephone) 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.
Each time a key representing a stroke is pressed,
eZiText Chinese makes an analysis which predicts the character the user is
entering. On the first stroke key press the analysis is based on the frequency
of use of individual characters. But as more strokes are entered and more
characters are selected, the algorithm becomes more sophisticated, giving a user
subsequent or associated characters on the basis of meaning, style and syntax in
addition to frequency of use. The most likely choice appears under the cursor
for immediate selection. While the average number of strokes required to draw a
Chinese character is approximately 14, eZiText Chinese algorithms allow Chinese
text to be entered with generally fewer than 3 key strokes per character.
Furthermore, eZiText Chinese goes beyond single character completion, offering
predictive word completion (as some Chinese words consist of more than one
character) and even phrase completion.
In addition to offering completed characters,
eZiText Chinese also considers partial character structures that could be
created with the entered sequences and displays these as well. Thus when a user
is confronted with having to enter a character that is infrequent, the ability
to select the structural aspect as controlling parameter greatly simplifies use.
This particular aspect is part of Zis Chinese Patent ZL-99-1-00625.9 and is
believed to be popular with the user community.
In alphabetic languages, eZiText
disambiguates single key presses where each key has several letters mapped to
it. The most common implementation of this approach is the numeric keypad found
on a cellular telephone. In English, the letters A, B, and C are all mapped to
key 2, D, E, and F to key 3, and so on according to ETSI standard. Words are
assembled from a sequence of key presses and predicted for the user even where
the word has more letters than the number of keys pressed. Because of the
structures of alphabetic languages, eZiText for Latin-based languages does not
attempt to offer candidates to the user at the first alphabetic key press unless
the entered key is a valid single letter word such as a or I in English.
Instead, eZiText waits until a second keypress is made whereupon candidates are
offered which are of significantly better quality than otherwise seen. This is
an implementation more suited to the way that a typical user interacts with the
display of the device.
In 2006, Zi announced its development of a
predictive text solution for keyboards called eZiType. This solution offers the
predictive word capabilities similar to eZiText, with the added benefit of
auto-correction when users misspell or accidentally press the wrong character.
The solution is made for physical and virtual keyboards and currently applies to
alphabetic based languages.
eZiText can now be used in the following languages:
Afrikaans, Arabic, Bengali, Bulgarian, Chinese (PRC, Hong Kong and Taiwan),
Croatian, Czech, Danish, Dutch, English (British, American, PRC, Hong Kong and
Taiwan), Estonian, Farsi, Finnish, French (European and Canadian), German,
Greek, Gujarati, Hebrew, Hindi, Hungarian, Icelandic, Indonesian, Italian,
Japanese, Kannada, Korean, Latvian, Lithuanian, Malay, Marathi, Malayalam,
Norwegian, Polish, Portuguese (European and Brazilian), Punjabi, Romanian,
Russian, Serbian, Slovak, Slovenian, Spanish (European and Latin American),
Swahili, Swedish, Tagalog, Tamil, Telugu, Thai, Turkish, Ukrainian, Urdu and
Vietnamese.
eZiText also includes a predictive multi-tap mode
(formerly offered as part of a separate product called eZiTap), wherein each
character is deterministically established by the user by tapping the keys,
rather than having the particular characters predicted for the user.
Our software technology is incorporated by reference design and chipset
providers, total solution providers, operating system developers, hardware
manufacturers and other businesses into their respective electronic, wireless
and computer devices, providing end users with a device that is
language-enabled for text-entry. eZiText and eZiType technology are distributed
through licensing agreements.

25

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From time to time, Zi releases new versions of eZiText and
eZiType 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.
Moreover, Zi has 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 the Microsoft Windows Mobile platform and
Front End Processors ("FEPs") for Symbian S60 smart phones for eZiText and
eZiType. These solutions enable OEMs easy access to Zis core products on
leading smart phone platforms.
Licensing of eZiText

As of March 23, 2008, Zi has entered into licenses with more
than 100 licensees who are in many cases original equipment manufacturers that
embed eZiText into their respective products. These licensees include among
others, cellular phone manufacturers, set-top box manufacturers and game
manufacturers.

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 2007,
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.
The royalty amount varies from customer to customer and may vary in accordance
with unit volumes produced by the licensee. Since cellular phones are consumer
products, our revenues are subject to seasonality associated with cellular phone
sales and are highly dependent on the market presence, marketing prowess,
manufacturing and distribution capabilities of the OEMs, and consumer acceptance
and demand for our licensees finished cellular telephone product. In the year
ended December 31, 2007, two customers accounted for 33 percent of our total
revenue.

Description of Qix

Qix is a natural discovery solution designed to
assist users to easily find and use features, services and content on a mobile
phone. A real word request using the keypad is entered by a user and Qix
presents a list of meaningful and actionable suggestions based on the word
entry. For example, to send a message to a friend, Jackie Smith, the user enters
her name using the keypad. When the user enters 522 (for the letters J, A
and C), Qix will present a list of relevant suggestions. All of the choices
will be related to the numbers 522 or the letters they represent. A user can
then select Jackie Smith and start writing her a message. Qix Natural
Discovery Solution is comprised of two components  Qix Client and Qix Updater.
Qix Client is embedded in mobile devices and integrates with handset features,
applications and content sources. Qix Updater is a service that enables
operators to promote new services and content by revising and personalizing Qix
suggestions. A device users first, most familiar and most fundamental action is
using the keypad for dialing. Qix Client builds upon this basic fundamental
familiarity. Users use their keypad to enter real words to find and do things on
the device. Qix Client is designed to allow users to access the full range of
device features simply and intuitively, without having to remember where or how
to locate them. This ease of use encourages users to utilize their device more
efficiently and to rely on it to do more things more often.

At the Mobile World Congress 2008, Zi announced that Telus
will offer the mobile discovery solution Qix on select models of TELUS phones
and PDAs. TELUS will be the first carrier in North America to offer the solution
to its customers.

26

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Description of Decuma Handwriting Recognition Solutions

In January 2005, we acquired the assets of Decuma AB of Lund,
Sweden. Decumas handwriting recognition solutions include Decuma Alphabetic,
Decuma Japanese, Decuma Chinese, Decuma Korean and Decuma Arabic, which together
comprise more that 70 languages and dialects.

Decuma is designed for mobility, to work optimally on small
form factor devices such as mobile phones, portable gaming consoles and more -
on devices that are prone to poor and shaky handwriting. There is no need to
adjust to a particular writing style, learn a special alphabet, or manually
switch between character sets or input modes. Decuma has the capability to
predict whole words as a user is writing each letter.

Decuma Alphabetic recognizes naturally shaped letters in
upper and lower cases, numbers and symbols/punctuation. This includes 60
plus Latin, Greek and Cyrillic based languages.

Decuma Arabic supports
naturally shaped Arabic, Farsi and Urdu letters, Arabic-Indic numbers and
punctuation/symbols, recognizing the natural variations commonly found in Arabic
writing styles, for all markets. The solution offers a consistent user
experience found on an Arabic keyboard or keypad. It also provides full regional
support including support for English, French, digits and punctuation/symbols.

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.

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

Geographic Segments

The table below summarizes the Companys revenues by
subsidiary activity and geographic market for the last three fiscal years:

|                                                                                                                                                   |   | 2007       | 2006       | 2005      
|-------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | ---------- | ----------
|Canada                                                                                                                                             | $ | 5,513,030  | 5,832,869  | 4,175,334 
|China                                                                                                                                              |   | 5,977,218  | 4,751,684  | 5,019,599 
|USA                                                                                                                                                |   | 1,038,729  | 935,956    | 1,021,769 
|Sweden                                                                                                                                             |   | 582,025    | 315,708    | 397,341   
|Total                                                                                                                                              | $ | 13,111,002 | 11,836,217 | 10,614,043
|                                                                                                                                                   |   |            |            |           
|The following table
    summarizes the Companys revenues by the geographic region where the
    customer resides for the last three fiscal years:
|                                                                                                                                                   |   |            |            |           
|                                                                                                                                                   |   | 2007       | 2006       | 2005      
|Asia                                                                                                                                               | $ | 7,466,932  | 6,719,440  | 6,249,245 
|Europe                                                                                                                                             |   | 4,157,540  | 3,871,481  | 2,743,486 
|North America                                                                                                                                      |   | 1,486,530  | 1,245,296  | 1,621,312 
|Total                                                                                                                                              | $ | 13,111,002 | 11,836,217 | 10,614,043

27

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Descriptions of the material effects of government
regulations on our business can be found elsewhere in this Form 20-F, including
in the discussions contained in Item 3.d - Risk factorsandItem 10 -
Additional Information.
C. Organizational Structure

As at December 31, 2007, unless otherwise
indicated, Zi, or one or more of its subsidiaries, owns 100 percent of the
outstanding shares of the subsidiary.

|Name of Subsidiary                                      | Country of Incorporation
|------------------------------------------------------- | ------------------------
|Multi-Corp International Ltd.                           | Barbados                
|Zi (Bermuda)
    Corporation Ltd.                       | Bermuda                 
|Zi Technology
    Corporation Ltd.                      | Bermuda                 
|845162 Alberta Ltd.                                     | Canada                  
|Zi Corporation of
    Canada, Inc.                      | Canada                  
|Huayu Zi Software
    Technology (Beijing) Co., Ltd.(2) | China                   
|Zi Software Technology
    (Beijing) Co., Ltd.          | China                   
|Asia Translation &
    Telecommunications Limited       | Hong
    Kong           
|Huayu Zi Software
    Technology Limited.(1)            | Hong
    Kong           
|Telecom Technology
    Corporation Limited              | Hong
    Kong           
|Zi Corporation (H.K.)
    Limited                       | Hong
    Kong           
|Zi Corporation of Hong
    Kong Limited                 | Hong
    Kong           
|Zi Decuma AB                                            | Sweden                  
|Zi Corporation of
    America, Inc.                     | USA                     

Notes:

(1)

Zi
Corporation (H.K.) Limited holds nearly eighty-five percent (85%) of Huayu Zi
Software Technology Limited. One share of Huayu Zi Software Technology Limited
is held by Zi Corporation of Hong Kong 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.

D. Property, plants and equipment.

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

|                       |                                      |                                        | Approximate   
|---------------------- | ------------------------------------ | -------------------------------------- | --------------
|Location               | Purpose                              | Owned or leased                        | Square footage
|                       |                                      |                                        |               
|Calgary, Alberta       | Corporate head office and            | Lease expires June 30, 2012            | 13,355 sq ft  
|                       | engineering office                   |                                        |               
|                       |                                      |                                        |               
|Vancouver, British     | Software
    development             | Lease
    automatically renews         | 140 sq ft     
|Columbia               |                                      | every six
    months until terminated. |               
|                       |                                      |                                        |               
|Martinez, California   | North American sales office          | November                               | 350 sq ft     
|                       |                                      | Lease expires 30, 2008                 |               
|                       |                                      |                                        |               
|Hong
    Kong, SAR     | Asia
    Pacific sales and           | November                               | 893 sq ft     
|                       | engineering office                   | Lease
    expires 18, 2009             |               
|                       |                                      |                                        |               
|Beijing, PRC (ZST)     | PRC R&D office                       | Lease expires February 28, 2010        | 3,606 sq ft   
|                       |                                      |                                        |               
|                       |                                      |                                        |               
|Beijing,
    PRC (ZiB) | PRC sales
    and engineering office | Lease
    expires December 31, 2008    | 4,252 sq ft   
|                       |                                      |                                        |               
|Lund, Sweden           | Corporate head office and            | Lease expires June 30, 2009            |               
|                       | engineering office for Decuma        |                                        | 4,237 sq ft   

We believe our facilities are adequate for our operations and
have no plans to add facilities during the remainder of 2008.

28

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Item 4A. Unresolved Staff Comments

Not applicableItem 5. Operating and Financial Review and Prospects

The following table summarizes certain of our selected
financial information (stated in thousands of U.S. dollars) prepared in
accordance with U.S. GAAP. The information in the table was derived from the
more detailed financial statements for the fiscal year ended December 31, 2005
through the fiscal year ended December 31, 2007, 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".

|For the years ended December 31 (thousands
    except per share amounts) |   | 2007    |   | 2006    |   | 2005   
|------------------------------------------------------------------------ | - | ------- | - | ------- | - | -------
|                                                                         |   |         |   |         |   |        
|Revenue                                                                  | $ | 13,111  | $ | 11,836  | $ | 10,614 
|                                                                         |   |         |   |         |   |        
|Gross margin                                                             | $ | 12,847  | $ | 11,430  | $ | 10,258 
|                                                                         |   |         |   |         |   |        
|Net loss from continuing operations                                      | $ | (5,759) | $ | (9,750) | $ | (4.489)
|                                                                         |   |         |   |         |   |        
|Total assets                                                             | $ | 15,695  | $ | 14,547  | $ | 22,405 
|                                                                         |   |         |   |         |   |        
|Net loss per share from continuing operations
    - basic and diluted    | $ | (0.11)  | $ | (0.21)  | $ | (0.10) 
|                                                                         |   |         |   |         |   |        
|Outstanding shares, weighted average                                     |   | 49,641  |   | 46,503  |   | 46,153 
|                                                                         |   |         |   |         |   |        
|Outstanding shares, end of year                                          |   | 50,558  |   | 46,689  |   | 46,273 

A. Operating results.

Overview

Zi Corporation is incorporated under the Business
Corporations Act (Alberta). Our corporate headquarters are in Calgary, Canada
with offices in the United States of America, Sweden, China, Hong Kong and
Japan; and a sales team that markets our products to customers around the globe.

We develop and market intelligent interface solutions
designed to enhance the usability of mobile handsets and consumer electronic
devices. Our embedded software products make such electronic devices such as
mobile phones, PDAs, handheld computers, video gaming consoles, television
set-top boxes, printers and other similar devices more intuitive and easier to
use. Users are able to enter data more efficiently and are able to circumvent
complex and tedious interfaces by accessing key features directly, thereby
increasing the user experience by allowing the user to utilize the full
potential of these devices. Increasing the user experience benefits our
customers by increasing the usage of their devices.

The mobile handset market is one of the largest and most
vibrant global electronics markets. Sources from Reuters estimate the global
subscriber base to have reached over 3.3 billion in November 2007. Researcher
strategy analytis estimates that over 1.2 billion handsets may be sold in 2008.
Positive trends include the continued growth of mobile handsets in emerging
markets, with sales of entry level devices growing, and increased sales of
feature phones as replacement devices. We are uniquely positioned to benefit
from this trend, based on our proven ability to develop mobile solutions in
multiple languages, for devices ranging from proprietary entry level ultra low
cost handsets and replacement feature phones, to smartphones based on open
architecture. Within both the emerging markets and the mature developed world,
2008 may well be the year of the smartphone. Dramatic increases in unit
smartphone sales in 2007 are expected to continue into 2008, driven by the
consumers desire to gain access to the outside world with them, in an
environment that recognizes the unique challenges of the mobile device. Our
product portfolio helps deliver on the promise of the smartphone, through
improved input, search, and service discovery.

As the handset market has grown and evolved, wireless
carriers worldwide have begun to deliver services which are uniquely positioned
to the personal "always on" nature of the mobile phone. Content and product
downloads, and other services unrelated to voice continue to deliver revenue
growth, and services such as mobile advertising are beginning to gain strategic
importance to the operator and subscriber alike. Informa estimates that
worldwide mobile advertising revenues should increase from $2.6 billion in 2007,
to almost $14 billion in 2011. In a recent market survey, Nielsen reported that
almost 25 percent of US mobile subscribers reported seeing mobile advertising,
and of those, over 50 percent reported responding to it. Our mobile search and
discovery solutions facilitate the effective, relevant, and context sensitive
delivery of these non-voice services.



---



To enable users to enter data more efficiently, circumvent
complex and tedius interfaces, to utilize features offered by smartphones, and
to capitalize on the potential advertising market, we offer a differentiated
line of products that our customers can conveniently and easily design into
their products that can help them address the needs of global markets. By
supporting keypad, keyboard, pen and other input methods, our products can
significantly increase the ease, speed and accuracy of text input on electronic
devices. Our text entry solutions are available in 60 languages, representing
languages spoken and written by two thirds of the world's population. Our
products allow for natural human interaction in such complex written languages
as Arabic, Chinese and Japanese.

Our worldwide solutions include eZiText for one-touch
predictive text entry; eZiType predictive keyboard with auto-correction; Decuma
for natural handwriting recognition with prediction technology; and Qix, a
mobile search and service discovery solution designed to enhance the user
experience, drive client and network service usage and adoption and help the
network operator increase average revenue per user ("ARPU").

Our primary customers are original equipment manufacturers
("OEMs") and original design manufacturers ("ODMs") seeking to embed a text
input solution in their device products for consumer use. We have also begun
selling our products to network operators seeking to promote more service use
and achieve revenue and innovation advantage. As more consumers use smartphones,
Qix is well positioned to enhance the user experience by making it easier to
utilize the advanced functions, and increase the ARPU that carries earn.

Our customer and alliance base of OEMs and ODMs is
extensive and continually growing with handset manufacturing and gaming console
customers from around the world, including: Nokia, Sony, Sony Computer
Entertainment, Sony Ericsson, Nintendo, Motorola, LG Electronics, ZTE, Lenovo,
UT Starcom and Kyocera. Currently, eZiText has been introduced to consumers
worldwide on more than 1,000 unique mobile devices.

We believe we deliver value to device manufacturers by
providing products that help them increase revenue and reduce costs through
flexible and simplified implementations of their products. Because the modular
nature of our products allows for easy handset customization, manufacturers can
quickly tailor our products and technology to a broad range of languages and
features. We also partner with manufacturers to adapt their products and
technology to specific market requirements, and we can deliver customized user
interfaces for a large variety of applications, as for example the Sony Walkman
Handset and the Nokia Linux Tablet.

Network operators, on the other hand, can increase service
usage and revenue with Qix. Qix makes it easier for consumers to use advanced
services, thus driving service usage and adoption  ultimately, resulting in
increased ARPU for wireless carriers. In June 2006, we announced the results of
the trial with UK operator Virgin Mobile, which demonstrated a 33 percent
increase in ARPU among consumers in the trial. In the fourth quarter 2006, Zi
announced its first revenue generating agreement for Qix with T-Mobile (UK)
Limited ("T-Mobile"), a major global wireless service operator. We are also in
the process of conducting a trial with another major carrier. The results of
these trials, when completed, will be used to further market our technology and
sign revenue generating agreements.

In summary, our product portfolio includes:

eZiText offers fast, easy, accurate text input for a range of
electronic devices, including mobile phones, telematic systems, set-top boxes,
printers and gaming consoles.

Key Features

- 

Full word prediction

Single mode entry for different languages and
  applications

Dual language prediction for multilingual users

Passive and active learning of user vocabulary

Cross-application indexing and context-sensitive
  vocabulary30

---



eZiType is a business text input product for advanced mobile email handsets
that is designed to increase speed, accuracy and make it easier to input text.

Key Features

- Full word prediction
- 
- 
- 
- 
- 
- 

Qix is a search and discovery engine that is designed to
enable quick and easy use of a mobile phones applications and services. It
allows users to access the full range of phone features simply and intuitively
without having to remember where or how to locate them. Field tests have shown
that this simplicity motivates users to find and use revenue-producing features
more often. Qix complements standard mobile search products.

Key Features

- 

On-device search

Natural language access to handset features and
  applications, bypassing the menu and encouraging repeated use

Operator content discovery 

Recent Developments:

Thus far in 2008, and in the fourth quarter of 2007, we
announced the following customer and market related events:
On February 7, 2008, we announced a license agreement with
TELUS, a leading national telecommunications company in Canada, to offer Qix on
select models of TELUS smart phones and feature phones. TELUS will be the first
carrier in North America to offer Qix.
We believe the implementation of Qix with TELUS is an
important breakthrough for us. It reinforces that Qix technology is now easy to
adapt and can be used on a broad range of handsets, regardless of the operating
system.
On January 24, 2008, we announced our plans to attend
February's Mobile World Congress exhibition in Barcelona to unveil the latest
developments for Qix, including the introduction of Qix Updater, a refresher
feature that allows operators to add new advertisements and content at any time
and allows operators to push these updates to mobile users worldwide.
On January 10, 2008 we announced a new license agreement for
eZiText and eZiType with Norway-based Trolltech ASA. Trolltech has integrated
eZiText and eZiType as part of the Qtopia Greensuite initiative, which offers
pre-integrated market leading partner components on top of Qtopia Phone Edition.
We also announced the following licensing agreements in the
fourth quarter of 2007:

A revenue generating agreement for eZiText, with a
  major global printer manufacturer;

The licensing of eZiText to a student at the
  University of Massachusetts Lowell, who has invented a unique device for a man
  with cerebral palsy that enables quicker text input on his computer; and

Signed new licensing agreement for eZiText, with
  Taiwanese research and development leader Leadtek Research Inc. 

On October 25, 2007, we announced the receipt of an award for
excellence for the intuitive qualities of our Chinese text input systems at the
20th Annual China Mobile Market Development Event held in Beijing. Joined by
officials from The Chinese Ministry of Information and Industry and
representatives from China Mobile, China Unicom, ZTE, Huawei and Qualcomm, Zi
was honored for its work in the Asian market over the past 10 years.
Throughout 2007, we announced the following significant non-customer or
market-related events:31

---

On May 2, 2007, the United States District Court for Western
District of Texas issued an Order of Non-Infringement of US Patent No. 4,674,112
against The Board of Regents of the University of Texas ("U of T"), as
plaintiff, and in favor of all remaining defendants. U of T has filed an appeal.
We were not a Defendant in this case but were participating as an indemnifier,
in the defense of a customer who was. We incurred significant legal expense in
the defense of this patent infringement claim and we may incur more expenses
during the appeal process (see additional discussion under the
"Litigation/Indemnification" section).
On April 10, 2007, a settlement agreement with the Receiver
for the Lancer Entities became effective. Pursuant to the settlement agreement,
the parties discontinued, with prejudice, all litigation and regulatory
proceedings of any kind. In addition, the Receiver, and certain of our current
and former directors delivered mutual releases.
On March 29, 2007, we completed a brokered private placement
in the United States and a non-brokered private placement in Canada of a total
of 3,776,848 units, consisting of one common share and two-fifths of a warrant
to purchase one common share, priced at $1.61 per unit for net proceeds of
$5,533,644.
On March 27, 2007, we completed the sale of our minority
interest in Archer for total proceeds of $632,601. The completion of this sale
represents the end of our involvement in the e-Learning business segment (see
additional discussion under the "Operating Results  Discontinued Operations"
section).
Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and judgments
that affect the reported amount of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates, including those related to asset
impairment, revenue recognition, contingencies and litigation. These estimates
are based on information that is currently available to us and on various other
assumptions that we believed to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions and
conditions.
We have identified the following critical accounting policies
that affect the more significant estimates and judgments used in preparation of
our consolidated financial statements:
Going Concern Uncertainty

As at December 31, 2007, we had an accumulated deficit of
$113,702,097 and for the year ended December 31, 2007, incurred a loss of
$5,759,199 from continuing operations. Continuing operations are dependent on us
achieving profitable operations and being able to raise capital, if and when
necessary to meet our obligations and repay liabilities when they come due.
We are executing a business plan to allow us to continue as a
going concern, which is to achieve profitability through cost containment and
increased revenues. We have reduced our losses and intend to reduce them
further, ultimately achieving profitability. There is significant uncertainty
that we will be successful in executing this plan. Should we fail to achieve
profitability, or if necessary, raise sufficient capital to sustain operations,
we may be forced to suspend our operations, and possibly even liquidate our
assets and wind-up and dissolve the Company.
During the first quarter of 2007, we completed a private
placement for net proceeds of $5,533,644. For the year ended December 31, 2007
compared to the corresponding period in 2006, operating expenses decreased and
revenues increased, resulting in reduced net losses from continuing operations.
We are in the process of establishing, with the Chinese
governments approval, an inter-company royalty program, which has received the
approval of some but not all applicable government departments. We expect final
approval in the near future, the effect of which will be that all cash held in
our Chinese subsidiaries, along with all other cash of the Company, will
effectively be available to fund the day-to-day operations of the Company.
Our consolidated financial statements are prepared on a going
concern basis, which assumes that we will be able to realize our assets at the
amounts recorded and discharge our liabilities in the normal course of business
in the foreseeable future. Should this assumption not be appropriate,
adjustments in the carrying amounts of the assets and liabilities to their
realizable amounts and the classifications thereof will be required and these
adjustments and reclassifications may be material.32

---



Principle of Consolidation

The 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 us except Archer, which have been
segregated to discontinued operations.

We consolidate an entitys financial statements when we
either will absorb a majority of the entitys expected losses or residual
returns, in the case of a variable interest entity, which there were none at
December 31, 2007 and 2006, or have the ability to exert control over a
subsidiary. Control is normally established when ownership interests exceed 50
percent in an entity. However, when we do not exercise control over a
majority-owned entity as a result of other investors having rights over the
management and operations of the entity, we account for the entity under the
equity method.

Software Development Costs

All research and development costs are expensed as incurred
except those that meet the criteria of 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 after technological feasibility of a project is established.

The determination of whether a project is technically
feasible involves management judgment. We determine that a product is
technically feasible when the concept has been reviewed by management, and we
have the necessary resources to complete the project. Technological feasibility
is also established when a product design or working model of the product,
consistent with the product design, is complete and tested. Capitalized costs
are amortized over three years commencing in the period of the product's
commercial release.

Revenue Recognition

Revenues from software licensing agreements are recognized in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". The application of these rules requires judgment, including, but
not limited to, estimating the probability of collection of the receivables
resulting from the sale, assessing whether or not all vendor obligations  i.e.,
obligations borne by us - have been satisfied and whether or not there is
sufficient evidence to support the fair value of the various elements in a
multi-element agreement. Changes to any of these elements could materially
impact the amount of earned and unearned revenue.

Under software licensing arrangements, we recognize 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.

Revenues from software licensing royalties related to the
sale of the product in which our technologies have been embedded are recorded as
earned.

Revenue from consulting and engineering services is
recognized using the percentage of completion method.

Stock-Based Compensation Plan

We account for stock-based compensation in accordance with
SFAS No. 123(R), "Share-Based Payment". Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the
grant date based on the value of the award and is recognized as expense over the
vesting period. Determining the fair value of share-based awards at the grant
date requires judgment, including estimating expected terms of the awards. In
addition, judgment is also required in estimating the amount of share-based
awards that are expected to be forfeited. If actual results differ significantly
from these estimates, stock-based compensation expense and our results of
operations could be materially impacted.



---



Contingencies

The outcomes of legal proceedings and claims brought against
us are subject to significant uncertainty. SFAS No. 5, "Accounting for
Contingencies", requires that an estimated loss from a loss contingency, such as
a legal proceeding or claim, should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. Disclosure of a contingency
is required if there is at least a reasonable possibility that a loss has been
incurred. In determining whether a loss should be accrued we evaluate, among
other factors, the degree of probability of an unfavorable outcome and the
ability to make a reasonable estimate of the amount of loss. Changes in these
factors could materially impact our financial position or our results of
operations.

Accounting for Income Taxes

We use the asset and liability method of accounting for
income taxes. Under this method, income tax expense is recognized for the amount
of taxes payable or refundable for the current year. In addition, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial reporting and tax bases of assets
and liabilities, and for operating losses and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount to be
expected to be realized. Management must make assumptions, judgments and
estimates to determine our current provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance to be recorded against a
deferred tax asset. Our judgments, assumptions and estimates relative to the
current provision for income tax take into account current tax laws, our
interpretation of current tax laws and possible outcomes of future audits
conducted by foreign and domestic tax authorities. Changes in tax law or our
interpretation of tax laws and future tax audits could significantly impact the
amounts provided for income taxes in our consolidated financial statements.

On January 1, 2007, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), an interpretation of FASB Statement No.
109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
interpretation requires that we recognize the impact of a tax position in the
financial statements if that position is more likely than not being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods and disclosure. In accordance with the provisions of FIN 48,
any cumulative effect resulting from the change in accounting principle is to be
recorded as an adjustment to the opening balance of deficit. The adoption of FIN
48 on January 1, 2007 did not result in a material impact on our financial
position or results of operation. However, in accordance with FIN 48, we
recorded a provision for $652,278 in 2007 as a result of an examination of our
international transfer pricing policies and procedures by the CRA (see
additional discussion under Operating Results  "Income Tax Expense" section).

Recent accounting pronouncements

In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities Including an
Amendment of FASB Statement No.115". The statement provides companies with an
option to report selected financial assets and liabilities at fair value. This
Statement is effective as of the beginning of an entitys first fiscal year
beginning after November 15, 2007. We have evaluated the SFAS 159 and have
determined that adopting it will not have a significant impact on our
consolidated operations and financial condition.

In September 2006 the FASB issued SFAS No. 157 "Fair Value
Measurements", which is effective for fiscal years beginning after November 15,
2007. The statement provides a single definition of fair value, together with a
framework for measuring it, and requires additional disclosure about the use of
fair value to measure assets and liabilities. We have evaluated the SFAS 157 and
have determined that adopting it will not have a significant impact on our
consolidated operations and financial condition.

The SEC commented that several registrants should have
recorded share purchase warrants that were issued in a currency other than their
functional currency as a derivative instrument in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", instead of shareholders
equity, and adjusted to market value each reporting period. The FASB met and
concluded that the position taken by the SEC was correct, but that entities
would be allowed until 2008 to adopt it, and then would be able to do so as a
change of accounting policy. Early adoption is not permitted. We have not
assessed what, if any, impact it will have on our financial statements. We do
not have warrants outstanding that meet the definition of a derivative under
SFAS 133 as at December 31, 2007. However, we did in previous years have
warrants that met this definition. This issue has not been settled by the SEC
and FASB. As a result, we may be required to record a significant cumulative
adjustment to our opening accumulated deficit in the quarter the issue is
settled.



---



Quarterly Overview

The following table summarizes selected unaudited quarterly
financial data for the past eight fiscal quarters:

|                                            |   | 2007   
|------------------------------------------- | - | -------
|                                            |   | Fourth 
|(In millions, except per share
    amounts) |   | Quarter
|                                            |   |        
|Revenues                                    | $ | 3.6    
|Selling,
    general and administrative     |   | 3.0    
|Business
    Taxes                          |   | 0.7    
|Legal                                       |   | 0.6    
|Product,
    research and development       |   | 0.7    
|Depreciation and amortization               |   | 0.4    
|Operating
    loss                          |   | 1.8    
|Loss from
    continuing operations         |   | 1.7    
|Net loss                                    | $ | 1.7    
|Loss per
    share - Basic and diluted      | $ | 0.03   



|                                        |   | 2006   
|--------------------------------------- | - | -------
|                                        |   | Fourth 
|(In millions, except per share amounts) |   | Quarter
|                                        |   |        
|Revenues                                | $ | 3.2    
|Selling, general and administrative     |   | 3.2    
|Business taxes                          |   | 0.2    
|Legal                                   |   | 0.8    
|Product, research and development       |   | 0.8    
|Depreciation and amortization           |   | 0.5    
|Operating loss                          |   | 2.3    
|Loss from continuing operations         |   | 2.6    
|Net loss                                | $ | 3.0    
|Loss per share - Basic and diluted      | $ | 0.06   

The net loss for the 2007 fourth quarter was $1.7 million, or
a loss per basic and diluted share of $0.03, compared to a net loss of $3.0
million, or a loss of $0.06 per basic and diluted share, in the prior year
period. The reduction in the net loss for the 2007 fourth quarter compared to
the corresponding period in 2006 is due to an increase in our revenues and a
reduction of our expenses. Offsetting the reduction in our expenses is the
general depreciation of the U.S. dollar against other currencies, especially the
Canadian dollar with in which a significant portion of our expenses is
denominated. (see additional discussion under the "Operating Results  Foreign
Currency" section).



---



Revenues in the fourth quarter of 2007 were $3.6 million.
This compares to the 2006 fourth quarter revenues of $3.2 million and 2007 third
quarter revenues of $3.4 million, increases of 13 percent and 7 percent,
respectively. These increases are attributable to some of our largest customers
reporting higher royalties, including one customer who reported first-time
revenue from shipments of their phones with Decuma embedded.

SG&A expense for the 2007 fourth quarter was $3.0 million
compared to $3.2 million for the fourth quarter of 2006 and $2.3 million in the
third quarter of 2007, a decrease of 6 percent and an increase of 28 percent
respectively. The decrease in SG&A expenses over the 2006 fourth quarter were
due primarily to:

- 

A decrease in our stock compensation expense;

A decrease in our insurance costs;

A decrease in our bad debts expense; offset by

A general increase due to appreciation of the
  Canadian dollar, in which denomination a large portion of our expenses are
  incurred, against the US dollar;

An increase in professional fees relating to
  Sarbanes-Oxley 404 ("SOX") compliance in order to ensure timely compliance and
  confirm managements ability to issue a clean report on internal controls;

An increase in rental expense; and

An increase in commissions; 

The increase of 28 percent over the third quarter of 2007 was
due primarily to:

A general increase due to appreciation of the
  Canadian dollar, in which denomination a large portion of our expenses are
  incurred, against the US dollar;

An increase in professional fees relating to
  Sarbanes-Oxley 404 ("SOX") compliance in order to ensure timely compliance and
  confirm managements ability to issue a clean report on internal controls;

An increase in commissions and special selling
  bonuses; andAn increase in our stock compensation
  expense relating to options granted in the fourth quarter of 2007, including a
  true-up caused by a decline in forfeiture rates versus assumption used in our
  Black  Scholes model calculation in previous periods. 

Business taxes for the 2007 fourth quarter were $0.7 million
compared to $0.2 million for the fourth quarter of 2006 and $0.1 million in the
third quarter of 2007, increases of 210 percent and 748 percent respectively.
The increase in business taxes over the 2006 fourth quarter was due primarily
to:Withholding taxes payable with
  respect to our inter-company royalty program. These royalties relate to
  revenues in one of our Chinese subsidiaries dating back to 2005 and thus a
  large portion of this expense can be considered one-time in nature; and

Increases in revenues on which business taxes are
  calculated. 

The increase over the third quarter of 2007 is due primarily to:

Withholding taxes payable with respect to our
  inter-company royalty program as described above; and

The recovery of withholding taxes from a licensee.
  

We continue to invest in new product features and
enhancements to software language databases along with continued investment in
Decuma handwriting recognition software and Qix. PR&D expense, net of
capitalized costs, for the 2007 fourth quarter was $0.7 million compared to $0.8
million fourth quarter of 2006 and $0.6 million in the third quarter of 2007,
decreases of 9 percent and an increase of 8 percent respectively. PR&D expense
has remained consistent with the fourth quarter of 2006 and the third quarter of
2007.
Legal expense for the 2007 fourth quarter was $0.6 million
compared to $0.8 million for the fourth quarter of 2006 and $0.5 million in the
third quarter of 2007, a decrease of 32 percent and increase of 24 percent
respectively. Legal expense for the 2007 fourth quarter increased from the 2007
third quarter due to fees for the audit of our cross border transactions by the
CRA. The decrease in legal expense from 2007 to 2006 was due, in large part, to
decreased activity in the U of T action, and lower fees incurred as a result of
the Settlement Agreement entered into with the Receiver for the Lancer Entities.
We expect legal expenses to continue to decrease in
2008.

36

---

Operating Results

Net Loss

|                                 |   |        |   |         |   |        | Percent     | Percent    
|-------------------------------- | - | ------ | - | ------- | - | ------ | ----------- | -----------
|                                 |   |        |   |         |   |        | Change 2007 | Change 2006
|(In millions, except percentages |   |        |   |         |   |        |             |            
|and per share amounts)           |   | 2007   |   | 2006    |   | 2005   | versus 2006 | versus 2005
|                                 |   |        |   |         |   |        |             |            
|Revenue                          | $ | 13.10  | $ | 11.80   | $ | 10.60  | 11%         | 12%        
|Operating loss -continuing       |   |        |   |         |   |        |             |            
|operations                       | $ | (5.00) | $ | (8.90)  | $ | (4.10) | -44%        | 117%       
|Gain (Loss) from                 |   |        |   |         |   |        |             |            
|Discontinued operations          | $ | 0.60   | $ | (1.20)  | $ | (0.80) | 151%        | 50%        
|Net Loss                         | $ | (5.10) | $ | (11.00) | $ | (5.30) | -53%        | 107%       
|Loss per share                   |   | (0.10) |   | (0.24)  |   | (0.12) |             |            

In 2007, we focused on optimizing our costs while working to increase
revenues in all product lines. As a result our net loss decreased in 2007
decreased by 53 percent from 2006, and is expected to decrease further in 2008.
This decrease resulted from the following:

- 

Increase in revenues of 11 percent compared to 2006
  (see additional discussion under the "Operating Results  Revenue" section);

Decreases in product research and development
  ("PR&D") (see additional discussion under Operating Results  "Product
  Research and Development" section);

Decreases in legal expenses (see additional
  discussion under the "Operating Results  Legal" section);

Decrease in our SFAS 123(R) stock based compensation
  expense;

Significant decrease in bad debt expense; offset by

Increases in certain selling general and
  administrative ("SG&A") costs (see additional discussion under the "Operating
  Results  Selling, General and Administrative" section). 

The increase in net loss in 2006 compared to 2005 is primarily attributable
to the following:

An increase in legal expenses (see additional
  discussion under the "Operating Results  Legal" section);

An increase in compensation costs resulting from the
  initial implementation of SFAS 123(R) stock based compensation;

An increase in bad debt expense as a result of
  competitive pressures being experienced by some of our Asian-based customers;

An increase in our depreciation expense with the
  commercial release of Qix and the purchase of Decuma in 2005;

The increase in the loss from discontinued
  operations of resulting from the inclusion of Archers operations; offset by

A one-time $1.4 million gain recognized in 2005 from
  the settlement of litigation with our former U.S. legal counsel. 

Revenue

|                                  |   |      |   |      |   |      | Percent     | Percent    
|--------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                  |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages) |   | 2007 |   | 2006 |   | 2005 | versus 2006 | Versus 2005
|                                  |   |      |   |      |   |      |             |            
|Royalties, license and            |   |      |   |      |   |      |             |            
|implementation fees               | $ | 13.1 | $ | 11.8 | $ | 10.6 | 11%         | 12%        

The increase in the 2007 revenues as compared to the 2006 revenues is
primarily due to the following:

- 



---



The increase in the 2006 revenues as compared to the 2005 revenues is
primarily due to the following:

- 

Our penetration into the
  gaming console market; and

Additional revenues
  recognized from our largest customer.We expect to continue to increase our revenues as we continue
to conduct trials and market Qix. As a result of our marketing efforts, we
announced our new Qix agreement with TELUS in February 2008. We believe this
agreement validates our Qix technology to the market and will be beneficial in
marketing Qix to other potential customers. We are also conducting trials with
major carriers in order to further validate Qix, and assist in entering into
additional license agreements.
We continue to make progress in licensing Decuma. One of our
major customers shipped a significant number of units with Decuma embedded in
the fourth quarter of 2007. Additionally, another major customer is expected to
start shipping units with Decuma embedded in 2008.We have also been successful in signing new license
agreements with our Predictive Text products  eZiText and eZiType.

Revenues by Product
and Classification

Our revenues are derived from three product groups:
Predictive Text - eZiText and eZiType; handwriting recognition - Decuma; and
mobile search and discovery - Qix. In 2007, 96 percent of our revenue was
derived from Predictive Text. The remaining portion was derived from Decuma. We
have now introduced Qix to the market and expect revenues from Qix in 2008. We
expect the percentage of revenues from Decuma and Qix to increase significantly
in 2008, due to two factors  higher volumes of both products and both Decuma
and Qix command higher average selling prices than Predictive Text.

We classify our revenues as license and implementation fees,
maintenance and support fees, and software licensing royalties. License and
implementation fees are one time fees charged at the outset of the relationship
for licensing our technology and for providing services with implementing or
customizing our technology for use on their platforms. Maintenance and support
fees are generated as those services are provided. Software licensing royalties
are ongoing revenues based on the number of units shipped in which our
technology is embedded. The following table sets forth our percentage of revenue
by classification.

|                                |      |      |      | Percent     | Percent    
|------------------------------- | ---- | ---- | ---- | ----------- | -----------
|                                |      |      |      | Change 2007 | Change 2006
|                                | 2007 | 2006 | 2005 | versus 2006 | versus 2005
|                                |      |      |      |             |            
|Software licensing royalties    | 82%  | 78%  | 84%  | 5%          | -7%        
|License and implementation fees | 13%  | 18%  | 11%  | -25%        | 64%        
|Maintenance and support fees    | 4%   | 4%   | 5%   | 7%          | -20%       

The percentage of revenues from royalties for 2007 has
increased to 82 percent, similar to levels in 2005. The percentage of revenues
from royalties declined temporarily in 2006 due to the signing of new license
agreements which included a significant amount of upfront license and
implementation fees. We are benefiting in 2007 as our customers continue to
embed our technology in their products, and are experiencing increased volumes
of units in which our software is embedded. As we continue to market our new Qix
and Decuma technologies, the percentage of royalties derived from total revenues
is expected to increase due to their premium pricing.

38

---



Revenues by Geographic Region

The following table sets forth the revenues recognized by
Zis subsidiaries established in the geographic locations in which
those subsidiaries reside:

|                                  |   |      |   |      |   |      | Percent     | Percent    
|--------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                  |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages) |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|                                  |   |      |   |      |   |      |             |            
|Canada                            | $ | 5.5  | $ | 5.8  | $ | 4.2  | -5%         | 40%        
|United States                     |   | 1.0  |   | 0.9  |   | 1.0  | 11%         | -8%        
|Asia                              |   | 6.0  |   | 4.8  |   | 5.0  | 26%         | -5%        
|Europe                            |   | 0.6  |   | 0.3  |   | 0.4  | 84%         | -21%       

The following table sets forth Zis revenues attributable to our customers on
the regions in which they reside:

|                                  |   |      |   |      |   |      | Percent     | Percent    
|--------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                  |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages) |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|                                  |   |      |   |      |   |      |             |            
|Asia                              | $ | 7.4  | $ | 6.7  | $ | 6.2  | 11%         | 8%         
|Europe                            |   | 4.2  |   | 3.9  |   | 2.7  | 7%          | 42%        
|North America                     |   | 1.5  |   | 1.2  |   | 1.6  | 19%         | -22%       

Significant customers

The following table sets forth the percentage of total
revenue accounted for by our top three customers along with the percentage of
total revenue accounted for by our top five customers for the three years ended
December 31:

|                       |      |      |      | Percent     | Percent    
|---------------------- | ---- | ---- | ---- | ----------- | -----------
|                       |      |      |      | Change 2007 | Change 2006
|                       | 2007 | 2006 | 2005 | versus 2006 | versus 2005
|                       |      |      |      |             |            
|Significant Customer 1 | 23%  | 27%  | 20%  | -14%        | 35%        
|Significant Customer 2 | 10%  | 4%   | N/A  | 121%        | N/A        
|Significant Customer 3 | 9%   | 10%  | 14%  | -13%        | -30%       
|Top Five Customers     | 58%  | 50%  | 46%  | 14%         | 11%        

Revenues from the top five customers in 2007 have increased
to 58 percent from 50 percent of total revenues in 2006 and 46 percent of total
revenues in 2005. The year over year increases are due to the success of our
customers in shipping greater quantities of their products in which our software
is embedded. As our significant customers grow their business and ship more
units with our technologies embedded, they contribute additional revenues and
become significant to our business. We expect that our largest customers will
continue to contribute a significant portion of our revenue.

Selling, General and Administrative Expenses

|                                                                                               |   |      |   |      |   |      | Percent     | Percent    
|---------------------------------------------------------------------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                                                                               |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages)                                                              |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|Selling, General &                                                                             |   |      |   |      |   |      |             |            
|Administration                                                                                 | $ | 10.5 | $ | 10.7 | $ | 8.8  | -2%         | 22%        
|                                                                                               |   |      |   |      |   |      |             |            
|The above table has been
    reclassified to reflect that business taxes are shown separately.

39

---



SG&A includes salaries and benefits, stock-based compensation
and other employee related expenses of sales, finance, in-house legal,
facilities and human resources functions. It also includes the cost of
professional fees (excluding legal fees), rent, business taxes, bad debts and
other administrative expenses.

SG&A costs in 2007 have decreased marginally compared to
2006. Our costs have decreased primarily due to:

- 













We are committed to the cost optimization initiatives that we
have implemented, and have been successful in reducing certain costs. Our cost
savings however, have been offset by cost increases in other areas as described
above. Despite these offsetting cost increases, we expect a slight overall
decrease in SG&A expense in 2008 compared to 2007.

The increase in SG&A costs in 2006 is primarily due to:

- 





Business taxes

|                                  |   |      |   |      |   |      | Percent     | Percent    
|--------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                  |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages) |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|                                  |   |      |   |      |   |      |             |            
|Business taxes                    | $ | 1.3  | $ | 0.9  | $ | 0.9  | 36%         | 9%         

Business taxes include withholding and value added taxes.
Withholding taxes represent amounts remitted to foreign governments for revenues
earned in those jurisdictions with which we do not have a permanent
establishment. Value added taxes represent taxes collected from our customers in
China and remitted to the PRC tax authorities.

Business taxes in 2007 have increased significantly compared
to 2006. Our costs have increased primarily due to:

- 

Withholding taxes payable
  with respect to our inter-company royalty program paid. These royalties relate
  to China revenues dating back to 2005 and thus a large portion of this expense
  can be considered one-time in nature; and

Increases in revenues upon
  which our business taxes are calculated. 

Business taxes in 2006 have increased marginally compared to 2005. The
increase is primarily due to increases in revenues upon which our business are
calculated.
Legal

|                                  |   |      |   |      |   |      | Percent     | Percent    
|--------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                  |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages) |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|                                  |   |      |   |      |   |      |             |            
|Legal                             | $ | 1.9  | $ | 3.4  | $ | 1.7  | -42%        | 101%       

40

---



Legal expenses relate to fees incurred with outside legal
counsel for patent protection work, the defense of our patents, shareholder
issues and other corporate matters.

Legal costs decreased in 2007 as a result of the successful
conclusion in the U of T litigation. While we did receive the order of
non-infringement, the litigation was still on going in 2007 and we still
incurred expenses related to its defense (see additional discussion under the
"Litigation/Indemnification" section). The U of T has filed an appeal, which may
affect our legal fees in subsequent periods.

In addition, legal fees were lower fees as a result of the
completion of the settlement agreement entered into with the Receiver of the
Lancer Entities which became effective on April 10, 2007 (see additional
discussion under the "Litigation/Indemnification" section).

In our third quarter interim report, we disclosed that on
November 12, 2007 we became aware of a lawsuit filed by AutoText Technologies,
Inc., claiming, among other things, that its patent has been infringed. In
January 2008, we received notice that the lawsuit had been dismissed by Autotext
Technologies, Inc. against all defendants without prejudice. Accordingly, we
expect no legal costs to be incurred as a result of the lawsuit.

The sharp increase in legal costs in 2006 are primarily due
to the ongoing defense costs related to the U of T action against certain of our
clients and legal matters related to the Receiver of the Lancer Entities.

Product Research and Development Expense

|                                       |   |       |   |       |   |       | Percent     | Percent    
|-------------------------------------- | - | ----- | - | ----- | - | ----- | ----------- | -----------
|                                       |   |       |   |       |   |       | Change 2007 | Change 2006
|(In millions, except percentages)      |   | 2007  |   | 2006  |   | 2005  | versus 2006 | versus 2005
|Gross Product Research and Development | $ | 4.1   | $ | 5.1   | $ | 4.0   | -25%        | 27%        
|Capitalized costs                      |   | (1.7) |   | (1.4) |   | (0.9) | 0%          | 51%        
|Product Research and Development       |   | 2.4   |   | 3.7   |   | 3.1   | -35%        | 16%        

PR&D expenses include salaries, benefits, stock-based
compensation expense and other employee related costs. PR&D costs also include
third-party development and programming costs and linguists.

Gross expenditures on product development (expenditures
before capitalization of costs related to new product development) decreased by
$1.3 million in 2007, compared to the same period in 2006, for the following
reasons:

- 

Decrease in salary,
  employment benefits, travel, and stock-based compensation cost caused by the
  elimination of an executive position; and

Decrease in consulting fees
  as a result of reduced language database development and less reliance on
  consulting services in the development of Qix. 

We will continue to incur costs in all of our product lines
to add additional features, language databases, and to implement on additional
platforms. In addition, we expect to incur costs for research and development
related to potential new products. We expect that PR&D expenses will increase
moderately in the future.
Gross expenditures on product development (expenditures
before capitalization of costs related to new product development) increased in
2006, compared to 2005, for the following reasons:

The impact of the initial
  adoption of SFAS 123(R), which increased PR&D related compensation expense;
  and

Acceleration of the
  development of Qix; and

An overall increase in the
  head count of the PR&D related departments41

---



Depreciation and Amortization

|                         |   |      |   |      |   |      | Percent     | Percent    
|------------------------ | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                         |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except     |   |      |   |      |   |      |             |            
|percentages)             |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|                         |   |      |   |      |   |      |             |            
|Depreciation             | $ | 0.3  | $ | 0.4  | $ | 0.4  | -22%        | 0%         
|Amortization of deferred |   |      |   |      |   |      |             |            
|software development     |   |      |   |      |   |      |             |            
|costs                    |   | 1.2  |   | 1.1  |   | 0.6  | 7%          | 80%        
|Amortization of other    |   |      |   |      |   |      |             |            
|intangibles              |   | 0.2  |   | 0.2  |   | 0.2  | 8%          | 2%         

The table above sets out the components of depreciation and
amortization expense. Depreciation and amortization expense in 2007 has remained
stable compared to the same period in 2006. Depreciation on furniture and office
equipment has decreased compared to 2006 due to prior capitalized furniture and
equipment costs being completely amortized, thereby reducing the expense. The
reduction for furniture and office equipment has been offset with increases in
the depreciation and amortization expense for deferred software costs and
intangibles. The commercial release of a product commences the amortization of
previously capitalized software development costs related to that product.

The increase in depreciation and amortization in 2006 and
2005 was due to increased amortization associated with the commercial release of
the S60 version of eZiText and Qix. We commercially released the S60 version of
eZiText and Qix in January 2006, and July 2006, respectively.

Interest and Other Income

Interest and other income consist primarily of income from
our interest bearing deposits. Interest and other income declined in 2007 and
2006 compared to their respective prior periods as average cash position
decreased from 2006 and 2005 respectively.

Income Tax Expense

|                                  |   |      |   |      |   |      | Percent     | Percent    
|--------------------------------- | - | ---- | - | ---- | - | ---- | ----------- | -----------
|                                  |   |      |   |      |   |      | Change 2007 | Change 2006
|(In millions, except percentages) |   | 2007 |   | 2006 |   | 2005 | versus 2006 | versus 2005
|                                  |   |      |   |      |   |      |             |            
|Income tax                        | $ | 1.0  | $ | 0.9  | $ | 0.7  | 17%         | 29%        

We account for income taxes in accordance with FASB SFAS No.
109, "Accounting for Income Taxes". Future tax assets and liabilities arise from
temporary differences between the tax bases of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years. These temporary differences are
measured using enacted tax rates. A valuation allowance is recorded to reduce
future tax assets to the extent that management considers it is more likely than
not that a future tax asset will not be realized. In determining the valuation
allowance, management considers factors such as the past history of operating
losses, projected taxable income, reversal of future income tax liabilities, and
the character of income tax assets and tax planning strategies. A change to
these factors could impact the estimated valuation allowance and income tax
expense.

We adopted the provisions of FIN 48 on January 1, 2007. The
implementation of FIN 48 did not result in any adjustment to our beginning tax
positions. We continue to recognize our tax assets, which are offset by a
valuation allowance to the extent that it is more likely than not that the
deferred tax assets will not be realized. As at January 1, 2007 and December 31,
2007, we did not have any unrecognized tax assets.

Except for our Chinese subsidiary, we incurred losses in
2007, 2006 and 2005, the tax benefits of which have not been reflected in the
financial statements. A valuation allowance equivalent to the full value of the
deferred tax assets of $13.2 million is reflected in the consolidated financial
statements resulting in no deferred tax assets being recognized.



---



The income tax expense from our Chinese subsidiary has
decreased to $0.4 million compared to $0.9 million for the same period in 2006.
The decrease resulted from reduced profits in that subsidiary. However, this
decrease was offset by a tax provision resulting from the examination of our
international transfer pricing polices by the CRA which is discussed further
below. It should be noted that this reduction in profit was offset by increased
profits in another Chinese subsidiary which has qualified for favorable tax
rates.

The tax incentives for our new Chinese subsidiary will begin
to be phased out after 2008. Accordingly, the subsidiarys income will become
taxable for taxation years after 2008. The effective tax rate in 2009 will be
lower than the general PRC corporate tax rate. The rate is expected to increase
for 2010 and subsequent years; however, the rate will still continue to be lower
than the general PRC corporate tax rate of 25 percent.

Our income tax expense increased in 2006 compared to 2005.
The increase results primarily to our Chinese subsidiary benefiting by reducing
its 2005 tax payable by using the remaining balance of loss carry forwards
available. Our Chinese subsidiary did not have tax loss carry forwards available
in 2006 to reduce its taxes payable.

We have net operating loss carry forwards of approximately
$62.0 million, which can be applied against future years' taxable income in
their respective jurisdictions. In addition, we have $51.6 million of capital
losses carry forward which are available to offset Canadian capital gains in
future years. Taxable income earned by our 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.

In 2006, the CRA commenced an examination of our
international transfer pricing policies and procedures and documentation for
2002 and 2003 in the second quarter of 2006. We prepared a submission for the
2002 and 2003 taxation years, which was submitted to CRA on July 10, 2007. In
accordance with FIN 48, we have included in our income tax expense for the year
ended December 31, 2007, a provision of $652,278. This provision represents
potential penalties, assuming that the methodology used in the submission to the
CRA with regard to the 2002 and 2003 taxation years is then applied to all tax
years that are currently open in Canada. We have included the provision in our
current liabilities; however, the determination of when the eventual payment, if
any, will be made is uncertain, and such payment could occur in years subsequent
to 2008. In addition, the ultimate resolution of this matter is uncertain, and
the eventual outcome may differ significantly should a) CRA not assess a penalty
for the years currently being audited and b) CRA not audit the other years that
remain open, and c) even if they do, choose not to assess a penalty for those
years. Once a final outcome is determined, we will adjust our tax provision
accordingly.

It should also be noted, that the penalties provision
relating to the above referenced FIN 48 determination has no effect on our
current cash position. The ultimate payment of the penalties, should it come to
that, will be made when the matter is completely resolved and known.

Discontinued Operations

Effective March 27, 2007, we sold our minority interest in
Archer, which represented our operations in the e-Learning business segment, for
total proceeds of $632,601.

For the year ended December 31, 2007, we did not recognize
our proportionate share of the loss from Archers operations because the
carrying value of the investment in Archer was nil and we had no commitment to
fund its losses. As a result, the full amount of the proceeds was recognized as
a gain for the year ended December 31, 2007.

The completion of this sale represents the end of our
involvement in the e-Learning business segment. As a result, for the years ended
December 31, 2007, 2006 and 2005, the e-Learning business segment has been
reclassified to discontinued operations.

Impact of Inflation and Changing Prices

Inflation is not a major factor affecting operations.

Foreign Currency

We report in U.S. dollars but also have operations and
expenses in Canada, Sweden, United Kingdom, Hong Kong and China. We carry
foreign exchange risk as our revenues are primarily earned in U.S. dollars and
Chinese Reminbi, and we incur the majority of our expenses in
Canadian dollars, Swedish Krona, Chinese Reminbi and Hong Kong dollars. Assuming
all of the above currencies appreciate by one hundred basis points at the
beginning of the year relative to the U.S. dollar, we estimate our expenses to
increase by approximately $152,000 on an annualized basis. Our most significant
foreign exchange risk is currently with the Canadian dollar. We estimate our
expenses to increase by approximately $93,000 for every one hundred basis point
depreciation in the U.S. dollar, relative to the Canadian dollar, on an
annualized basis assuming the rate increases at the beginning of the year.



---



Based on the actual appreciation of the Canadian dollar,
Chinese Reminibi, Hong Kong dollar, and Swedish Krona relative to the U.S.
dollar for the year ended December 31, 2007, we estimate our total expenses to
have increased by approximately $0.9 million assuming the same expense level in
the above foreign currencies remains unchanged from 2006. This increase in costs
has offset many of the cost reductions we have implemented during the year.

We have not entered into any arrangements to hedge our
foreign exchange requirements or foreign assets. Given the recent depreciation
of the U.S. dollar, especially in comparison to the Canadian dollar, we are
reviewing our foreign exchange risk and the appropriateness of hedging
strategies.

Impact of Governmental Policies and Other Factors on
Operations and Investments

We operate primarily in Canada, the United States of America,
China, Sweden and Hong Kong. The market for our 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

|                                |   |       |   |       |   |       |   | Increase   |   | Increase  
|------------------------------- | - | ----- | - | ----- | - | ----- | - | ---------- | - | ----------
|                                |   |       |   |       |   |       |   | (Decrease) |   | (Decrease)
|                                |   |       |   |       |   |       |   |            |   |           
|Cash and cash equivalents       | $ | 5.0   | $ | 1.7   | $ | 10.7  | $ |            | $ |           
|Net Cash provided by (used in): |   |       |   |       |   |       |   |            |   |           
|Operating activities            |   | 0.3   |   | (7.3) |   | (0.7) |   | 7.6        |   | (6.6)     
|Financing activities            |   | 4.6   |   | 1.0   |   | 2.3   |   | 3.6        |   | (1.3)     
|Investing activities            |   | (1.9) |   | (3.7) |   | (2.2) |   | 1.8        |   | (1.5)     

Cash Requirements Outlook

At December 31, 2007, we had cash and cash equivalents of
$7.7 million, of which $5.0 million was classified as cash and cash equivalents
and $2.7 million that was classified as restricted (see the "Restricted Cash"
discussion below), an increase of $3.3 million and $0.6 million, respectively,
since December 31, 2006. Cash increased as a result of receiving $4.6 million
from our financing activities (comprised of net proceeds from our private
placement minus repayment of bank debt) and $0.6 million from the sale of
Archer, offset by cash used in operating and investing activities of $1.7
million.

At December 31, 2006, we had cash and cash equivalents of
$3.8 million, of which $1.7 million was classified as cash and cash equivalents
and $2.1 million that was classified as restricted, a decrease of $9.1 million
in cash and cash equivalents and an increase of $1.5 million in restricted cash
respectively, since December 31, 2005. Cash decreased as a result of receiving
$1.0 million from our financing activities, offset by cash used in operating and
investing activities of $10.0 million. Cash decreased in 2006 due to an increase
in our operating expenses and the reclassification of $1.5 million to restricted
cash.

Cash not immediately required for our ongoing operations is
invested in highly liquid investments with maturities of less than 90 days. The
objective of our investment policy is to preserve capital and maintain
short-term liquidity while earning reasonable investment returns.



---



During the past three years, our cash requirements have been
met through revenues from operations, proceeds from issuance of our common
shares or other securities, through the exercise of common share purchase
warrants and options and short term credit facilities from our primary
commercial bank.

In the first quarter of 2007, we completed private placements
for net proceeds of $5,533,644. Our business plan includes achieving
profitability through cost containment and revenue growth. In addition, we are
in the process of establishing, with the Chinese governments approval, an
inter-company royalty program, which has received the approval of some but not
all applicable government departments. We expect final approval in the near
future, the effect of which will be that all cash held in our Chinese
subsidiaries, along with all other cash of the Company, will effectively be
available to fund the day-today operations of the Company. While we do expect
final approval in the near future, we cannot provide any assurances of this. We
expect that some capital will be required in 2008 to support continued product
development and enhancements, as well as expanding our sales and marketing
efforts to accelerate the introduction of Qix to the marketplace. We believe
that we have sufficient capital to meet these requirements and plan to generate
positive cash from operations in the future (see additional discussion under the
"Critical Accounting Policies and Estimates  Going Concern Basis" section), and
will be successful in unrestricting our restricted cash balances in full. See
"Risk Factors" and "Restricted Cash".

Restricted Cash

Due to Chinese government regulations pertaining to the
capitalization of Chinese companies, funds held in one of our Chinese
subsidiaries are currently restricted for use in funding the day-to-day
operations of our various Chinese subsidiaries, and have not been fully
available to fund the non-Chinese operations of the Company. We are in the
process of establishing, with the Chinese governments approval, an
inter-company royalty program, which has received the approval of some but not
all applicable government departments. We expect final approval in the near
future, the effect of which will be that all cash held in our Chinese
subsidiaries, along with all other cash of the Company, will effectively be
available to fund the day-to-day operations of the Company. While we do expect
final approval in the near future, we cannot provide any assurances of this.

At December 31, 2007, we held the U.S. dollar equivalent of
$2,740,702 (December 31, 2006 - $2,160,495) in cash classified as restricted
through our Chinese subsidiary. On approval from the above mentioned
authorities, we expect to reclassify the entire restricted cash balance to
non-restricted cash. In addition, due to our transfer pricing agreements and
allocation of revenues in our Chinese operations, we anticipate that future cash
receipts in our Chinese operations will be non-restricted; however, there can be
no assurance that approval will be granted. See "Risk Factors".

Bank Indebtedness

In December 2006, we secured a $1,000,000 credit facility
with our principal bank, HSBC Bank Canada. The loan was secured by a single
trade receivable of ours, which was insured by Export Development Canada. The
outstanding amount on the loan was due on demand, or the earlier of the
collection of the receivable or March 1, 2007. The proceeds of the loan were
used to augment our cash balances for operating purposes.

The loan was secured by a first priority interest in all
capital assets of the Company. The loan bore interest at LIBOR plus 2%. The loan
agreement contains a number of restrictive covenants, all of which we were in
compliance with as of December 31, 2006.

The loan and accrued interest thereon was repaid in full on
January 10, 2007.

Cash Flows - Summary

During the year ended December 31, 2007, we experienced an
increase in available cash by $3.3 million primarily represented by:

- 

$5.6 million increase in cash
  from financing activities resulting from the net proceeds of our private
  placement and exercise of stock options;

$3.6 million decrease in non-cash
  working capital;

$0.6 million gain from the sale of
  Archer (see additional discussion under the "Operating Results  Discontinued
  Operations" section);

offset by $3.0
  million in cash losses from continuing operations (i.e. $5.7 million loss from
  continuing operations less $2.7 million of non-cash expenses including
  depreciation and amortization expense and stock compensation expense);



---



- 

$2.0 million in deferred
  software development costs and capital asset additions;

and $1.0 million in repayment of
  indebtedness;

and $0.6 million increase in
  restricted cash.

During year ended December 31, 2006, we experienced a decrease in available
cash of $9.8 million primarily represented by:

- $6.4 million in cash losses from continuing operations
  (i.e.$9.8 million loss from continuing operations less $3.4 million of
  non-cash expenses, including depreciation and amortization expense, and stock
  compensation expense);
- $1.7 million in deferred software development costs and
  capital asset additions;
- $1.5 million increase in restricted cash;
- $0.9 million increase in non-cash working capital;
- $0.4 million decrease in cash from discontinued operations;
- offset by $1.0 million in financing through bank
  indebtedness.

Cash applied to Operating Activities

Cash received from operating activities in 2007 was $0.3
million, compared to cash used in operating activities in 2006 of $7.2 million
for an increase of $7.6 million. This increase is primarily due to a decrease in
our net loss of $4.0 million and a decrease in non-cash working capital of $4.4
million, offset by non-cash items such as stock based compensation expense and
depreciation and amortization. The decrease in non-cash working capital relates
mainly to the collection in early 2007 of a large receivable that was due in
December 2006.

Cash applied to operations in 2006 increased by $6.5 million,
compared to 2005. This increase resulted from an increase in our net loss of
$5.3 million and an increase in non-cash working capital, of $3.3 million,
partially offset by non-cash items such as stock based compensation expense and
depreciation and amortization

Financing Activities

In 2007, we received a net amount of $4.6 million from our
financing activities, which included $5.6 million in net proceeds from the
issuance of shares from a private placement and the exercise of stock options,
offset by the repayment of $1.0 million in bank indebtedness from 2006. The bank
credit facility was terminated upon repayment of the $1.0 million.

In December 2006, we received $1.0 million in financing from
a credit facility, which was terminated on repayment in January 2007.

In 2005, we received $2.3 million in financing from the
issuance of common shares net of issuance costs.

Investing Activities

Cash used in investing activities decreased by $0.7 million
in 2007 compared to 2006. The decrease is due primarily to a relative decrease
in the amount of cash classified as restricted. In 2007 our restricted cash
balance increased by $0.6 million, compared to an increase of $1.5 million in
2006, a relative change of $0.9 million. This benefit was offset by an increase
in cash used to purchase capital assets and for deferred software development
costs.

Cash used in investment activities increased by $0.7 million
in 2006 compared to 2005 primarily due to the increase in restricted cash of
$1.5 million and an increase in the capitalization of software development costs
of $0.5 million. The increase in cash used is offset with the purchase of Decuma
in 2005 and advances to our discontinued operations.

Commitments and Contractual Obligations

As at December 31, 2007 and 2006, we did not have any
long-term debt; however, we did have current portions of capital lease
obligations and deferred inducements on December 31, 2006 received upon entering
into new office leases in 2002.



---



We rented premises under operating leases, which expire at
various dates up to June 2012. Annual rentals under these leases for each of the
next five years are as follows:

2008
      992,4012009
      836,4242010
      686,8962011
      675,0742012
      337,537Total
      $  3,528,332


These lease commitments are expected to be paid from revenues
from operations, existing working capital and if necessary, additional capital.

Transactions with Related Parties

In the course of our operations, we have transactions with
related parties. 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: |   |           |   |         
|------------------------------------------------------------------------------ | - | --------- | - | --------
|                                                                               |   | 2007      |   | 2006    
|Due to law firm in which a former director is a
    partner                    |   | N/A       | $ | (57,931)
|Due to law firm in which a director is a partner                               | $ | (1,938)   |   | N/A     
|Due to a company in which an officer is a partner                              | $ | (116,000) | $ | (56,188)



|The following table outlines the Companys related party
    transactions:        |   |         |   |         |   |        
|--------------------------------------------------------------------------------- | - | ------- | - | ------- | - | -------
|                                                                                  |   | 2007    |   | 2006    |   | 2005   
|Legal services provided by a law firm in which a
    former director is a partner | $ | 160,476 | $ | 158,078 | $ | 227,883
|Legal services provided by a law firm in which a
    director is a partner        | $ | 26,382  |   | N/A     |   | N/A    
|Fees paid on behalf of significantly influenced
    company                       | $ | -       | $ | 7,247   | $ | 760    
|Consulting fees paid to a firm owned by a former
    officer                      | $ | -       | $ | 34,248  | $ | 49,333 
|Consulting fees paid to a firm in which an officer
    is a partner               | $ | 296,328 | $ | 66,006  | $ | -      

Foreign Exchange

We have not entered into any arrangements to hedge our
foreign exchange requirements or foreign assets.

Capital Expenditure Commitments

Our operations require certain ongoing capital expenditures
to support the productivity of our staff. This includes offices, furniture and
equipment, and computers. In addition, we require continuous upgrade of servers,
language databases, developer software, and other productivity software. We also
purchase a significant number of mobile phones each year for testing, user
experience analysis and sales demonstrations. Most of this equipment is
purchased as required and does not require long order times.

C. Research and development, patents and licenses, etc.

Our intellectual property may be grouped into the following
product areas: Predictive Text (eZiText, eZiType), Decuma, and Qix. It includes
patents, copyrights, trademarks, domain names and trade secrets (people,
technical know-how and documents). Historically, most of our research and
development activities were dedicated to Predictive Text technology. However,
with the introduction of Qix and Decuma, the amount previously dedicated to
Predictive Text technology will now be split across all three product areas. In
addition to this, we are continually looking for new market opportunities.

The amount spent during each of the last three years on
company-sponsored research and development activities are as follows: 2007 -
$4.1 million; 2006 - $5.1million; 2005 - $4.0 million



---



D. Trend information.

The following chart summarizes the quarterly revenues and operating expenses
from continuing operations:




Operating expenses  represents operating expenses from
continuing operations, excluding interest, other income, income tax, and
discontinued operations.

As evidenced by the above chart, our revenues have been
steadily increasing over the past eight quarters. The increase is the result of
our continued efforts to increase revenues by signing agreements with new
customers and increasing revenues from our existing customers, which we expect
to continue in the future.

In addition, we have been successful in reducing our
operating expense over the past eight quarters. However, there were a number of
circumstances in the 4th quarter of 2007 that caused a temporary
interruption of the trend, including some onetime withholding taxes paid in
China in order to implement our inter-company royalty program, and general
increases in costs caused by appreciation of the Canadian dollar versus the US
dollar. However, we intend to tightly control costs in 2008 to assist with our
progress towards achieving profitability.

Litigation/Indemnification

Autotext

In our third quarter interim report, we disclosed that we had
become aware of a lawsuit filed by AutoText Technologies, Inc., claiming, among
other things, that its patent has been infringed. In January 2008, we received
notice that the lawsuit had been dismissed by Autotext Technologies, Inc.
against all defendants without prejudice.

U of T

Commencing on March 11, 2005, the U of T filed federal
lawsuits against numerous alleged infringers of U.S. Patent No. 4,674,112 (112
Patent") in the U.S. District Court for the Western District of Texas, Austin
Division. Of the named parties, the majority are customers of our principal
competitor in the text input market and a few are customers of ours. We are not
a named party in the action. We have not accepted liability for any indemnity
pursuant to our customer license agreements or otherwise. As a result of our
efforts, the claim against two of our customers was dismissed prior to any
defence being filed. Without any admission of liability, we agreed as a business
decision to assume the defense of five of our customers. Given the costs
involved, we settled the claims against four of our relatively minor customers.
While we were not a defendant, the validity of our licensed software was legally
challenged in the U of T filed federal lawsuit. In order to defend the
legitimacy of our licensed software and maintain our relationships with our
licensees, we made the business decision to actively participate in the costs of
the legal defense.



---



On May 2, 2007, the United States District Court for Western
District of Texas issued an Order of Non-Infringement of U.S. Patent No.
4,674,112 against the Plaintiff, U of T, and in favor of all remaining
Defendants. This court action was therefore terminated. The Plaintiff, however,
has filed an appeal. The court has not determined whether or not it will allow
the appeal.

We have also undertaken considerable expense in actively
protecting our intellectual property and defending against alleged infringement
claims. We have incurred substantial costs related to patent infringement
litigation in the sum of $424,000 for 2007 (2006  $1,930,000; 2005  $540,000)
for defense and settlement of such claims.

Receiver

On February 22, 2007, we entered into a settlement agreement
with the Receiver to settle any and all outstanding claims and issues among the
Receiver, the Lancer Entities and us, subject to certain conditions. On April
10, 2007, the settlement agreement became effective. Pursuant to the settlement
agreement, the parties discontinued, with prejudice, all litigation and
regulatory proceedings of any kind. In addition, the Receiver, and certain of
our current and former directors delivered mutual releases.

Donnell

On November 18, 2005, Mike Donnell (the "Plaintiff") filed a
wrongful termination lawsuit against us in the Court of Queen's Bench of
Alberta, Judicial District of Calgary. The Plaintiff was the President and Chief
Executive Officer of Zi for the period from July 23, 2003 to May 26, 2005, when
he submitted his resignation. On December 9, 2005, we filed a Statement of
Defense and Counterclaim, denying the Plaintiff's claims. In March 2006, the
Company settled these actions. The Company had accrued sufficient settlement
costs related to this lawsuit as of December 31, 2005.

Former Counsel

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

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

Although we do not anticipate or foresee at this time any new
intellectual property proceedings being instigated by other parties against us
or by us against other parties, there is no assurance that our legal costs or
legal actions will significantly diminish in the future. We do not view the
legal expenses on the current legal actions and indemnities as being of a
recurring nature and anticipate that these legal matters will eventually come to
a resolution; however, our legal costs in respect of these actions may increase
or maintain current levels if any judgment or determination is appealed or
otherwise progresses through the legal process. Moreover, given the extremely
competitive nature of our 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.

Subsequent Events

On February 1, 2008, we received a NASDAQ Staff Deficiency
Letter dated January 30, 2008 stating that the bid price of our common shares
has closed below $1.00 per share for 30 consecutive days. As a result, in
accordance with Marketplace Rule 4310(c)(4) ("the Rule"), we are granted 180
calendar days, or until July 28, 2008, for the bid price of our common shares to
close at US$1.00 or more for a minimum of 10 consecutive business days. If the
Rule requirements cannot be demonstrated by July 28, 2008, but we continue to
meet the initial listing criteria, NASDAQ will provide an additional 180
calendar days to meet the Rule requirements. If during the first 180 day
compliance period, or if applicable, the second 180 day
compliance period, we do not meet the Rule requirements by trading above $1.00
for a minimum of 10 consecutive business days, NASDAQ will provide written
notification that our common shares will be delisted from the NASDAQ Capital
Market. If necessary, we would have the right to appeal the delisting notice to
a NASDAQ Listing Qualifications Panel.



---



Our listing is currently unaffected and will continue to
trade on the NASDAQ Capital Market. As a result of the notice, we have an
initial period of 180 days to meet the Rule requirement. Management will focus
on continuing to improve our financial fundamentals and communicating results
with shareholders and investors in an effort to meet the Rule requirements
within the prescribed time period.

E. Off-balance sheet arrangements.

The Company did not have any off-balance sheet arrangements
at December 31, 2007.

F. Tabular disclosure of contractual obligations.

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, 2007
were nil (2006  $1,833). The current portion at December 31, 2007 was nil (2006
 $1,833). The future minimum lease payments under the capital leases are nil in
2007. No other payments are required under the capital leases.

Inducements for leasehold improvements received by the
Company upon entering into new leases as at December 31, 2007 were nil (2006 
$28,634). The current portion at December 31, 2007 was nil (2005  $28,634).

See additional discussion under "B. Liquidity and capital
resources -Commitments and Contractual Obligations" section) for our
tabular format of contractual obligations.

See Item 6 for contractual obligation disclosure related to
employees.

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

G. Safe harbor.

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, since January 1, 2007:

50

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|Name                                        | Position or office within Corporation
|------------------------------------------- | -------------------------------------
|Milos Djokovic(12)                          | Director                             
|Parker, Colorado, U.S.A.                    | President and Chief Executive Officer
|H. Donald Hyde(1) (2) (4) (5)               | Director                             
|Calgary, Alberta, Canada                    |                                      
|Michael E. Lobsinger(7)                     | -                                    
|Calgary, Alberta, Canada                    |                                      
|Donald P. Moore(1) (3) (4) (6) (12)         | Director                             
|Miami, Florida, U.S.A.                      |                                      
|Richard D. Tingle (5) (6) (8)(13)           | -                                    
|Calgary, Alberta, Canada                    |                                      
|Robert P. Stefanski (3) (4) (6)             | Director                             
|Palo Alto, California, U.S.A.               |                                      
|George C. Tai (2) (5) (10)                  | Chairman of the Board of Directors   
|Calgary, Alberta                            | Director                             
|Andrew M. Gertler (1) (2) (4) (5) (11) (12) | Director                             
|Montreal, Quebec                            |                                      
|Blair Mullin                                | Chief Financial Officer              
|Salem, Oregon, U.S.A.                       |                                      
|Derrick R. Armstrong (9)                    | -                                    
|Calgary, Alberta, Canada                    |                                      
|Jason Paul                                  | Corporate Secretary                  
|Calgary, Alberta, Canada                    |                                      

Notes:

(1) Currently member of the Audit Committee. 
(2) Currently member of the Corporate Governance Committee. 
(3) Currently member of the Compensation Committee. 
(4) Member of the Audit Committee during 2007. 
(5) Member of the Corporate Governance Committee during 2007. 
(6) Member of the Compensation Committee during 2007. 
(7) Ceased being director on April 10, 2007. 
(8) Ceased being director on June 27, 2007. 
(9) Ceased being Corporate Secretary on July 26, 2007 
(10) Appointed to the Board on April 10, 2007 
(11) Appointed to the Board on June 27, 2007 
(12) Currently member of the Strategic Committee, and during 2007. 
(13) Ceased being Chairman of the Board of Directors on June 27, 2007.

MILOS DJOKOVIC became the Companys President and Chief
Executive Officer, as well as a member of the Board of Directors, in May 2006.
From October 2004 and until May 2006, Mr. Djokovic served as the Companys Chief
Operating Officer and Chief Technical Officer. Mr. Djokovic was the founder in
1992 of Cygnus Corporation, an Ontario based developer of customer relationship
management software, which he sold in 1998 to TeleTech Holdings Inc., and
continued to serve as its chief technical officer until March 2003. Mr. Djokovic
also served as CEO of TeleTechs Enhansiv division from 2000-2002. From August
2003 until October 2004, Mr. Djokovic was employed with Accenture, an
international management consulting firm, where he was responsible for that
firms customer relationship technology strategy. Mr. Djokovic is a member of
the Companys Strategic Committee.

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 Corporate Governance 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.

MICHAEL E. LOBSINGER was a director of the Company from 1987
until his resignation on April 10, 2007. Mr. Lobsinger was the Chairman of the
Board from 1987 to May 2006, the Chief Executive Officer of the Company from
1993 to November 2003 and President of the
Company from 1993 to 2000. As well, Mr. Lobsinger assumed the position of
President and Chief Executive Officer from May 2005 to May 2006 as a result of
the resignation of Michael D. Donnell, who had served as the Companys Chief
Executive Officer from November 2003 to May 2005. According to the terms of the
settlement agreement between the Company and the Receiver, Michael Lobsinger
resigned as a director of the Company on April 10, 2007, but remained on as a
consultant of the Company throughout 2007 - see Item 4  Information on the
Company  History and Development of the Company.



---



DONALD P. MOORE was elected to the Board in August 2004 and
is currently a member of the Audit Committee, the Compensation Committee and the
Strategic Committee. Mr. Moore is a lawyer in the Miami office of Holland &
Knight LLP.

RICHARD D. TINGLE, Q.C. was elected to the Board in December
2004 and served as the Chairman of the Board from May 2006 until his death on
June 27, 2007. Prior to his death, Mr. Tingle served as the chair of the
Corporate Governance Committee and as a member of the Compensation Committee.
Mr. Tingle was a lawyer with Tingle Merrett LLP (formerly Tingle & Associates).
Mr. Tingle was a director of Intermap Technologies Inc., Venpath Investments
Ltd. and Emerald Bay Energy Inc., each a publicly traded company.

ROBERT PAUL STEFANSKI was elected to the Board on December
22, 2006. Mr. Stefanski is currently the chair of the Compensation Committee and
also served as a member of the Audit Committee until July 26, 2007. Mr.
Stefanski is an executive vice president with TIBCO Software Inc., a software
company headquartered in Palo Alto, California. Prior to joining TIBCO, Mr.
Stefanski practiced law in New York with Weil, Gotshal & Manges, a major
international law firm. He also served as Director of Intellectual Property for
financial news and information provider Reuters.

BLAIR MULLIN was appointed Chief Financial Officer of the
Company on September 6, 2006. Mr. Mullin has been a Partner in the Portland
practice of Tatum, LLC since 2003, during which time, prior to joining Zi,
served as consultant and then Chief Financial Officer of Homax Products Inc.,
Vice President Finance of Yakima Products Inc., strategic advisor to Casey
Industrial Inc., a $100 million construction company engaged in construction of
major industrial facilities, and consultant to numerous manufacturers. Prior to
joining Tatum, Mr. Mullin was a strategic advisor and turnaround consultant for
two companies in the Telecom sector, before which he served as President and
Chief Operating Officer of International DisplayWorks, Inc., a manufacturer of
LCD displays and modules; and as Chairman, President and Chief Financial Officer
of Morrow Snowboards. Mullin has held other leadership positions at Westbeach
Canada, ULC, British Columbia Mercantile Corp., and Padovano Foods, Ltd., as
well as numerous consulting engagements in a variety of industries.

GEORGE C. TAI was appointed to the Board on April 10, 2007
and assumed the role of Chairman on July 26, 2007. Mr. Tai is the Chairman of
the Companys Corporate Governance Committee. Mr. Tai practices securities and
business law with the law firm of Carscallen Leitch, LLP in Calgary, Alberta.
Prior to returning to the practice of law in 2004, Mr. Tai held senior executive
positions in legal, finance and operations with private and public (TSX and
NASDAQ) technology companies, including Zi Corporation, where he served as Chief
Operating Officer from 2000 to 2003.

ANDREW M. GERTLER was appointed to the Board on June 27,
2007. Mr. Gertler has been the Vice President of Lester Asset Management since
July 2006. Prior thereto, he was Chairman and Chief Executive Officer of Neutron
Enterprises, Inc. from August 2004 to July 2006, and Managing Director of
Gestion Jean Paul Auclair from April 2001 to April 2004. Mr. Gertler is the
Chairman of the Companys Strategic Committee and is also a member of the Audit
Committee and Corporate Governance Committee.

Pursuant to an agreement signed in July 2004, the Company
agreed, among other things, to appoint one director to the Companys board as a
nominee of the Receiver. The Company subsequently appointed Donald Moore to the
Board of Directors as the Receivers nominee. See Item 4  Information on the
Company  History and Development of the Company.

According to the terms of the settlement agreement between
the Company and the Receiver, signed in February 2007, both the Receiver and Mr.
Lobsinger each have the right to designate two persons as director nominees to
be elected or appointed as directors of the Corporation, up until the
Corporations shareholders meeting held in respect of the fiscal year ended
2007, and the Corporation shall not nominate Mr. Lobsinger nor certain persons
or entities related to Mr. Lobsinger for appointment to the Corporations board
of directors. Currently, Mr. Moore and Mr. Stefanski are the Receivers
nominees, and Mr. Gertler and Mr. Hyde are Mr. Lobsingers nominees.
Notwithstanding these designations for the purposes of the
settlement agreement, each of these directors continues to act as independent
directors. See Item 4  Information on the Company  History and Development
of the Company



---



B. Compensation.

(a) Compensation of Directors

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

The 2007 compensation plan for directors called for the
following payments and option grants (which do not apply to any director serving
as an executive officer of Zi):

Each director received an annual retainer of $10,000. The
Chairman of the Board of Directors received an additional monthly retainer in
the amount of $3,000 per month. The Chairman of the Audit Committee received an
annual retainer of $5,000, and all other members of the Audit Committee received
an annual retainer of $2,500 each. The Chairman of the Compensation Committee
received an annual retainer of $4,000, and all other members of the Compensation
Committee received an annual retainer of $2,000 each. The Chairman of the
Corporate Governance Committee received an annual retainer of $3,000, and all
other members of the Corporate Governance Committee received an annual retainer
of $1,500 each. All members of the Strategic Committee received an annual
retainer of $4,000 each. Each director was paid $2,500 per board meeting
attended, regardless of whether such director attended in person or via
telephone, provided that no director received such payments in respect of more
than five board meetings per year. For each committee, each committee member was
paid $1,000 per meeting attended, regardless of whether such committee member
attended in person or via telephone, provided that no committee member received
such payments in respect of more than five meetings of such committee per year,
and further provided that no such five meeting maximum applied on payments for
meetings of the Strategic Committee. For greater clarity, a director serving on
more than one committee was entitled to receive payment for up to five meetings
for each committee on which such director served, as well as payments to
Strategic Committee members for an unlimited number of Strategic Committee
meetings. Under the compensation plan, each director shall receive 50,000 share
options annually, to be granted at the Companys annual general meeting of
shareholders.

The Company intends to continue to compensate its directors
in 2008 as outlined above.

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

During the fiscal period ended December 31, 2007, stock
options to purchase 391,700 common shares were granted to directors of the
Corporation, pursuant to the 2007 directors compensation plan, not including
options granted to Milos Djokovic in his capacity as an Executive Officer of the
Corporation. See "Compensation of Executive Officers" below for details on stock
options granted to Mr. Djokovic.

(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, 2007, 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,
2007 (the "Named Executive Officers").

53

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Summary compensation table

|                        |      | Annual Compensation(6) | Long-Term Compensation |        
|----------------------- | ---- | ---------------------- | ---------------------- | -------
|                        |      |                        |                        |        
|                        |      |                        |                        |        
|                        |      |                        |                        |        
|                        |      |                        |                        | Other  
|                        |      |                        |                        | annual 
|                        |      |                        |                        | compen-
|Name and principal      |      | Salary                 | Bonus                  | sation 
|position                | Year | ($U.S.)                | ($U.S.)                | ($U.S.)
|                        |      |                        |                        |        
|Milos Djokovic (1)      | 2007 | 300,000                | 260,000                | Note(5)
|President and Chief     | 2006 | 275,417                | 60,000                 | Note(5)
|Executive Officer       | 2005 | 230,000                | Nil                    | Note(5)
|(previously Chief       |      |                        |                        |        
|Operating Officer)      |      |                        |                        |        
|                        |      |                        |                        |        
|Roland Williams(2)      | 2007 | 183,750                | 60,000                 | Nil    
|Senior Vice President   | 2006 | 180,000                | Nil                    | Nil    
|Intellectual Property   | 2005 | 158,750                | 10,000                 | Nil    
|                        |      |                        |                        |        
|Axel Bernstorff(3)      | 2007 | 190,153                | Nil                    | 34,387 
|Vice President, Global  | 2006 | 142,601                | Nil                    | 51.176 
|Sales                   | 2005 | 42,396                 | Nil                    | Nil    
|                        |      |                        |                        |        
|Blair Mullin (4)        | 2007 | 332,406                | 48,965                 | Nil    
|Chief Financial Officer | 2006 | 109,706                | Nil                    | Nil    
|                        |      |                        |                        |        
|Weigen Qiu(6)           | 2007 | 131,810                | 18,618                 | Nil    
|Director, R&D and       | 2006 | 118,868                | 22,040                 | Nil    
|Architecture            | 2005 | 107,309                | 20,638                 | Nil    

Notes:

(1) Mr. Djokovic was appointed as President and Chief
Executive Officer on May 26, 2006. Mr. Djokovic was appointed Chief Operating
Officer and Chief Technology Officer on October 25, 2004. 
(2) Dr. Williams has been employed by the Corporation in various capacities and
at various times, since July 1995. 
(3) Mr. Bernstorff was appointed VP Global Sales on September 15, 2006, from his
previous position as Director Sales, Europe on joining the Company on August 30,
2005. 
(4) Mr. Mullin was appointed Chief Financial Officer on September 6, 2006,
pursuant to an agreement with an executive services and consulting firm. 
(5) For 2007 compensation, all Canadian dollar and British pound denominated
compensation was converted to U.S. dollars at 0.9309 and 2.0016 respectively,
being the average conversion rate for 2007. Other annual compensation is less
than CDN$50,000 and less than 10 percent of the salary and bonus of the
respective Named Executive Officer. 
(6) WEIGEN QIU has been employed with the Company since 1995, initially as a
computer programmer. In February 2000, Mr. Qiu was promoted to the position of
Director, R&D and Architecture.

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, 2007.



---



|                   |              |                  |              | Market value of  |           
|------------------ | ------------ | ---------------- | ------------ | ---------------- | ----------
|                   |              |                  |              | Securities       |           
|                   | Securities   | Percent of total |              | underlying       |           
|                   | under        | Options/SARs     |              | Options/SARs/    |           
|                   | Options/SARs | granted to       | Exercise or  | RSUs on the date |           
|                   | granted      | employees in     | base price   | of grant         | Expiration
|Name               | (#)          | financial year   | ($/Security) | ($/Security)     | date      
|                   |              |                  |              |                  |           
|Milos Djokovic (1) | 900,000      | 38.1             | Note(1)      | Note(1)          | Note(1)   
|Axel Bernstorff(2) | 50,000       | 2.1              | Note(2)      | Note(2)          | Note(2)   
|Roland Williams(3) | 25,000       | 1.1              | Note(3)      | Note(3)          | Note(3)   
|Blair Mullin(4)    | 50,000       | 2.1              | Note(4)      | Note(4)          | Note(4)   
|Weigen Qiu(5)      | 30,000       | 1.3              | Note(5)      | Note(5)          | Note(5)   

Notes:

(1) During the year, the Corporation issued the following
stock options to Mr. Djokovic: options to acquire 400,000 common shares at
CDN$2.43 expiring February 28, 2012; and, options to acquire 500,000 common
shares at CDN$1.15 expiring November 26, 2012. The market value of the common
shares at the date of the grant was the same as the exercise price for the
options granted to Mr. Djokovic prior to July 26, 2007. For options granted as
of July 26, 2007 and thereafter, the exercise price for such options was equal
to the higher of (i) the five day volume weighted average trading price of the
common shares where such five day period ends on the trading day immediately
prior to the date of grant and (ii) the closing price of the common shares on
the trading day immediately prior to the date of grant.

(2) During the year, the Corporation issued to Mr. Bernstorff
options to acquire 50,000 common shares at CDN$1.15 expiring November 26, 2012.
The exercise price for such options was equal to the higher of (i) the five day
volume weighted average trading price of the common shares where such five day
period ends on the trading day immediately prior to the date of grant and (ii)
the closing price of the common shares on the trading day immediately prior to
the date of grant.

(3) During the year, the Corporation issued to Dr. Williams
options to acquire 25,000 common shares at CDN$1.15 expiring November 26, 2012.
The exercise price for such options was equal to the higher of (i) the five day
volume weighted average trading price of the common shares where such five day
period ends on the trading day immediately prior to the date of grant and (ii)
the closing price of the common shares on the trading day immediately prior to
the date of grant.

(4) During the year, the Corporation issued to Mr. Mullin
options to acquire 50,000 common shares at CDN$1.15 expiring November 26, 2012.
The exercise price for such options was equal to the higher of (i) the five day
volume weighted average trading price of the common shares where such five day
period ends on the trading day immediately prior to the date of grant and (ii)
the closing price of the common shares on the trading day immediately prior to
the date of grant.

(5) During the year, the Corporation issued to Mr. Qiu
options to acquire 30,000 common shares at CDN$1.15 expiring November 26, 2012.
The exercise price for such options was equal to the higher of (i) the five day
volume weighted average trading price of the common shares where such five day
period ends on the trading day immediately prior to the date of grant and (ii)
the closing price of the common shares on the trading day immediately prior to
the date of grant.

The following table sets forth information in respect of all
stock options and RSUs which were either exercised or not exercised by the Named
Executive Officers during the Corporations fiscal year ended December 31, 2007.

55

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

|Name            | Securities   | Aggregate value | Unexercised          | Value of unexercised         
|--------------- | ------------ | --------------- | -------------------- | -----------------------------
|                | acquired on  | realized(1)     | Options/SARS/RSUs as | in-the-Money Options/SARs    
|                | exercise (#) | ($U.S.)         | at December 31, 2007 | /RSUs at December 31, 2007(2)
|                |              |                 | exercisable/         | exercisable/unexercisable    
|                |              |                 | unexercisable(#)     | ($U.S.)                      
|                |              |                 | Exercisable          | Exercisable                  
|                |              |                 | 520,000              | Nil                          
|                |              |                 | Unexercisable        | Unexercisable                
|Milos Djokovic  | Nil          | Nil             | 900,000              | Nil                          
|                |              |                 | Exercisable          | Exercisable                  
|                |              |                 | 53,333               | Nil                          
|                |              |                 | Unexercisable        | Unexercisable                
|Axel Bernstorff | Nil          | Nil             | 116,667              | Nil                          
|                |              |                 | Exercisable          | Exercisable                  
|                |              |                 | 96,916               | Nil                          
|                |              |                 | Unexercisable        | Unexercisable                
|Roland Williams | Nil          | Nil             | 58,334               | Nil                          
|                |              |                 | Exercisable          | Exercisable                  
|                |              |                 | Nil                  | Nil                          
|                |              |                 | Unexercisable        | Unexercisable                
|Blair Mullin    | Nil          | Nil             | 50,000               | Nil                          
|                |              |                 | Exercisable          | Exercisable                  
|                |              |                 | 51,500               | Nil                          
|                |              |                 | Unexercisable        | Unexercisable                
|Weigen Qiu      | Nil          | Nil             | 30,000               | Nil                          

Notes:



(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,
2007 and the exercise price.

Long-term Incentive Plans

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

Stock Appreciation Rights and Restricted Shares

No stock appreciation rights were granted by the Company to
the Named Executive Officers of the Company during the fiscal year ended
December 31, 2007 or since incorporation.

Stock Option and SAR Repricing

No repricing took place during the fiscal year ended December
31, 2007 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 paragraphs 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.

56

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Employment Contracts

The Corporation entered into an employment agreement with
Milos Djokovic on October 25, 2004 (as amended) pursuant to which Mr. Djokovic
was appointed Chief Technology Officer and Chief Operating Officer of the
Corporation. The terms of the agreement provided for Mr. Djokovic to be paid a
base salary of U.S.$230,000 per annum. The Corporation may terminate Mr.
Djokovics employment upon payment of twelve months base salary plus an
allowance for a bonus and forgone benefits. Effective May 26, 2006, Mr. Djokovic
was promoted to President and CEO and his base salary increased to U.S. $300,000
per annum. Pursuant to Mr. Djokovics employment contract, in the event of a
change of control of the Corporation and subject to certain conditions being
met, all of his options may vest immediately. Mr. Djokovic was required to
execute a Confidentiality and Non-Competition agreement.



The Corporation entered into an employment agreement with
Roland Williams on February 5, 2001 pursuant to which Dr. Williams was appointed
Senior Vice President  Technical Innovations. The terms of the agreement
provided for Dr. Williams to be paid a base salary of U.S. $150,000 per annum.
Effective June 1, 2005 Dr. Williams base salary increased to U.S. $165,000 per
annum. Effective January 1, 2006 Dr. Williams base salary increased to U.S.
$180,000 per annum. Effective April 1, 2007, Dr. Williams base salary increased
to US$185,000 per annum. The Corporation may terminate Dr. Williams employment
upon payment of an amount equal to the Base Salary. Dr. Williams was required to
execute a Confidentiality and Non-Competition agreement.

The Corporation entered into an employment agreement with
Axel Bernstorff on July 19, 2005 pursuant to which Mr. Bernstorff was appointed
Director of Sales  Europe. The terms of the agreement provided for Mr.
Bernstorff to be paid a base salary of 70,000 British Pounds per annum.
Effective September 15, 2006 Mr. Bernstorff was promoted to Vice President 
Global Sales and as such his base salary increased to 95,000 British Pounds per
annum. The Corporation may terminate Mr. Bernstorffs employment upon payment of
three months annual remuneration. Pursuant to Mr. Bernstorffs employment
contract, in the event of a change of control of the Corporation, all of his
options vest immediately. Mr. Bernstorff was required to execute a
Confidentiality and Non-Competition agreement.

The Corporation entered into an employment agreement with
Weigen Qiu effective February 16, 2000, pursuant to which Mr. Qiu was promoted
to Director, R&D and Architecture. In 2007, Mr. Qiu was paid a salary of
$141,594.12 Canadian dollars. Mr. Qiu was required to execute a Confidentiality
and Non-Competition agreement.

(c) Plans and Share Options

The Company currently has in effect the 2007 Stock Incentive
Plan for its directors, officers, employees and consultants pursuant to which
7,583,693 common shares were reserved for issuance pursuant to shareholder
approval which was obtained at the July 26, 2007 shareholder meeting.

The following summarizes aggregate stock option plan activity
during the fiscal years ended December 31, 2005, 2006 and 2007:

|                                       | 2007        | 2006        | 2005       
|-------------------------------------- | ----------- | ----------- | -----------
|Options outstanding, beginning of year | 3,999,982   | 4,106,487   | 4,911,972  
|Granted                                | 2,361,700   | 1,580,468   | 940,375    
|Cancelled                              | (1,274,121) | (1,270,917) | (1,454,893)
|Exercised                              | (92,486)    | (416,056)   | (290,967)  
|Options outstanding, end of year       | 4,995,075   | 3,999,982   | 4,106,487  

57

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(d) Other Compensation

During the Corporations fiscal year ended December 31, 2007,
the Corporation accrued and/or paid legal fees to a law firm of which George Tai
is a partner amounting, in the aggregate, to $26,382.

During the Corporations fiscal year ended December 31, 2007,
the Corporation accrued and/or paid consulting fees to a consulting firm of
which Blair Mullin was a partner amounting, in aggregate, to $296,328.

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

C. Board practices.

(a) Board of Directors

The Board currently consists of six members. Each director
elected holds 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. Other than for Milos Djokovic, no director has
any service contract with Zi or any of its subsidiaries providing for benefits
upon termination of employment. See also Item 6A. Directors and Senior
Management.

Board Committees

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

Audit Committee

The Audit Committee consists of three members. Mr. Donald
Hyde, who is a chartered accountant in private practice, joined the Board in
June, 2003 and was appointed Chairman of the Audit Committee. Mr. Hyde was
specifically recruited to the Corporations Board of Directors for his financial
and accounting skills. Robert Stefanski served as a member of the Audit
Committee from January 2007 until July 2007. Andrew Gertler was appointed to the
Audit Committee in July 2007. Donald Moore served as a member of the Audit
Committee throughout 2007. All of the above individuals are financially literate
and possess an understanding of the accounting principles, internal controls and
procedures used by the Company. All members of the Audit Committee are outside
and unrelated directors and independent from any interest in the Corporation.
The Committee met seven times in 2007.

The Corporation adopted an Audit Committee Charter in June
2000 which was amended in 2005 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. In addition, the Audit Committee approves the fees and other
significant compensation to be paid to the independent auditors. The Audit
Committee has direct access to the independent auditors at all times and has the
ability to retain, at the Corporations expense, special legal, accounting or
other consultants or experts it deems necessary in the performance of its
duties.

Compensation Committee

During 2007, the Compensation Committee consisted of Robert
Stefanski, as Chairman, Donald Moore and Richard Tingle (until his death on June
27, 2007). Currently, the Compensation Committee is comprised of Robert
Stefanski, as Chairman, and Donald Moore. 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 levels 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, restricted stock awards ("RSAs") and restricted stock units ("RSUs").
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. 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 and
compares the base salaries of the Companys executive officers with compensation
data for comparable organizations available from such surveys and reports.
Annual cash incentive awards are given pursuant to a cash
incentive 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 proposed by the Compensation Committee,
and approved by the Board, by evaluating some or all of financial and
non-financial criteria, including revenue, net income/operating profit, cash
flow, net asset value growth and achievement of specific strategic goals.
Individual target award levels increase in relation to job responsibilities so
that the ratio of at-risk versus fixed compensation is greater for higher levels
of management. Individual awards are intended to reflect a combination of
personal, business unit and total company performance. In 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 shareholders. 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 proposed
by the Compensation Committee and approved by the Board to create a long-term
incentive to increase shareholder value. Awards of stock options, RSAs and RSUs
are supplementary to the cash incentive plan and are intended to increase the
pay-at-risk component for officers and key employees. No RSAs or RSUs have been
issued as at March 23, 2008 in respect of 2007 incentive compensation.
We have
employment agreements or remuneration arrangements with all of our executive
officers. Each agreement or arrangement provides for salary, benefits and
bonuses for the executive officer, and for compensation if his or her employment
is terminated. Many such agreements or arrangements provide for incentive stock
option grants. For information regarding the employment agreements of the 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 Committee

During 2007, and until Richard Tingles death on June 27,
2007, the Corporate Governance Committee consisted of two members: Richard
Tingle, as Chairman, and Donald Hyde. Currently the Corporate Governance
Committee consists of George Tai as Chairman, Andrew Gertler and Donald Hyde.
The Corporation has adopted a charter for this committee. Pursuant to its
charter, the Corporate Governance Committee takes responsibility for developing
and monitoring the Corporations general approach to corporate governance issues
as they may 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 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s
business, reviewing the strategic plan on a timely basis, developing and
monitoring corporate policies relating to trading in securities, ensuring the
Board annually reviews organizational structure and succession planning, and
reviews areas of potential personal liability of directors and ensures
reasonable protective measures are in place and causing the Board to annually
review its definition of an unrelated director. The Committee met formally three
times in 2007 and, in view of its size, communicated informally from time to
time.



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Strategic Committee

During 2007, the Strategic Committee consisted of Andrew
Gertler, as Chairman, Donald Moore and Milos Djokovic. The Committee was
established to investigate and make recommendations to the board on matters
related to strategic opportunities and investor relations. The Committee met
formally eight times in 2007.D. Employees.

As of March 1, 2008, we had 88 regular, full-time employees:

ZI TECHNOLOGY

|                    |      | North   |        |      
|------------------- | ---- | ------- | ------ | -----
|                    | Asia | America | Europe | Total
|Sales & Marketing   | 8    | 4       | 4      | 16   
|Technical           | 13   | 29      | 7      | 49   
|Admin/Corp          | 8    | 15      | 0      | 23   
|ZI TECHNOLOGY TOTAL | 29   | 48      | 11     | 88   

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, 2007 we had 90 regular, full time employees; at December 31, 2006
we had 78 regular, full time employees; at December 31, 2005, we had 78 regular,
full time employees; and at December 31, 2004, we had 109 regular, full-time
employees. We believe we enjoy good relationships with our employees.

E. Share ownership.

(a) Share and Option Holdings

The following table sets forth the direct and indirect actual
common share ownership and option holdings of our directors and previously Named
Executive Officers (including those who have ceased to serve during the course
of 2007) at March 24, 2008.

|                             | Number of Shares      | Percentage of
|---------------------------- | --------------------- | -------------
|Name                         | Beneficially Owned(1) | Class(2)     
|Michael E. Lobsinger         | 5,769,613 (3)         | 11.2         
|Derrick R. Armstrong         | 207,395 (4)           | *            
|H. Donald Hyde               | 281,245 (5)           | *            
|Donald P. Moore              | 231,445 (6)           | *            
|Richard D. Tingle            | 174,995 (7)           | *            
|Milos Djokovic               | 653,333 (8)           | 1.3          
|Robert P. Stefanski          | 68,750 (9)            | *            
|Roland Williams              | 96,916 (10)           | *            
|Axel Bernstorff              | 53,333 (11)           | *            
|Blair Mullin                 | (12)                  | *            
|George C. Tai                | 54,200 (13)           | *            
|Andrew M. Gertler            | 37,500 (14)           | *            
|Weigen Qiu                   | 51,500 (15)           | *            
|* Indicates less than
    1% |                       |              

60

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Notes:

(1) Includes options and RSUs exercisable within 60 days of
March 24, 2008. Except as noted to the contrary, in notes 1 to 15 below all
grant prices are expressed in Canadian dollars.

(2) Based upon the 50,557,957 outstanding common shares, as
of March 24, 2008.

(3) In the case of Mr. Lobsinger, this comprises 4,119,613
common shares held directly or beneficially by Mr. Lobsinger, 700,000 common
shares held by Quarry Bay Investments Inc., a private Alberta corporation
wholly-owned by Mr. Lobsinger, and 950,000 share options. The share options
include: 100,000 options granted April 17, 2003 at a grant price of $2.56 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; 400,000 options granted March 25,
2004 at a grant price of $3.60 and expire March 25, 2009; 50,000 options granted
September 16, 2004 at a grant price of $2.60 and expire September 16, 2009;
150,000 options granted July 21, 2005 at a grant price of $3.22 and expire on
July 21, 2010; 100,000 options granted April 4, 2006 at a grant price of $2.01
and expire on April 3, 2011, and; 50,000 options granted January 10, 2007 at a
grant price of $1.96 and expire on January 10, 2012.

(4) In the case of Mr. Armstrong, this comprises 207,395
common shares held directly or beneficially by Mr. Armstrong. This does not
include 10,000 common shares held pursuant to a spousal registered retirement
savings plan. As Mr. Armstrong is no longer with the Company, such information
is made to the best of our knowledge based on existing regulatory reports.

(5) In the case of Mr. Hyde, this comprises 12,495 common
shares held directly or beneficially by Mr. Hyde and 268,750 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; 50,000 options granted May 26, 2005 at a grant price of $3.64 and
expire on May 26, 2010; 50,000 options granted April 4, 2006 at a grant price of
$2.01 and expire on April 3, 2011; 50,000 options granted January 10, 2007 at a
grant price of $1.96 and expire on January 10, 2012, and; 18,750 options granted
July 26, 2007 at a grant price of $1.10 and expire on July 26, 2012.

(6) In the case of Mr. Moore, this comprises 12,695 common
shares held directly or beneficially by Mr. Moore and 218,750 share options. The
share options include: 50,000 options granted September 16, 2004 at a grant
price of $2.60 and expire on September 16, 2009, and; 50,000 options granted May
26, 2005 at a grant price of $3.64 and expire on May 26, 2010; 50,000 options
granted April 4, 2006 at a grant price of $2.01 and expire on April 3, 2011,
50,000 options granted January 10, 2007 at a grant price of $1.96 and expire on
January 10, 2012, and; 18,750 options granted July 26, 2007 at a grant price of
$1.10 and expire on July 26, 2012.

(7) In the case of Mr. Tingle, this comprises 12,495 common
shares held directly or beneficially by Mr. Tingle and 162,500 share options
which include: 50,000 options granted January 5, 2005 at a grant price of $7.79
and expire on January 5, 2010 and; 50,000 options granted May 26, 2005 at a
grant price of $3.64 and expire on May 26, 2010; 50,000 options granted April 4,
2006 at a grant price of $2.01 and expire on April 3, 2011, and: 12,500 options
granted January 10, 2007 at a grant price of $1.96 and expire on January 10,
2012.

(8) In the case of Mr. Djokovic, this comprises 653,333 share
options which include: 230,000 options granted October 26, 2004 at a grant price
of U.S.$3.40 and expire October 26, 2009, and; 90,000 options granted July 21,
2005 at a grant price of $3.22 and expire July 21, 2010; 200,000 options granted
April 4, 2006 at a grant price of $2.01 and expire on April 3, 2011; and 133,333
options granted February 28, 2007 at a grant price of $2.43 and expire on
February 28, 2012.

(9) In the case of Mr. Stefanski, this comprises 68,750 share
options which include: 50,000 options granted January 10, 2007 at a grant price
of $1.96 and expire on January 10, 2012, and; 18,750 options granted July 26,
2007 at a grant price of $1.10 and expire on July 26, 2012.

(10) In the case of Dr. Williams, this comprises 96,916 share
options which include: 6,500 options granted March 25, 2004 at a grant price of
$3.60 and expire March 25, 2009; 13,750 options granted March 17, 2005 at a
grant price of $5.60 and expire March 17, 2008; 10,000 options granted July 21,
2005 at a grant price of $3.22 and expire July 21, 2010; 50,000 options granted
April 4, 2006 at a grant price of $2.01 and expire April 3, 2011; and 16,666
options granted September 6, 2006 at a grant price of $0.99 and expire September
6, 2011.



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(11) In the case of Mr. Bernstorff, this comprises 53,333
share options which include: 10,000 options granted August 30, 2005 at a grant
price of $2.73 and expire August 30, 2010; 10,000 options granted April 4, 2006
at a grant price of $2.01 and expire April 3, 2011; and 33,333 options granted
September 15, 2006 at a grant price of $0.96 and expire September 15, 2011.
(12) In the case of Mr. Mullin, there are no share options
that are exercisable within 60 days of March 24, 2008.
(13) In the case of Mr. Tai, this comprises 54,200 share
options which include: 16,700 options granted June 26, 2007 at a grant price of
$1.22 and expire on June 26, 2012, and; 37,500 options granted July 26, 2007 at
a grant price of $1.10 and expire on July 26, 2012.
(14) In the case of Mr. Gertler, this comprises 37,500
options granted July 26, 2007 at a grant price of $1.10 and expire on July 26,
2012.
(15) In the case of Mr. Qiu, this comprises 51,500 share
options which include: 25,000 options granted June 11, 2003 at a grant price of
$3.43 and expire June 11, 2008; 6,500 options granted March 25, 2004 at a grant
price of $3.60 and expire March 25, 2009; 10,000 options granted March 17, 2005
at a grant price of $5.60 and expire March 17, 2008; and 10,000 options
granted April 4, 2006 at a grant price of $2.01 and expire April 3, 2011.
(b) Stock Incentive Plan

Purpose of Plan

The purpose of the Zi Corporation Stock Incentive Plan - 2007
(the "Plan") is to advance the interests of the Corporation and its subsidiaries
and affiliates by encouraging the directors, officers, employees and service
providers of the Corporation and its subsidiaries and affiliates to acquire
shares in the Corporation, thereby increasing their proprietary interest in the
Corporation, encouraging them to remain associated with the Corporation or its
subsidiaries or affiliates and furnishing them with additional incentive in
their efforts on behalf of the Corporation and its subsidiaries or affiliates in
the conduct of their affairs.

Eligibility

The Plan provides for the issuance of options ("Options")
exercisable to acquire common shares of the Corporation and the issuance of
Restricted Stock Awards and Restricted Stock Unit Awards (as described below) to
directors, officers, employees and consultants. The specific terms of each
Option, Restricted Stock Award and Restricted Stock Unit Award are provided in a
separate Participant Agreement.

"Restricted Stock Award" means an award of stock
from treasury granted to a participant as evidenced by a Participant Agreement
that shall specify the number of common shares subject to the Restricted Stock
Award, the applicable restrictions (whether service-based restrictions, with or
without performance acceleration, and/or performance-based restrictions), the
Period of Restriction (the period during which common shares subject to a
Restricted Stock Award are restricted and subject to forfeiture), and such other
provisions as shall be determined by a committee of the Board appointed to
administer the Plan (the "Committee"). Subject to any applicable securities laws
restrictions, common shares covered by each Restricted Stock Award made under
the Plan shall become non-forfeitable and freely transferable by the participant
after the last day of the Period of Restriction and, where applicable, after a
determination of the satisfaction or achievement of any and all applicable
performance goal(s) by the Committee.

"Restricted Stock Unit" means a notional unit evidencing the
right of a participant to receive, at the time of vesting and without payment to
the Corporation, one common share issued from treasury. The number of common
shares that may be issued under the Plan is subject to appropriate adjustment in
the event of certain corporate transactions or events.

Administration of the Plan

The Plan is administered by the Committee pursuant to rules
of procedure fixed by the Board of Directors. The Committee shall have full and
final discretion to interpret the provisions of the Plan and prescribe, amend,
rescind and waive rules and regulations to govern the administration and
operation of the Plan, and all decisions and interpretations made by the
Committee shall be binding and conclusive upon the participants and the
Corporation subject to shareholder approval if required by any relevant stock
exchange. The Plan shall replace and supercede all previous employee stock
option plans or other share compensation arrangements of the Corporation and any
grants made under such previous plans or arrangements shall be deemed to have
been made under the Plan, except that the terms of any such previous grants
shall continue pursuant to their existing terms to the extent inconsistent with
the terms of the Plan.



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Amendment of the Plan
The Board may at any time or from time to time, in its sole
and absolute discretion, amend, suspend, terminate or discontinue the Plan and
may amend the terms and conditions of Options, Restricted Stock Awards or
Restricted Stock Unit Awards granted under the Plan, subject to any required
approval of any regulatory authority or stock exchange or the shareholders of
the Corporation. Notwithstanding the foregoing, no such amendment, suspension,
termination or discontinuance may adversely impair the rights of any participant
with respect to outstanding Options, Restricted Stock Awards or Restricted Stock
Unit Awards without the participants consent.

Necessary Approvals

The ability of the Options, Restricted Stock Awards or
Restricted Stock Unit Awards to be exercised or vest, as the case may be, and
the obligation of the Corporation to issue and deliver shares in accordance with
the Plan are subject to any approvals which may be required from the
shareholders of the Corporation and any regulatory authority or stock exchange
having jurisdiction over the securities of the Corporation and compliance with
applicable securities laws.

Adjustment in Shares Subject to the Plan

Other than dividends declared in the normal course and
subject to any required approvals of applicable regulatory authorities and stock
exchanges, in the event of any change in the Corporations common shares by
reason of any stock dividend, recapitalization, merger, consolidation, split-up,
combination or exchange of shares, or rights offering to purchase the
Corporations common shares at a price substantially below fair market value, or
of any similar change affecting the Corporations common shares, the number and
kind of shares which thereafter may be optioned and awarded under the Plan and
the number and kind of shares subject to the Option, Restricted Stock Award or
Restricted Stock Unit Award in outstanding Participant Agreements and the
purchase price per share thereof shall be appropriately adjusted consistent with
such change in such manner as the Board may deem equitable to prevent
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan.

Options provide the holder with the right to purchase
common shares of the Corporation at a stated exercise price (the "Exercise
Price") before a specified date in the future. The Exercise Price shall be not
less than the price permitted by any stock exchange on which the Corporations
common shares are then listed or other regulatory body having jurisdiction. The
Exercise Price shall be determined by the Committee at the time the Option is
granted, which shall in no event be lower than the Market Value of the
Corporations common shares as of the date of grant. "Market Value" means at any
date when the market value of common shares is to be determined, the higher of:
(i) the five day volume weighted average trading price of the common shares
where such five day period ends on the trading day immediately prior to such
date and (ii) the closing price of the common shares on the trading day
immediately prior to the date when the Market Value of common shares is to be
determined.

The 2007 Plan was approved at the Corporations annual
general meeting of shareholders held on July 26, 2007, and replaces and
supersedes all previous employee stock option plans or other share compensation
arrangements of the Corporation and any grants made under such previous plans or
arrangements are deemed to have been made under the 2007 Plan, except that the
terms of any such previous grants shall continue pursuant to their existing
terms to the extent inconsistent with the terms of the 2007 Plan.

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 24, 2008.



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|                             | Beneficial number | Percentage of total
|---------------------------- | ----------------- | -------------------
|Name and municipality        | of shares held    | voting rights      
|Marty Steinberg, Receiver(1) |                   |                    
|Miami, Florida               | 18,718,008        | 37.0%(3)           
|Michael E. Lobsinger(2)      |                   |                    
|Calgary, Alberta             | 4,819,613         | 9.5%(3)            

Notes:

(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 pendingbefore 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 SEC 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 most recently on April 10, 2007. Such
amended Schedule 13D reported holdings of approximately 40% of our common
shares, but such percentage has been reduced to approximately 37% by virtue of
the private placement of our shares which took place in March 2007 - see "Item
4.A  Financing efforts in 2007".

(2)

Of which 1,819,613
common shares are held directly or beneficially by Mr. Lobsinger and 700,000 are
held by Quarry Bay Investments Inc., a private Alberta corporation wholly-owned
by Mr. Lobsinger. The information provided herein is based in part upon a
Schedule 13D filed on February 2, 2007.

(3)

The Companys
major shareholders hold common shares, which shares do not carry different
voting rights than any other shares, except as limited by the Alberta Courts
ruling in the case of the Receiver. As a result of attempts by the Receiver to
effect a replacement of the members of the Zi Board of Directors, the Alberta
Court had issued an interim injunction that prohibited the Receiver from
requisitioning a special meeting of the Corporations shareholders for the
purpose of voting its shares in support of its proposed slate of directors. In
February 2007, the Company and the Receiver entered into a settlement agreement,
which aimed to settle any and all outstanding claims and issues between the
Receiver, the Lancer Funds and the Corporation. See Item 4  Information on
the Company  History and Development of the Company.

Based on a report from Olympia Trust Company, as at December
31, 2007, there were 164 registered shareholders in the United States that held
28,402,654 common shares or 56.18 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.

The Company is not aware of any arrangements the operation of
which may at a subsequent date result in a change in control of the Company.

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, 2007
to March 24, 2008, other than the following:

64

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January 1, 2008 to March 24, 2008

During the Corporations period from January 1, 2008 to March
24, 2008, the Corporation accrued and/or paid legal fees to a law firm of which
George Tai was a partner amounting, in the aggregate, to $12,012.

A consulting
fee was paid by the Corporation to a consulting firm in which Blair Mullin was a
partner amounting to $20,800 during the period from January 1, 2008 to March 24,
2008

In February 2006, Donald P. Moore, a director of the
Corporation nominated by the Receiver, brought an action against the Corporation
and Michael Lobsinger, then the Chairman, President and CEO of the Corporation
at that time, under the Business Corporation Act (Alberta) (the "ABCA"),
claiming that the Corporation had failed to make certain records available to
him required by the ABCA and had denied him access to other records that he
believed to be entitled to under the ABCA. This matter has been settled between
the parties.

The Corporation was a party to legal proceedings with the
Receiver in both Alberta and Florida, in respect of which the parties have
signed a settlement agreement. The Receiver is the holder of approximately 37
percent of the Corporations outstanding shares. See Item 4  Information on
the Company  History and Development of the Company.

Various inter-company software licenses and arrangements
exist between some of the Corporations subsidiaries, which allow certain of the
Corporations subsidiaries to use the Corporations software and to license it
to third parties.

January 1, 2007 to December 31, 2007

During the Corporations fiscal year ended December 31, 2007,
the Corporation accrued and/or paid legal fees to a law firm of which George Tai
is a partner amounting, in the aggregate, to $26,382.

During the Corporations fiscal year ended December 31, 2007,
the Corporation accrued and/or paid consulting fees to a consulting firm of
which Blair Mullin was a partner amounting, in aggregate, to $296,328.

C. Interests of experts and counsel.

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information.

See Item 18 - Financial Statements.

All revenues are generated outside of Canada for the years ended 2007, 2006,
and 2005.

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 High 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.



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(ii)
Dalian Hanpu
Applied Technology Co., Ltd., Hu Xianhua & Hu Bin v. Ericsson (China) Co., Ltd.
and Nanjing Ericsson Panda Mobile Terminals Co., Ltd., (the "Second Dalian
Ericsson (Panda) Action").The Second Dalian Ericsson (Panda) Action is in
the Second Intermediate Peoples Court (the "Lower Court") in Beijing, China.
This is a lower court than the High Court in which the First Dalian Ericsson
Action is being tried. The plaintiffs complaint was filed with the Lower Court
on February 22, 2001. This complaint alleges that Ericsson (China) Co., Ltd. and
Nanjing Ericsson Panda Mobile Terminals Co., Ltd. infringed the plaintiffs
intellectual property rights, namely Chinese patent ZL96120693.4, "Keyboard
Assignment of Stroke Input and its Screen Prompt" (the same patent under suit in
the First Dalian Ericsson Action). On February 22, 2001, Ericsson sent Zi
Corporation a request for indemnification pursuant to the Ericsson Chinese
License Agreement (defined below). The Company and its affiliates have not been
named as a party in the Second Dalian Ericsson (Panda) Action. A ruling in
Ericssons favour was issued by the Lower Court on this matter on May 23, 2002.
The Lower Court rejected the plaintiffs claims of infringement finding that:
(1) there was no literal infringement of the plaintiffs patent by Zis input
technology on the Ericsson phone models in dispute; and (2) the doctrine of
equivalence argued by the plaintiff could not be accepted as it would broaden
the original scope of the plaintiffs patent claims. The plaintiff was charged
with paying a nominal amount of RMB1,000 to cover case handling fees. The
plaintiff has filed a notice of appeal to the High Court in order to appeal this
Lower Court ruling. To the Companys knowledge, Ericsson is defending this
appeal.
Both claims described in (i) and (ii) above will be
collectively referred to as the "Ericsson/HuBin Claims" and the Ericsson parties
named in the Ericsson/HuBin Claims shall be referred to as "Ericsson". Under the
respective notices sent to us, Ericsson asserted its rights to indemnification
granted by us to Ericsson under our Chinese eZiText license agreement with
Ericsson signed February 17, 1998 (the "Ericsson Chinese License Agreement").
Pending determination of the actual scope of the alleged infringement and
whether the scope of indemnity provided under the Ericsson Chinese License
Agreement applies, we have taken a course of action where we pay for Ericssons
legal fees and where we exercise sole control of the conduct of Ericssons
defense against the Ericsson/HuBin Claims. Ericsson is cooperating and
participating with Zi to defend against the Ericsson/HuBin Claims. We believe
that the allegations are unfounded and without merit and Zi and Ericsson are
vigorously defending against the Hu Bin claims.
Furthermore, Ericsson made a separate application to the PRC
Patent Office seeking invalidation of the HuBin Patent (the "Invalidation
Application"). An invalidation hearing was held with the PRC Patent
Re-examination Board on May 27, 2002. In March 2004, a ruling from the PRC
Patent Re-examination Board was rendered in favour of the patent. An appeal was
heard in October 2004 and Ericsson was successful on most counts. As a result,
certain portions of the Hu Bin patent were found to be invalid. This ruling is
currently under appeal. We are awaiting advice with respect to the status of
this appeal. We have been informed by our attorneys that, on March 2, 2005, the
High Court issued an administrative ruling to suspend the proceedings of the
Ericsson/HuBin Claims, in light of the fact that a final decision has not yet
been made in respect of the Invalidation Application, and our attorneys believe
that it is unlikely for such proceedings to resume prior to a final decision
being made on the Invalidation Application.
(iii)
Dalian Hanpu
Applied Technology Co., Ltd., Hu Xianhua & Hu Bin v. Alcatel Suzhou
communication Co., Ltd and Another (the "Dalian Alcatel Action").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 on May 8, 2001
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.
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.66

---

The plaintiff has filed a notice of appeal to the High Court
in order to appeal this Lower Court ruling. To the Companys knowledge, Alcatel
is defending this appeal.
We have disputed the applicability of the indemnity provided
by us to Alcatel under the license agreement dated October 20, 1999 (the
"Alcatel License Agreement") in respect of the Alcatel/HuBin Claims. To date, we
are not providing any indemnification to Alcatel in respect of Alcatels defense
of the Alcatel/Hu Bin claim; however, we have been actively providing Alcatel
technical support for their defense. The Company believes that the Dalian
Alcatel Action has been suspended in light of the fact that a final decision has
not yet been made in respect of the Invalidation Application.
(iv)
Commencing on
March 11, 2005, the Board of Regents of the University of Texas System ("U of
T") filed federal lawsuits against numerous alleged infringers of U.S. Patent
No. 4,674,112 (the "112 Patent") in the U.S. District Court for the Western
District of Texas, Austin Division. Of the named parties, the majority are
customers of the Company's principal competitor in the text input market and a
few are customers of the Company.

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

Simultaneously, the world's second
largest provider of mobile phones and the Company's principal competitor in the
text input market are seeking re-examination of the 112 Patent in the US Patent
& Trademark Office.

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

On May 3, 2007, the court issued an
Order entering the parties stipulation of non-infringement of the asserted
patent, dismissing pending counterclaims and entering final judgment in favour
of the defendants. U of T filed a notice of appeal on May 23, 2007. The appeal
is currently pending before the United States Court of Appeals for the Federal
Circuit.

(v)

The
Corporation was a party to legal proceedings with the Receiver in both Alberta
and Florida, in respect of which the parties have signed a settlement agreement.
The Receiver is the holder of approximately 37 percent of the Corporations
outstanding shares. See Item 4  Information on the Company  History and
Development of the Company.

(vi)

On November
12, 2007, we became aware of a lawsuit filed by AutoText Technologies, Inc.
("AutoText"), claiming, among other things, that its patent has been infringed.
Zi was one of over twenty defendants named in the lawsuit. Certain of Zis
customers were also named as defendants. We were never served with notice of
this lawsuit. On January 8, 2008, we learned that AutoText had dismissed the
lawsuit against all defendants, including Zi, on a "without prejudice" basis.
Therefore, while the suit has been dismissed, it is possible that AutoText may
re-file the suit again in the future.

Dividend Policy

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

B. 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 Capital 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 Global Market and/or NASDAQ Capital Market.
Toronto Stock Exchange (in CDN$):

|Period                               |   | High |   | Low 
|------------------------------------ | - | ---- | - | ----
|February 2008                        | $ | 1.03 | $ | 0.56
|January 2008                         | $ | 0.86 | $ | 0.61
|December 2007                        | $ | 1.15 | $ | 0.77
|November 2007                        | $ | 1.35 | $ | 0.78
|October 2007                         | $ | 1.15 | $ | 0.82
|September 2007                       | $ | 1.25 | $ | 0.68
|Quarter ended December 31, 2007      | $ | 1.35 | $ | 0.77
|Quarter ended
    September 30, 2007 | $ | 1.48 | $ | 0.68
|Quarter ended June 30,
    2007      | $ | 1.88 | $ | 1.14
|Quarter ended March
    31, 2007     | $ | 3.20 | $ | 1.80
|Quarter ended December
    31, 2006  | $ | 2.99 | $ | 0.95
|Quarter ended
    September 30, 2006 | $ | 1.78 | $ | 0.74
|Quarter ended June 30,
    2006      | $ | 2.13 | $ | 1.10
|Quarter ended March
    31, 2006     | $ | 2.78 | $ | 1.65
|Year ended December
    31, 2007     | $ | 3.20 | $ | 0.68
|Year ended December
    31, 2006     | $ | 2.99 | $ | 0.74
|Year ended December
    31, 2005     | $ | 9.15 | $ | 1.53
|Year ended December
    31, 2004     | $ | 8.69 | $ | 2.57
|Year ended December
    31, 2003     | $ | 5.60 | $ | 2.39
|                                     |   |      |   |     
|NASDAQ (in U.S.$):                   |   |      |   |     
|Period                               |   | High |   | Low 
|February 2008                        | $ | 1.00 | $ | 0.59
|January 2008                         | $ | 1.13 | $ | 0.53
|December 2007                        | $ | 1.12 | $ | 0.75
|November 2007                        | $ | 1.35 | $ | 0.85
|October 2007                         | $ | 1.20 | $ | 0.80
|September 2007                       | $ | 1.27 | $ | 0.66
|Quarter ended December 31, 2007      | $ | 1.35 | $ | 0.75
|Quarter ended
    September 30, 2007 | $ | 1.37 | $ | 0.66
|Quarter ended June 30,
    2007      | $ | 1.64 | $ | 1.05
|Quarter ended March
    31, 2007     | $ | 2.73 | $ | 1.54
|Quarter ended December
    31, 2006  | $ | 2.85 | $ | 0.84
|Quarter ended
    September 30, 2006 | $ | 1.57 | $ | 0.66
|Quarter ended June 30,
    2006      | $ | 1.85 | $ | 1.00
|Quarter ended March
    31, 2006     | $ | 2.44 | $ | 1.42
|Year ended December
    31, 2007     | $ | 2.73 | $ | 0.66
|Year ended December
    31, 2006     | $ | 2.85 | $ | 0.66
|Year ended December
    31, 2005     | $ | 7.45 | $ | 1.32
|Year ended December
    31, 2004     | $ | 7.55 | $ | 2.00
|Year ended December
    31, 2003     | $ | 4.08 | $ | 1.62

68

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B. Plan of distribution.

Not applicable.

C. Markets.

Our common shares are listed on the Toronto Stock Exchange
and NASDAQ Capital Market. At December 31, 2007, the Company had 50,557,957
common shares with no par value outstanding.

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.

Directors

A director of our Company need not be a shareholder. In
accordance with the Alberta Business Corporations Act, at least 25
percent 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 one quarter of the directors present are resident Canadians. Business
cannot be transacted at a directors meeting without a quorum.

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

- 



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.

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

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

Preferred Shares

Our articles of incorporation authorize the issuance of an
unlimited number of preferred shares, in one or more series. The Alberta 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
shares.
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.
Shareholder Meetings
An annual meeting of shareholders is held each year,
generally not later than 15 months after the last preceding annual meeting, for
the purpose of considering the financial statements and reports, electing
directors, appointing auditors and for the transaction of other business as may
be brought before the meeting. The Board of Directors has the power to call a
special meeting of shareholders at any time. The By-laws of the Company provide
that two persons present in person holding or representing by proxy five percent
(5%) of the issued common shares of the Corporation, shall constitute a quorum
for the meeting in respect of holders of common shares. Although this quorum
requirement is less than that imposed by the rules of the NASDAQ Capital Market
System, we have operated for the past years under an exemption from such
requirement on the basis that we are a foreign private issuer and such a quorum
requirement is consistent with normal business practices in our jurisdiction of
incorporation.
Notice of the time and place of each meeting of shareholders
must be given not less than 21 days, nor more than 50 days, before the date of
each meeting to each director, to the auditor and to each shareholder who at the
close of business on the record date for notice is entered in the securities
register as the holder of one or more shares carrying the right to vote at the
meeting. Notice of meeting of shareholders called for any other purpose other
than consideration of the minutes of an earlier meeting, financial statements
and auditors report, election of directors and reappointment of the incumbent
auditor, must state the nature of the business in sufficient detail to permit a
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 state that meetings of our
shareholders may be held in the cities of San Francisco, California, Los
Angeles, California, New York, New York and Phoenix, Arizona in the United
States of America, in Toronto, Ontario, Canada and in Hong Kong, China and
Beijing, China in addition to anywhere in the Province of Alberta.
Limitations on Right to Own Securities
There is no limitation imposed by Canadian law or by our
articles or other charter documents on the right of a non-resident to hold or
vote common shares or preference shares with voting rights (the "Voting
Shares"), other than as provided in the 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) or an investment to
establish a new Canadian business, to identify, notify, or file an application
for review with the Investment Review Division of Industry Canada ("IRD").71

---

The notification procedure involves a brief statement of
information about the investment on a prescribed form which is required to be
filed with the IRD by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment
is in a specific type of business activity related to Canadas cultural heritage
and national identity.
If an investment is reviewable under the ICA, an application
for review in the form prescribed is normally required to be filed with the IRD
prior to the investment taking place and the investment may not be implemented
until the review has been completed and the Minister of Industry ("Minister")
(the Minister responsible for Investment Canada) is satisfied that the
investment is likely to be of net benefit to Canada. The Minister has up to 75
days to make this determination. If the Minister is not satisfied that the
investment is likely to be of net benefit to Canada, the non-Canadian must not
implement the investment or, if the investment has been implemented, may be
required to divest himself of control of the business that is the subject of the
investment.
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:
An investment to
  establish a new Canadian business; and
  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:
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: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 percent of
    the asset value of the global transaction;
    Except as
    specified in paragraph (c) below, a threshold is calculated annually for
    reviewable direct acquisitions by or from WTO investors. The threshold for
    2007 is CDN$281 million. Pursuant to Canadas international commitments,
    indirect acquisitions by or from WTO investors are not reviewable;
    The limits set
    out in paragraph (a) apply to all investors for acquisitions of a Canadian
    business that:engages in the
      production of uranium and owns an interest in a producing uranium property
      in Canada;
      provides any
      financial service;
      provides any
      transportation services; or
      is a cultural
      business.
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.72

---



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, without
limitation, 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 member, 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.

Change of Control

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

Our authorized capital consists of an unlimited number of
common shares and an unlimited number of preferred shares. Although we have not
issued any preferred shares to date, the Board of Directors, may without any
further vote by the common shareholders, issue preferred shares and determine
the price, preferences, rights and restrictions 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 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:

Settlement Agreement with the
Receiver  See Item 4  Information on the Company  History and Development
of the Company and Exhibit 4.12. Settlement Agreement by and among the
Corporation, the Receiver, Michael Lobsinger and Quarry Bay Investments Inc.

See also the exhibits to this annual report.

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
regulations or other legislation, including foreign exchange controls, in Canada
which may affect the export or import of capital or that may affect the
remittance of dividends, interest or other payments to non-resident holders of
the Companys securities. Any such remittances to United States residents,
however, are subject to a withholding tax pursuant to The Canada - U.S.
Income Tax Convention (1980), as amended.

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 Memorandum and Articles of Association - Limitations on
Rights to Own Securities.

E. Taxation.

Material Canadian Income Tax Consequences

The following is a general discussion of certain possible
Canadian Federal income tax consequences under the Income Tax Act
(Canada) (the "Tax Act") generally applicable to a non-resident shareholder of
common shares in the Company. This discussion is of a general nature only and
does not take into account the particular facts and circumstances of any
particular non-resident shareholder, nor does it take into account provincial,
territorial, United States or other foreign income tax considerations.

This summary is based on the current provisions of the Tax
Act and the regulations thereunder (the "Regulations"), all specific proposals
to amend the Tax Act and Regulations publicly and officially announced by the
Minister of Finance (Canada), the current provisions of the Convention (as
hereinafter defined) and Counsel's understanding of the current administrative
policy and practices of the Canada Revenue Agency published in writing prior to
the date hereof.

This summary is of a general nature only and is not
exhaustive of all possible Canadian Federal income tax consequences. It is not
intended as legal or tax advice to any prospective or current holders of shares
of the Company and should not be construed as such. The tax consequences to any
prospective or current shareholders of the Company will vary according to that
holder's particular circumstances. Each holder should consult the holder's own
tax advisor with respect to the tax consequences applicable to the holder's own
particular circumstances.

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



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Material United States Federal Income Tax ConsequencesTO COMPLY WITH UNITED STATES INTERNAL REVENUE SERVICE
CIRCULAR 230, PROSPECTIVE INVESTORS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION
OF U.S. FEDERAL TAX ISSUES CONTAINED OR REFERRED TO IN THIS OFFERING CIRCULAR IS
NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY PROSPECTIVE INVESTORS,
FOR THE PURPOSES OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THEM UNDER THE
UNITED STATES INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS BEING USED IN
CONNECTION WITH THE PROMOTION OR MARKETING BY THE ISSUER OF THE TRANSACTIONS OR
MATTERS ADDRESSED HEREIN; AND (C) PROSPECTIVE INVESTORS SHOULD SEEK ADVICE BASED
ON THE TAXPAYERS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
The following is a general discussion of certain possible
United States ("U.S.") federal income tax consequences, under current law,
generally applicable to a U.S. Holder (as hereinafter defined) of common shares
in the Company. This discussion is of a general nature only and does not take
into account the particular facts and circumstances, with respect to U.S.
federal income tax issues, of any particular U.S. Holder. In addition, this
discussion does not cover any state, local or foreign tax consequences.
The following discussion is based upon the sections of the
Internal Revenue Code of 1986, as amended ("Code"), 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 and which are subject to differing
interpretations. This discussion does not consider the potential effects, both
adverse and beneficial, of any proposed legislation which, if enacted, could be
applied, possibly on a retroactive basis, at any time.
This discussion is for general information only and it is not
intended to be, nor should it be construed to be, legal or tax advice to any
U.S. Holder or prospective U.S. Holder of common shares issued by the Company,
and no opinion or representation with respect to the U.S. federal income tax
consequences to any such U.S. Holder or prospective U.S. Holder is made.
Accordingly, U.S. Holders and prospective U.S. Holders of common shares issued
by the Company should consult their own financial advisor, legal counsel or
accountant regarding the U.S. federal, state, local and foreign tax consequences
of purchasing, owning and disposing of common shares issued by the Company.
U.S. Holders.
As used herein, a "U.S. Holder" means a holder of common
shares issued by the Company who is (i) a citizen or individual resident of the
U.S., (ii) a corporation created or organized in or under the laws of the U.S.
or of any political subdivision thereof, (iii) an estate whose income is taxable
in the U.S. irrespective of source or (iv) a trust subject to the primary
supervision of a court within the U.S. and control of a U.S. fiduciary as
described Section 7701(a)(30) of the Code. If a partnership or other
"pass-through" entity treated as a partnership for U.S. federal income tax
purposes holds common shares issued by the Company, the U.S. federal income tax
treatment of the partners or owners of such partnership or other pass-through
entity generally will depend on the status of such partners or owners and the
activities of such partnership or pass-through entity.
Persons Not Covered.
This summary does not address the U.S. federal income tax
consequences to persons (including persons who are U.S. Holders) subject to
special provisions of U.S. federal income tax law, including but not limited to
(i) persons who are 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, or brokers, dealers or traders in securities, (ii) persons
who have a "functional currency" other than the U.S. dollar, (iii) persons
subject to the alternative minimum tax, (iv) persons who own their common shares
as part of a straddle, hedging, conversion transaction, constructive sale or
other arrangement involving more than one position, (v) persons who acquired
their common shares through the exercise of employee stock options or otherwise
as compensation for services, (vi) persons that own an interest in an entity
that owns common shares, (vii) persons who own, exercise or dispose of any
options, warrants or other rights to acquire common shares, (viii) persons who
are partners or owners of partnerships or other pass-through entities such as
corporations subject to Subchapter S of the Code or (ix) persons who own their
common shares other than as a capital asset within the meaning of Section 1221
of the Code.75

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Distributions Made by the Company to U.S. Holders.
General Rules. U.S. Holders receiving
distributions (including constructive distributions) with respect to common
shares issued by the Company are required to include in gross income as a
dividend for U.S. federal income tax purposes the gross amount of such
distributions (without reduction for any Canadian income tax withheld from such
distributions), equal to the U.S. dollar value of such distributions 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. To the extent that
distributions from the Company exceed its current and accumulated earnings and
profits, such distributions will be treated first as a return of capital, to the
extent of the U.S. Holders adjusted basis in the common shares, and thereafter
as gain from the sale or exchange of the common shares. (See more detailed
discussion at "Disposition of Common Shares" below). Any Canadian tax
withheld from a distribution by the Company may be credited, subject to certain
limitations, against the U.S. Holders U.S. federal income tax liability or,
alternatively, may be deducted in computing the U.S. Holder's U.S. federal
taxable income by those who itemize deductions. (See more detailed discussion at
"Foreign Tax Credit" below).
Currency Gain or Loss. In the case of foreign
currency received as a distribution that is not converted by the recipient into
U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the
foreign currency equal to its U.S. dollar value on the date of receipt.
Generally any gain or loss recognized upon a subsequent sale or other
disposition of the foreign currency, including the exchange for U.S. dollars,
will be ordinary income or loss.
Dividends may be Eligible for Reduced Tax Rate.
Under current U.S. tax laws, for taxable years beginning after December 31, 2002
and before January 1, 2011, dividends received by U.S. Holders that are
individuals, estates or trusts from "qualified foreign corporations," as defined
in Section 1(h)(11) of the Code, generally are taxed at the same preferential
tax rates applicable to long-term capital gains. Although not free from doubt,
it appears that the Company would be a "qualified foreign corporation," as
defined in Section 1(h)(11) of the Code if the Company is not a Passive Foreign
Investment Company ("PFIC"). The Company has not determined whether it meets the
definition of a PFIC. A corporation that is properly described as a PFIC, along
with other foreign corporations given special status under the Code, for its
taxable year during which it pays a dividend, or for its immediately preceding
taxable year, will not be treated as a "qualifying foreign corporation" and
dividends received by U.S. Holders that are individuals, estates or trusts
generally will be subject to U.S. federal income tax at ordinary income tax
rates (and not at the preferential tax rates applicable to long-term capital
gains).
Dividends not Eligible for Dividends Received Deduction.
Dividends paid by the Company generally will not be eligible for the "dividends
received deduction" allowed to corporate shareholders receiving dividends from
certain U.S. corporations. Under certain circumstances, a U.S. Holder that is a
corporation and that owns shares representing at least 10% of the total voting
power and the total value of shares issued by the Company may be entitled to a
70% deduction of the "U.S. source" portion of dividends received from the
Company (unless the Company qualifies as a "PFIC" as defined below). The
availability of the dividends received deduction is subject to several complex
limitations that are beyond the scope of this discussion, and U.S. Holders of
common shares issued by the Company should consult their own financial advisor,
legal counsel or accountant regarding the dividends received deduction.
Dividends Paid to Shareholder who Made QEF Election may be
Exempt from Tax. Generally, shareholders are not subject to additional
income taxation on distributions made by a PFIC to the extent of the
shareholders basis in the corporations common shares if a Qualified Electing
Fund ("QEF") election is in effect. (Please see the "QEF Election"
discussion below.) A shareholders basis in this situation is usually equal to
the cost of purchasing the common shares plus the amount of the Companys income
that was reported on the shareholders return pursuant to the QEF election less
any prior distributions made by the corporation to the shareholder. Again, these
rules are subject to several exceptions that are beyond the scope of this
discussion. U.S. Holders of common shares issued by the Company should
consult their own financial advisor, legal counsel or accountant regarding
whether dividends paid by the Company to them will be exempt from federal income
tax if a QEF election is made.76

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Disposition of Common Shares.
General Rule. A U.S. Holder will recognize gain or
loss upon the sale or other taxable disposition of common shares issued by the
Company 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 common shares. This gain or loss will be long-term capital gain or loss
if the common shares are held for more than one year.
Reduced Tax Rate. Under current U.S. tax law,
preferential tax rates apply to long-term capital gains of U.S. Holders that are
individuals, estates or trusts. There are currently no preferential tax rates
for long-term capital gains for a U.S. Holder that is a corporation. Deductions
for net capital losses are subject to significant limitations. For U.S. Holders
that are not corporations, any unused portion of such net capital loss may be
carried over to be used in later tax years until such net capital loss is
thereby exhausted. For U.S. Holders that are corporations, an unused net capital
loss may be carried back three years and carried forward five years from the
loss year to be offset against capital gains until such net capital loss is
thereby exhausted. Sales of PFIC stock are not eligible for the reduced
long-term capital gains rates that are usually applicable to sales of stock
unless the shareholder made a QEF election regarding such common shares.
The Company may be a Passive Foreign Investment Company.
General Discussion. The Company has not determined
whether it meets the definition of PFIC, within the meaning of Sections 1291
through 1298 of the Code for the current tax year and any prior tax years. The
Company may or may not qualify as a PFIC in subsequent years due to changes in
its assets and business operations. A U.S. Holder who holds stock in a foreign
corporation during any year in which such corporation qualifies as a PFIC is
subject to numerous special U.S. federal income taxation rules and may elect to
be taxed under two alternative tax regimes. The following is a discussion of
these special rules applied to U.S. Holders of common shares issued by the
Company. In addition, special rules apply if a foreign corporation qualifies as
both a PFIC and a "controlled foreign corporation" (as defined below) and a U.S.
Holder owns, actually or constructively, 10 % or more of the total combined
voting power of all classes of stock entitled to vote of such foreign
corporation (See more detailed discussion at "Controlled Foreign Corporation"
below).
Definition of PFIC. Section 1297 of the Code
generally defines a PFIC as a corporation that is not formed in the U.S. and,
for any taxable year, either (a) 75% or more of its gross income is "passive
income" or (b) the average percentage, by fair market value of its assets that
produce or are held for the production of "passive income" is 50% or more.
"Passive income" includes, for example, dividends, interest, certain rents and
royalties, certain gains from the sale of stock and securities, and certain
gains from commodities transactions. For purposes of the PFIC income test and
the assets test, if a foreign corporation owns (directly or indirectly) at least
25% by value of the stock of another corporation, such foreign corporation shall
be treated as if it (a) held a proportionate share of the assets of such other
corporation, and (b) received directly its proportionate share of the income of
such other corporation. Also, for purposes of such PFIC tests, passive income
does not include any interest, dividends, rents or royalties that are received
or accrued from a "related" person to the extent such amount is properly
allocable to the income of such related person which is not passive income. For
these purposes, a person is related with respect to a foreign corporation if
such person "controls" the foreign corporation or is controlled by the foreign
corporation or by the same persons that control the foreign corporation. For
these purposes, "control" means ownership, directly or indirectly, of stock
possessing more than 50% of the total voting power of all classes of stock
entitled to vote or of the total value of stock of a corporation.
Generally Applicable PFIC Rules. If a U.S. Holder
does not make a timely election to be taxed in conformity with the
Mark-to-Market rules (as described below) or the QEF rules (as described below)
during a year in which it holds (or is deemed to have held) common shares issued
by the Company while it is a PFIC (a "Non-Electing U.S. Holder"), then special
taxation rules under Section 1291 of the Code will apply to (i) gains realized
on the disposition (or deemed to be realized by reasons of a pledge) of his
common shares and (ii) certain "excess distributions" (generally, distributions
received in the current taxable year that are in excess of 125% of the average
distributions received during the three preceding years or, if shorter, the U.S.
Holders holding period) by the Company.
A Non-Electing U.S. Holder generally would be required to pro
rate all gains realized on the disposition of his common shares and all excess
distributions on his common shares over the entire holding period for the common
shares. All gains or excess distributions allocated to prior years of the U.S.
Holder (other than years prior to the Companys first taxable year during such
U.S. Holders holding period and beginning after January 1, 1987 for which the
Company was a PFIC) would generally be taxed at the highest tax rate for each
such prior year applicable to ordinary income, and such Non-Electing U.S. Holder
also would be liable for interest on the foregoing tax liability for each such
prior year calculated as if such liability had been due with respect to each
such prior year. A Non-Electing U.S. Holder that is not a corporation must treat
this interest charge as "personal interest" which, as discussed above, is wholly
nondeductible. The balance of the gain or the excess distribution will be
treated as ordinary income in the year of the disposition or distribution, and
no interest charge will be incurred with respect to such balance.77

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If the Company is a PFIC for any taxable year during which a
Non-Electing U.S. Holder holds common shares issued by the Company, then it will
continue to be treated as a PFIC with respect to such common shares and such
Non-Electing U.S. Holder, even if it ceases meeting the definition of a PFIC. A
Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to
recognize gain (which will be taxed under the rules discussed above for
Non-Electing U.S. Holders) as if such common shares had been sold on the last
day of the last taxable year for which it was a PFIC.
Mark-to-Market Election. Effective for tax years of U.S.
Holders beginning after December 31, 1997, U.S. Holders who hold, actually or
constructively, marketable stock (as specifically defined in the Treasury
Regulations) of a foreign corporation that qualifies as a PFIC may annually
elect to mark such stock to the market (a "mark-to-market election"). If such an
election is made, such U.S. Holder will generally not be subject to the special
taxation rules of Section 1291 discussed above. However, if the mark-to-market
election is made by a Non-Electing U.S. Holder after the beginning of the
holding period for the PFIC stock, then the Section 1291 rules will apply to
certain dispositions of, distributions on and other amounts taxable with respect
to the Companys common shares. A U.S. Holder who makes the mark-to market
election will include in income for the taxable year for which the election was
made an amount equal to the excess, if any, of the fair market value of the
Companys common shares as of the close of such tax year over such U.S. Holders
adjusted basis in such common shares. In addition, the U.S. Holder is allowed a
deduction for the lesser of (i) the excess, if any, of such U.S. Holders
adjusted tax basis in the common shares over the fair market value of such
shares as of the close of the tax year, or (ii) the excess, if any, of (A) the
mark-to-market gains for the Companys common shares included by such U.S.
Holder for prior tax years, including any amount which would have been included
for any prior tax year but for the Section 1291 interest on tax deferral rules
discussed above with respect to Non-Electing U.S. Holders, over (B) the
mark-to-market losses for common shares that were allowed as deductions for
prior tax years. A U.S. Holders adjusted tax basis in his common shares will be
adjusted to reflect the amount included in or deducted from income as a result
of a mark-to-market election. A mark-to-market election applies to the taxable
year in which the election is made and to each subsequent taxable year, unless
the common shares cease to be marketable, as specifically defined, or the IRS
consents to revocation of the election.
QEF Election. In general, a U.S. Holder who makes a
timely QEF election (an "Electing U.S. Holder") regarding his common shares
issued by the Company will be subject, under Section 1293 of the Code, to
current U.S. federal income tax for any taxable year in which the Company
qualifies as a PFIC on his pro rata share of the Companys (i) "net capital
gain" (the excess of net long-term capital gain over net short-term capital
loss), which will be taxed as long-term capital gain to the Electing U.S. Holder
and (ii) "ordinary earnings" (the excess of earnings and profits over net
capital gain), which will be taxed as ordinary income to the Electing U.S.
Holder, in each case, for the shareholders taxable year in which (or with
which) the Companys taxable year ends, regardless of whether such amounts are
actually distributed.
The effective QEF election also allows the Electing U.S.
Holder to (i) generally treat any gain realized on the disposition of his common
shares (or deemed to be realized on the pledge of his common shares) as capital
gain; (ii) treat his share of the Companys net capital gain, if any, as
long-term capital gain instead of ordinary income; and (iii) either avoid
interest charges resulting from PFIC status altogether, or make an annual
election, subject to certain limitations, to defer payment of current taxes on
his share of the Companys annual realized net capital gain and ordinary
earnings subject, however, to an interest charge. If the Electing U.S. Holder is
not a corporation, such an interest charge would be treated as "personal
interest" that is not deductible.
The procedure a U.S. Holder must comply with in making an
effective QEF election, and the U.S. federal income tax consequences of the QEF
election, will depend on whether the year of the election is the first year in
the U.S. Holders holding period in which the Company is a PFIC. If the U.S.
Holder makes a QEF election in such first year, i.e., a timely QEF
election, then the U.S. Holder may make the QEF election by simply filing the
appropriate QEF election documents at the time the U.S. Holder files his tax
return for such first year. However, if the Company qualified as a PFIC in a
prior year, then in addition to filing the QEF election documents, the U.S.
Holder must elect to recognize (i) under the rules of Section 1291 of the Code
(discussed herein), any gain that he would otherwise recognize if the U.S.
Holder sold his stock on the qualification date or (ii) if the Company is a
controlled foreign corporation, the U.S. Holders pro rata share of the
Companys post-1986 earnings and profits as of the qualification date. The
qualification date is the first day of the Companys first tax year in which the
Company qualified as a QEF with respect to such U.S. Holder. The elections to
recognize such gain or earnings and profits can only be made if such U.S.
Holders holding period for the common shares includes the qualification date.
By electing to recognize such gain or earnings and profits, the U.S. Holder will
be deemed to have made a timely QEF election. U.S. Holders are urged to
consult a tax advisor regarding the availability of and procedure for electing
to recognize gain or earnings and profits under the foregoing rules. In
addition to the above rules, under very limited circumstances, a U.S. Holder may
make a retroactive QEF election if such U.S. Holder failed to file the QEF
election documents in a timely manner.78

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A QEF election, once made with respect to the Company,
applies to the tax year for which it was made and to all subsequent tax years,
unless the election is invalidated or terminated, or the IRS consents to
revocation of the election. If a QEF election is made by a U.S. Holder and the
Company ceases to qualify as a PFIC in a subsequent tax year, the QEF election
will remain in effect, although not applicable, during those tax years in which
the Company does not qualify as a PFIC. Therefore, if the Company again
qualifies as a PFIC in a subsequent tax year, the QEF election will be effective
and the U.S. Holder will be subject to the rules described above for Electing
U.S. Holders in such tax year and any subsequent tax years in which the Company
qualifies as a PFIC. In addition, the QEF election remains in effect, although
not applicable, with respect to an Electing U.S. Holder even after such U.S.
Holder disposes of all of his or its direct and indirect interest in the
Companys common shares. Therefore, if such U.S. Holder reacquires an interest
in the Company, that U.S. Holder will be subject to the rules described above
for Electing U.S. Holders for each tax year in which the Company qualifies as a
PFIC.
Generally, shareholders do not make a QEF election unless
they have sufficient information to determine their proportionate share of a
corporations net capital gain and ordinary earnings. The Company has not
calculated these amounts for any shareholder, and do not anticipate making these
calculations in the foreseeable future. Therefore, U.S. Holders of the
Companys common shares should consult their own financial advisor, legal
counsel or accountant regarding the QEF election before making this election.
Other PFIC Rules. Under Section 1291(f) of the
Code, the IRS has issued Proposed Treasury Regulations that, subject to certain
exceptions, would treat as taxable certain transfers of PFIC stock by
Non-Electing U.S. Holders that are generally not otherwise taxed, such as gifts,
exchanges pursuant to corporate reorganizations, and transfers at death.
Generally, in such cases the basis of common shares in the hands of the
transferee and the basis of any property received in the exchange for those
common shares would be increased by the amount of gain recognized. However, the
specific U.S. federal income tax consequences to the U.S. Holder and the
transferee may vary based on the manner in which the common shares are
transferred.
Certain special, generally adverse, rules will apply with
respect to common shares issued by the Company while it is a PFIC whether or not
it is treated as a QEF. For example under Section 1298(b)(6) of the Code, a U.S.
Holder who uses PFIC stock as security for a loan (including a margin loan)
will, except as may be provided in regulations, be treated as having made a
taxable disposition of such shares.
The PFIC rules are very complicated, and U.S. Holders should
consult their own financial advisor, legal counsel or accountant regarding the
PFIC rules, including the advisability of and procedure for making a QEF
election or a mark-to-market election, and how these rules may impact their U.S.
federal income tax situation.
Foreign Tax Credit.
A U.S. Holder who pays (or has withheld from distributions)
Canadian or other foreign income tax with respect to the ownership of common
shares issued by the Company may be entitled, at the option of the U.S. Holder,
to either receive a deduction or a tax credit for U.S. federal income tax
purposes with respect to such foreign tax paid or withheld. There are
significant and complex limitations that apply to the foreign tax credit, among
which is the general limitation that the credit cannot exceed the proportionate
share of the U.S. Holders U.S. income tax liability that the U.S. Holders
"foreign source" income bears to his or its worldwide taxable income. In
applying this limitation, the various items of income and deduction must be
classified as either "foreign source" or "U.S. source." Complex rules govern
this classification process.
In addition, U.S. Holders that are corporations and that own
10% or more of the Companys voting stock may be entitled to an "indirect"
foreign tax credit under Section 902 of the Code with respect to the payment of
dividends by the Company under certain circumstances and subject to complex
rules and limitations.The availability of the foreign tax credit and the
application of the limitations with respect to the foreign tax credit are fact
specific, and each U.S. Holder of common shares issued by the Company should
consult their own financial advisor, legal counsel or accountant regarding the
foreign tax credit rules.79

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Information Reporting; Backup Withholding.
Certain information reporting and backup withholding rules
may apply with respect to certain payments related to common shares issued by
the Company. In particular, a payor or middleman within the U.S., or in certain
cases outside the U.S., will be required to withhold at a current rate of 28%
(which rate is scheduled for periodic adjustment) of any payments to a U.S.
Holder regarding dividends paid by the Company, or proceeds from the sale of,
such common shares within the U.S., if a U.S. Holder fails to furnish its
correct taxpayer identification number (generally on Form W-9) or otherwise
fails to comply with, or establish an exemption from, the backup withholding tax
requirements. Any amounts withheld under the U.S. backup withholding tax rules
will be allowed as a refund or a credit against the U.S. Holders U.S. federal
income tax liability, provided the required information is furnished to the IRS.
U.S. Holders should consult their own financial advisor, legal counsel or
accountant regarding the information reporting and backup withholding rules
applicable to the Companys common shares.
Other Considerations for U.S. Holders.
In the following circumstances, the above sections of this
discussion may not describe the U.S. federal income tax consequences to U.S.
Holders resulting from the ownership and disposition of common shares issued by
a foreign corporation.
Controlled Foreign Corporation.
If more than 50% of the total voting power or the total value
of the Companys outstanding shares is owned, directly or indirectly, by
citizens or residents of the U.S., U.S. partnerships or corporations, or U.S.
estates or trusts (as defined by the Code Section 7701(a)(30)), each of which
own, directly or indirectly, 10% or more of the total voting power of the
Companys outstanding shares (each a "10% Shareholder"), the Company could be
treated as a "Controlled Foreign Corporation" ("CFC") under Section 957 of the
Code.
The classification of the Company as a CFC would effect many
complex results, including that 10% Shareholders would generally (i) be treated
as having received a current distribution of the Companys "Subpart F income"
and (ii) would also be subject to current U.S. federal income tax on their pro
rata share of the Companys earnings invested in "U.S. property." The foreign
tax credit may reduce the U.S. federal income tax on these amounts for such 10%
Shareholders (See more detailed discussion at "Foreign Tax Credit" above). In
addition, under Section 1248 of the Code, gain from the sale or other taxable
disposition of the Companys common shares by a U.S. Holder that is or was a 10%
Shareholder at any time during the five-year period ending with the sale is
treated as a dividend to the extent of the Companys earnings and profits
attributable to the common shares sold or exchanged.
If the Company is classified as both a PFIC and a CFC, it
generally will not be treated as a PFIC with respect to 10% Shareholders. This
rule generally will be effective for taxable years of 10% Shareholders beginning
after 1997 and for its taxable years ending with or within such taxable years of
10% Shareholders.
The Company has not determined whether it meets the
definition of a CFC, and there can be no assurance that it will not be
considered a CFC for the current or any future taxable year.The CFC rules are very complicated, and U.S. Holders should
consult their own financial advisor, legal counsel or accountant regarding the
CFC rules and how these rules may impact their U.S. federal income tax
situation.
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 - 7th Avenue S.W.,
Calgary, AB T2P 3G2, and, for certain documents, on the Internet at
www.sedar.com and at www.sec.gov.



---

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 SEC. 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 SEC filings, and the exhibits
thereto, are available for inspection and copying at the public reference
facilities maintained by the SEC in Judiciary Plaza, Room 1580, 100 F 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 SEC at
1-800-SEC-0330 for further information on the public reference rooms. These
filings are also available on the SEC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 regarding 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 Disclosures About Market Risk.

(A) Quantitative information about market risk.

Accounts receivable, cash equivalents, investment in a
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 4). The investment in a significantly influenced company constitutes a
financial instrument with a fair value that is not determinable due to the
unavailability of independent third party evidence to support a valuation of
this investment.

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

(B) Qualitative information about market risk

Interest Rate Risk

The Company does not maintain any market risk sensitive
instruments for trading purposes or instruments entered into for purposes other
than trading purposes, other than maintaining a short term investment portfolio
consisting mainly of term deposits purchased with an average maturity of less
than three months. These securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest rates were
to increase immediately and uniformly by 10 percent of their levels at December
31, 2007, 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.



---

Foreign Exchange Rate Risk
The foreign operations of the Company are translated into
U.S. dollars for financial statement presentation. Consequently, movements in
exchange rates may have significant impact on financial results.
Substantially all of the Companys product revenues are
denominated in U.S. dollars while expenses are denominated in Canadian dollars,
Hong Kong dollars, U.S. dollars, Swedish kronor, and Chinese renminbis. Based on
the 2007 distribution of revenues and cash flows, a one percent change in the
U.S. dollar relative to all other named currencies is estimated to affect
revenues by nil and expenses by $152,000.

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.

Disclosure Controls and Procedures

As of December 31, 2007, 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 (as defined in Rule
13a-15(e) of the Exchange Act). Based on this evaluation, our principal
executive officer and principal financial officer have concluded that as of
December 31, 2007, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in our periodic reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the SECs rules and forms, and
accumulated and communicated to the Companys management, including the
principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure.

Management Report on Internal Control Over Financial Reporting

The Companys management is responsible for establishing and
maintaining adequate internal control over financial reporting, and has designed
such internal control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Management has used the Internal Control  Integrated
Framework to evaluate the effectiveness of internal control over financial
reporting, which is a recognized and suitable framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.

Because of inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Zis internal control over financial
reporting as of December 31, 2007 and concluded that Zis internal control over
financial reporting was effective as of that date.

Zi is only required to comply with the management report
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal
year ended December 31, 2007. It will be required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for
its fiscal year ending December 31, 2008.

Milos Djokovic, President and Chief Executive Officer 
Blair Mullin, Chief Financial Officer



---

Changes in Internal Control Over Financial Reporting

During the period covered by this report, no changes occurred
in the Zis internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, Zis internal control
over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert.

The Board of Directors of the Company has appointed Mr. H.
Donald Hyde to the audit committee. Mr. Hyde is a chartered accountant and has
had his own practice since 1991. Prior to setting up his own practice, Mr. Hyde
was the vice president of finance and administration for an international oil
and gas drilling and service company. The Board of Directors has determined that
Mr. 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. 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 listing standards of the
NASDAQ Market System.
Item 16B. Code of Ethics.

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

Item 16C. Principal Accountant Fees and Services.

Audit Fees

Ernst & Young LLP are the Companys independent registered
chartered accountants, appointed at the Companys annual general meeting of
shareholders on July 26, 2007. Audit fees billed were $153,002 for 2007. Audit
fees relate to the audit of the year end financial statements, reviews of
interim financial statements, and review of SEC filings.

Deloitte & Touche LLP were the Companys independent
registered chartered accountants for 2006. Audit fees billed were $334,836 for
2006. 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

In 2007, audit-related fees billed by Ernst & Young LLP were
$20,925. Audit-related fees billed by Deloitte & Touche were $170,697 for 2006.
Audit-related fees billed relate to consultations concerning financial
accounting, reporting standards and transfer pricing.

Tax Fees

In 2007, Ernst & Young LLP billed $12,587 for tax services.
In 2006, Deloitte & Touche LLP billed $126,430 for tax services. Tax services
billed relate to reorganization strategy, corporate tax filing review and tax
filings.

All Other Fees

We did not purchase any other services from Ernst &
Young LLP in 2007 or from Deloitte & Touche LLP in 2006.

Our Audit Committee has
adopted a policy and procedures for the approval of audit and non-audit services
rendered by our independent registered chartered accountants, other than any de minimus non-audit services allowed by applicable law or regulation. 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 has approved all of the audit fees,
audit-related fees and tax fees reported above.



---

Item 16D. Exemptions from the Listing Standards for Audit Committees.

Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.

Not applicable.

PART III

Item 17. Financial Statements.

Not Applicable.

Item 18. Financial Statements.

See attached.

Item 19. Exhibits.

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

SIGNATURES

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

| | ZI CORPORATION                           
| | -----------------------------------------
| |                                          
| |                                          
| | Per: /s/Milos Djokovic                   
| |                                          
| | Milos Djokovic                           
| | President and Chief
    Executive Officer
| |                                          
| | Date: March 27, 2008                     
| |                                          
| | Per: /s/ Blair
    Mullin                
| |                                          
| | Blair Mullin                             
| | Chief Financial
    Officer              
| |                                          
| | Date: March 27, 2008                     

84

---



ANNUAL REPORT ON FORM 20-F

EXHIBIT INDEX

|Exhibit  |                                                                                                                                                                                                                                                                                  
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. Item | Description of
    Exhibit                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                  
|1.1**    | Certificate of Incorporation, together
    with all amendments. (Previously filed as Exhibit 1.1)                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                  
|1.2**    | Bylaws.
    (Previously filed as Exhibit 1.2)                                                                                                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                  
|4.4+     | 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 dated July 30, 2005, between Zi Corporation of America,
    Inc. and Milos Djokovic.                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                  
|4.5.1    | Amendment to Employment Agreement,
    dated June 26, 2007, between Zi Corporation of America, Inc. and Milos
    Djokovic                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                  
|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 SEC pursuant to a
    request for confidential treatment)
|         |                                                                                                                                                                                                                                                                                  
|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.             
|         |                                                                                                                                                                                                                                                                                  
|4.12+++  | Settlement Agreement made February 22, 2007, by and among Zi Corporation,
    Marty Steinberg (solely in his capacity as court appointed receiver of
    certain "Lancer Entities"), Quarry Bay Investments Inc. and Michael
    Lobsinger.                                      
|         |                                                                                                                                                                                                                                                                                  
|4.13+++  | Interim Executive Services Agreement
    made August 23, 2006, between Tatum, LLC and Zi Corporation.                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                  
|4.14     | 2007
    Stock Incentive Plan                                                                                                                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                  
|4.15     | Employment Agreement dated September
    15, 2006, between Zi Corporation (H.K.) Limited and Axel Bernstorff                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                  
|4.16     | Employment Agreement dated December 20, 1999, between Zi Corporation of
    Canada, Inc. and Weigen Qiu (as amended)                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                  
|4.17     | Permanent Placement Agreement dated
    December 31, 2007, between Zi Corporation and Tatum, LLC.                                                                                                                                                                                

85

---



|8.1  | List of Subsidiaries
    (included in Item 4)                                                      
|---- | ---------------------------------------------------------------------------------------------------
|     |                                                                                                    
|12.1 | Section 302 Certification by Blair Mullin, Chief Financial Officer dated
    March 27, 2007.       
|     |                                                                                                    
|12.2 | Section 302
    Certification by Milos Djokovic, Chief Executive Officer dated March 27,
    2008. 
|     |                                                                                                    
|13.1 | Section 906 Certification by Blair Mullin, Chief Financial Officer dated
    March 27, 2008.       
|     |                                                                                                    
|13.2 | Section 906
    Certification by Milos Djokovic, Chief Executive Officer, dated March 27,
    2008.
|     |                                                                                                    
|15.1 | Audit Committee Charter                                                                            
|     |                                                                                                    
|15.2 | Consent of Ernst &
    Young LLP, Independent Registered Chartered Accountants                     
|     |                                                                                                    
|15.3 | Consent of Deloitte & Touche LLP, Independent Registered Chartered
    Accountants                 
|     |                                                                                                    
|*    | Previously filed on
    Form 20-F Annual Report for December 31, 1999.                             
|     |                                                                                                    
|+    | Previously filed on
    Form 20-F Annual Report for December 31, 2000.                             
|     |                                                                                                    
|**   | Previously filed on
    Form 20-F Annual Report for December 31, 2001.                             
|     |                                                                                                    
|++   | Previously filed on
    Form 20-F Annual Report for December 31, 2003.                             
|     |                                                                                                    
|***  | Previously filed on
    Form 20-F Annual Report for December 31, 2004.                             
|     |                                                                                                    
|+++  | Previously filed on
    Form 20-F Annual Report for December 31, 2006.                             

86

---

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

|[signed]                                  | [signed]                   
|----------------------------------------- | ---------------------------
|Milos Djokovic                            | Blair
    Mullin           
|President and Chief
    Executive Officer | Chief
    Financial Officer
|March 24, 2008                            |                            

-1-

---



Report of Independent Registered Chartered Accountants

To the Shareholders of Zi
Corporation

We have audited the consolidated balance sheet of Zi
Corporation as at December 31, 2007 and the consolidated statement of loss,
shareholders equity and cash flows for the year then ended. 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 audit.

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. We were not engaged to perform an audit of
the Companys 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. 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 the Company
as at December 31, 2007 and the results of its operations and its cash flows for
the period then ended in accordance with United States generally accepted
accounting principles.

The financial statements as at December 31, 2006 and for the
year then ended were audited by other auditors who expressed an opinion without
reservation on those statements in their reports dated March 29, 2007 (except
for notes 13 and 20 which are as of June 15, 2007).

[signed] Ernst & Young LLP 
Independent Registered Chartered Accountants 
Calgary, Canada 
March 17, 2008

Comments by Independent Registered Chartered Accountants
on Canada-United States of America Reporting Differences

United States reporting standards for auditors require the
addition of an explanatory paragraph when the financial statements are affected
by conditions and events that cast substantial doubt on the Companys ability to
continue as a going concern, such as those described in Note 2 to the
consolidated financial statements. Although we conducted our audit in accordance
with both Canadian generally accepted auditing standards and the standards of
the Public Company Accounting Oversight Board (United States), our report to the

Shareholders dated March 17, 2008, is expressed in
accordance with Canadian reporting standards which do not permit a reference to
such conditions and events in the auditors report when these are adequately
disclosed in the financial statements.

[signed] Ernst & Young LLP 
Independent Registered Chartered Accountants 
Calgary, Canada 
March 17, 2008



---



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

We have audited the consolidated balance sheet of Zi
Corporation as at December 31, 2006 and the consolidated statements of loss,
shareholders equity and cash flows for each of the years in the two-year period
ended December 31, 2006. 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, 2006 and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2006
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 audits
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 Accountants 
Calgary, Canada

March 29, 2007 except for Notes 13 and 20 which are as of June 15, 2007

Comments by Independent Registered Chartered Accountants on Canada-United
States of America Reporting Difference

The standards of the Public Company Accounting Oversight
Board (United States) require the addition of an explanatory paragraph
(following the opinion paragraph) when the financial statements are affected by
conditions and events that cast substantial doubt on the Companys ability to
continue as a going concern, such as those described in Note 2 to the
consolidated financial statements. Although we conducted our audits in
accordance with both Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States), our
report to the Board of Directors and Shareholders dated March 29, 2007, except
for Notes 13 and 20 which are as of June 15, 2007, is expressed in accordance
with Canadian reporting standards which do not permit a reference to such
conditions and events in the auditors report when these are adequately
disclosed in the financial statements.

[signed] "Deloitte & Touche LLP"Independent Registered Chartered Accountants 
Calgary, Canada

March 29, 2007 except for Notes 13 and 20 which are as of June 15, 2007

- 3 -

---



Consolidated Balance Sheets

|As at December 31,                                                           |   | 2007          |   | 2006         
|---------------------------------------------------------------------------- | - | ------------- | - | -------------
|(All amounts in United States of
    America dollars except share amounts)  
|                                                                             |   |               |   |              
|Assets                                                                       |   |               |   |              
|Current assets                                                               |   |               |   |              
|Cash and cash equivalents                                                    | $ | 4,979,193     | $ | 1,672,847    
|Restricted cash                                                              |   | 2,740,702     |   | 2,160,495    
|Accounts receivable, net of allowance of
    $454,070 (2006 - $936,731)      |   | 2,644,413     |   | 5,785,954    
|Prepayments and deposits                                                     |   | 677,262       |   | 599,963      
|Total current assets                                                         |   | 11,041,570    |   | 10,219,259   
|Capital assets - net (note 5)                                                |   | 931,921       |   | 906,094      
|Intangible assets - net (note 6)                                             |   | 3,721,623     |   | 3,421,717    
|                                                                             | $ | 15,695,114    | $ | 14,547,070   
|                                                                             |   |               |   |              
|Liabilities and shareholders equity                                         |   |               |   |              
|Current liabilities                                                          |   |               |   |              
|Bank indebtedness (note 7)                                                   | $ | -             | $ | 1,000,000    
|Accounts payable and accrued liabilities (note
    17)                       |   | 4,677,007     |   | 4,046,022    
|Deferred revenue                                                             |   | 4,500,044     |   | 4,478,026    
|Future income tax (note 11)                                                  |   | 14,636        |   | 174,400      
|Current portion of other long-term liabilities
    (note 8)                  |   | -             |   | 30,467       
|Total current liabitities                                                    |   | 9,191,687     |   | 9,728,915    
|                                                                             |   |               |   |              
|Contingent liabilities, commitments
    and guarantees (notes 13 & 15)       |   |               |   |              
|Going
    concern uncertainty (note 2)                                       |   |               |   |              
|                                                                             |   |               |   |              
|Shareholders equity                                                         |   |               |   |              
|Share
    capital (note 9)                                                   |   |               |   |              
|Unlimited number of Class A, 9%
    convertible, preferred shares authorized |   |               |   |              
|and no shares issued or outstanding                                          |   | -             |   | -            
|Unlimited number of common shares, no
    par value, authorized,             |   |               |   |              
|50,557,957 (2006  46,688,624) issued and
    outstanding                    |   | 114,991,895   |   | 110,635,085  
|Additional paid-in capital                                                   |   | 3,860,022     |   | 3,101,201    
|Warrants                                                                     |   | 1,403,160     |   | -            
|Accumulated deficit                                                          |   | (113,702,097) |   | (108,575,499)
|Accumulated other comprehensive loss                                         |   | (49,553)      |   | (342,632)    
|                                                                             |   | 6,503,427     |   | 4,818,155    
|                                                                             | $ | 15,695,114    | $ | 14,547,070   

See accompanying notes to consolidated financial statements.

|[signed]              | [signed]       
|--------------------- | ---------------
|George Tai            | Donald
    Hyde
|Chairman of the Board | Director       

- 4 -

---



Consolidated Statements of Loss

|Years ended December 31,                                                           |   | 2007         |   | 2006         |   | 2005       
|---------------------------------------------------------------------------------- | - | ------------ | - | ------------ | - | -----------
|(All amounts in United States of America dollars except share
    amounts)        
|                                                                                   |   |              |   |              |   |            
|Revenues                                                                           | $ | 13,111,002   | $ | 11,836,217   | $ | 10,614,043 
|Cost of sales                                                                      |   | (263,922)    |   | (406,463)    |   | (355,597)  
|Gross margin                                                                       |   | 12,847,080   |   | 11,429,754   |   | 10,258,446 
|                                                                                   |   |              |   |              |   |            
|Operating expenses                                                                 |   |              |   |              |   |            
|                                                                                   |   |              |   |              |   |            
|Selling
    general and administrative                                             |   | (10,531,299) |   | (10,728,671) |   | (8,764,212)
|Business taxes                                                                     |   | (1,257,662)  |   | (925,192)    |   | (846,478)  
|Litigation
    and legal (note 13)                                                 |   | (1,941,660)  |   | (3,352,763)  |   | (1,670,577)
|Product research and
    development                                               |   | (2,450,771)  |   | (3,700,242)  |   | (3,137,263)
|Depreciation and amortization (note 6)                                             |   | (1,670,037)  |   | (1,667,534)  |   | (1,125,695)
|Impairment of note receivable
    (note 12)                                        |   |             |   |             |   | (250,000)  
|Gain on settlement of litigation (note 13)                                         |   |             |   |             |   | 1,415,616  
|Operating loss before undernoted                                                   |   | (5,004,349)  |   | (8,944,648)  |   | (4,120,163)
|                                                                                   |   |              |   |              |   |            
|Interest on capital lease obligation                                               |   | (43)         |   | (795)        |   | (3,924)    
|Other interest expense                                                             |   | (35,570)     |   | (17,211)     |   | (2,368)    
|Interest income and other income                                                   |   | 189,290      |   | 227,562      |   | 325,050    
|Loss before undernoted                                                             |   | (4,850,672)  |   | (8,735,092)  |   | (3,801,405)
|Recovery (impairment) of note receivable (note
    12)                             |   | 130,931      |   | (129,417)    |   |           
|Income taxes (note 11)                                                             |   | (1,039,458)  |   | (885,084)    |   | (687,515)  
|Net loss from continuing operations                                                |   | (5,759,199)  |   | (9,749,593)  |   | (4,488,920)
|Discontinued operations (Note 20)                                                  |   | 632,601      |   | (1,245,291)  |   | (828,503)  
|Net Loss                                                                           | $ | (5,126,598)  | $ | (10,994,884) | $ | (5,317,423)
|Basic and diluted loss per share from continuing operations
    (note 9 and 16)    | $ | (0.11)       | $ | (0.21)       | $ | (0.10)     
|Basic and
    diluted gain (loss) per share from discontinued operations (note 20) |   | 0.01         |   | (0.03)       |   | (0.02)     
|Basic and diluted loss per share                                                   |   | (0.10)       |   | (0.24)       |   | (0.12)     
|Weighted average number of common shares outstanding  basic
    and diluted       |   | 49,640,891   |   | 46,502,728   |   | 46,152,711 
|Common shares outstanding, end of year                                             |   | 50,557,957   |   | 46,688,624   |   | 46,272,568 

See accompanying notes to consolidated financial statements.



---

Consolidated Statements of Shareholders EquityAccumulatedAdditional
    
    
    
    
    
    other
    
    TotalCommon shares issued
    paid-in
    
    
    Accumulated
    comprehensive
    comprehensiveshares
    
    amount
    capital
    
    Warrants
    
    deficit
    income (loss)
    
    income (loss)(All amounts in United States of
    America dollars except share amounts)Balance  December 31, 2004
    45,225,190
    $
    106,025,634
    $
    2,114,190
    $
    
    $
    (92,263,192)
    $
    (463,637)
    $
    (2,448,526)Issued on exercise of stock options
    290,967
    
    736,867
    
    
    
    
    
    
    
    Issued on exercise of share purchase warrants
    609,482
    
    1,605,187
    
    
    
    
    
    
    
    Issued on acquisition of subsidiary
    146,929
    
    998,136
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    (5,317,423)
    
    
    
    (5,317,423)Other comprehensive loss from foreigncurrency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (114,108)
    
    (114,108)Balance  December 31, 2005
    46,272,568
    $
    109,365,824
    $
    2,114,190
    $
    
    $
    (97,580,615)
    $
    (577,745)
    $
    (5,431,531)Issued on exercise of restricted stock units
    416,056
    
    1,269,261
    
    (1,269,261)
    
    
    
    
    
    Issued restricted stock units
    
    
    
    
    156,663
    
    
    
    
    
    Employee stock-based compensation costs
    
    
    
    
    1,340,706
    
    
    
    
    
    Archer dilution
    
    
    
    
    758,903
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    (10,994,884)
    
    
    
    (10,994,884)Other comprehensive income from foreigncurrency translation adjustment
    
    
    
    
    
    
    
    
    
    
    235,113
    
    235,113Balance  December 31, 2006
    46,688,624
    $
    110,635,085
    $
    3,101,201
    $
    
    $
    (108,575,499)
    $
    (342,632)
    $
    (10,759,771)Issued on exercise of stock options
    55,000
    
    159,184
    
    (65,101)
    
    
    
    
    
    Issued on exercise of restricted stock units
    37,485
    
    67,142
    
    (67,142)
    
    
    
    
    
    Issued under private placement
    3,776,848
    
    5,533,644
    
    
    
    
    
    
    
    Private placement warrants
    
    
    (1,403,160)
    
    
    $
    1,403,160Employee stock-based compensation costs
    
    
    
    
    891,064
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    (5,126,598)
    
    
    
    (5,126,598)Other comprehensive income from foreigncurrency translation adjustment
    
    
    
    
    
    
    
    
    
    
    293,079
    
    293,079Balance  December 31, 2007
    50,557,957
    $
    114,991,895
    $
    3,860,022
    $
    1,403,160
    $
    (113,702,097)
    $
    (49,553)
    $
    (4,833,519)See accompanying notes to consolidated
    financial statements.- 6 -
Consolidated Statements of Cash Flow

|Years ended December 31,                                                 |   | 2007        |   | 2006        |   | 2005       
|------------------------------------------------------------------------ | - | ----------- | - | ----------- | - | -----------
|(All amounts in United States of
    America dollars)                    |   |             |   |             |   |            
|Net cash flow from (used in) operating
    activities:                   |   |             |   |             |   |            
|Net loss from continuing operations                                      | $ | (5,759,199) | $ | (9,749,593) | $ | (4,488,920)
|Items not affecting cash:                                                |   |             |   |             |   |            
|Depreciation and amortization                                            |   | 1,707,552   |   | 1,707,212   |   | 1,152,294  
|Impairment (Recovery) of note receivable                                 |   | (130,931)   |   | 129,417     |   | 250,000    
|Stock-based compensation expense                                         |   | 891,064     |   | 1,544,755   |   |           
|Loss on dispositions of capital assets                                   |   | 65,462      |   | 24,212      |   | 5,929      
|Decrease (increase) in non-cash working
    capital:                     |   |             |   |             |   |            
|Accounts receivable                                                      |   | 3,141,541   |   | (2,206,562) |   | 970,865    
|Prepayments and deposits                                                 |   | (77,299)    |   | (59,607)    |   | (42,229)   
|Accounts payable and accrued liabilities                                 |   | 630,985     |   | 536,725     |   | 334,686    
|Deferred revenue                                                         |   | 22,018      |   | 671,215     |   | 1,143,190  
|Future income taxes                                                      |   | (159,764)   |   | 174,400     |   |           
|Cash flow from (used in) operating activities                            |   | 331,429     |   | (7,227,826) |   | (674,185)  
|Cash flow from (used in) financing
    activities:                       |   |             |   |             |   |            
|Proceeds from issuance of common shares, net of
    issuance costs       |   | 4,130,484   |   |            |   |           
|Proceeds from exercise of options                                        |   | 94,083      |   |            |   | 737,722    
|Proceeds from issuance of warrants                                       |   | 1,403,160   |   |            |   | 1,604,332  
|Received from bank indebtedness (note 7)                                 |   | 2,000,000   |   | 1,000,000   |   |           
|Payment of bank indebtedness                                             |   | (3,000,000) |   |            |   |           
|Payment of capital lease obligations                                     |   | (1,833)     |   | (7,545)     |   | (16,141)   
|Cash flow from financing activities                                      |   | 4,625,894   |   | 992,455     |   | 2,325,913  
|Cash flow from (used in) investing
    activities:                       |   |             |   |             |   |            
|Advances to discontinued operations                                      |   |            |   |            |   | (767,597)  
|Note receivable                                                          |   |            |   |            |   | (250,000)  
|Purchase of capital assets                                               |   | (407,792)   |   | (304,457)   |   | (277,971)  
|Software development costs                                               |   | (1,638,389) |   | (1,407,204) |   | (930,264)  
|Other deferred costs                                                     |   | (28,634)    |   | (57,445)    |   | (52,732)   
|Acquisition of subsidiaries                                              |   |            |   |            |   | (458,466)  
|Recovery of impaired note receivable                                     |   | 130,931     |   |            |   |           
|Changes in restricted cash                                               |   | (580,207)   |   | (1,512,376) |   | 114,927    
|Cash flow used in investing activities                                   |   | (2,524,091) |   | (3,281,482) |   | (2,622,103)
|Cash flow from (used in) discontinued
    operations                     |   |             |   |             |   |            
|Operating activities                                                     |   |            |   | (139,328)   |   | (472,888)  
|Financing activities                                                     |   |            |   | (106,650)   |   | 874,247    
|Investing activities                                                     |   | 632,601     |   | (181,199)   |   | 45,312     
|Cash flow from (used in)  discontinued
    operations                    |   | 632,601     |   | (427,177)   |   | 446,671    
|Effect of foreign exchange rate
    changes on cash and cash equivalents |   | 240,513     |   | 107,556     |   | (93,264)   
|Net cash (outflow) inflow                                                |   | 3,306,346   |   | (9,836,474) |   | (616,968)  
|Cash and cash equivalents, beginning
    of year                         |   | 1,672,847   |   | 11,509,321  |   | 12,126,289 
|Cash and cash equivalents, end of year                                   | $ | 4,979,193   | $ | 1,672,847   | $ | 11,509,321 
|Cash
    and cash equivalents held in discontinued operations (note 20)  |   |            |   |            |   | (730,004)  
|Cash and cash equivalents, end of year                                   | $ | 4,979,193   | $ | 1,672,847   | $ | 10,779,317 
|Components of cash and cash
    equivalents                              |   |             |   |             |   |            
|Cash                                                                     | $ | 4,979,193   | $ | 1,294,185   | $ | 4,120,256  
|Cash equivalents                                                         | $ |            | $ | 378,662     | $ | 7,389,065  
|Total cash and cash equivalents                                          | $ | 4,979,193   | $ | 1,672,847   | $ | 11,509,321 
|Supplemental cash flow information                                       |   |             |   |             |   |            
|Cash paid for interest                                                   | $ | 35,613      | $ | 18,006      | $ | 6,292      
|Cash paid
    for income taxes                                           | $ | 940,495     | $ | 772,260     | $ | 687,515    

See accompanying notes to consolidated financial statements.

- 7 -

---



Notes to the Consolidated Financial Statements

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. The Company’s full range of intuitive and easy-to-use solutions include its new eZiTypeTM predictive keyboard with auto-correction, eZiText®for one-touch predictive text entry, Decuma®for natural handwriting which now includes prediction technology and QixTM, a search and discovery engine. Zi
markets these products directly to original equipment manufacturers, original
design manufacturers and carriers.

2.

Going Concern Uncertainty

As at December 31, 2007, the Company had an accumulated deficit of $113,702,097 and for the year the Company incurred a loss of $5,759,199 from continuing operations.  Continuing operations are dependent on the Company achieving profitable operations and being able to raise additional capital, if and when necessary,  to meet the Companys obligations and repay liabilities arising from the normal course of operations when they come due.

The Company is executing a business plan to allow it to continue as a going concern which is to achieve profitability through cost containment and revenue growth.  The Company has reduced its losses and plans to ultimately achieve profitable operations.  There is significant uncertainty that the Company will be successful in executing this plan.  Should it fail to achieve profitability, or if necessary, raise sufficient capital to sustain operations, it may be forced to suspend operations, and possibly even liquidate assets and wind-up and dissolve the Company.

During the first quarter of 2007, the Company completed a private placement for net proceeds of $5,533,644.  For the year ended December 31, 2007 compared to the corresponding period in 2006, operating expenses decreased and revenues increased, resulting in reduced net losses from continued operations.

These consolidated financial statements are prepared on a going concern basis, which assumes that the Company will be able to realize its assets at the amounts recorded and discharge its liabilities in the normal course of business in the foreseeable future.  Should this assumption not be appropriate, adjustments in the carrying amounts of the assets and liabilities to their realizable amounts and the classifications thereof will be required and these adjustments and reclassifications may be material.

3.

Significant Accounting Policies

Basis of presentation

The accompanying consolidated financial statements are expressed in United States of America dollars (U.S. dollars) and prepared by management in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).

Use of estimates

The preparation of these consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of these financial statements, and the reported amounts of 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, uncertainty surrounding tax positions taken, 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 consolidated 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.

Principles of consolidation

These consolidated financial statements include the accounts of Zi and its subsidiaries. All inter-company transactions and balances have been eliminated. Archer Education Group Inc. (Archer) (see Discontinued Operations note 20) and Magic Lantern Group, Inc. (MLG) are investments which the Company does not control but exercises significant influence. These investments, which the Company does not control but exercises significant influence over its operating, investing and financing activities, are accounted for using the equity method. With respect to MLG, the Company does not recognize its proportionate share of losses that would result in a negative carrying value of its equity investment.  MLG was wound up and dissolved during the year ended 2006.  The dissolution did not affect Zis operations as the carrying value was nil.  Since the deconsolidation of Archer in February 2006, (see note 4) the Company has been recognizing its proportionate share of losses until the fourth quarter of 2006 when the investment was reduced to zero. Dilution gains triggered by future share issuances by Archer may cause the investment to be increased at which point the Company will resume recognizing its proportionate share of losses up to the amount of the investment.

- 8 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

Minority interest in earnings of consolidated subsidiaries represents the minority shareholders share of the after-tax net income or loss from Archer prior to the deconsolidation in March 2006.  Archer has generated losses since its inception; as a result, the Company has not allocated to minority interests their proportionate share of the losses, as the minority shareholders do not have any obligation to reimburse the Company their proportionate share of the losses.

The Company consolidates an entitys financial statements when the Company either will absorb a majority of the entitys expected losses or residual returns, in the case of a variable interest entity (VIE), which there were none at December 31, 2007 and 2006, or has the ability to exert control over a subsidiary. Control is normally established when ownership interests exceed 50 percent in an entity. However, when the Company does not exercise control over a majority-owned entity as a result of other investors having rights over the management and operations of the entity, the Company accounts for the entity under the equity method. As at December 31, 2007 and 2006, there were no greater-than-50 percent-owned affiliates whose financial statements were not consolidated.

Foreign currency translation

The Companys functional currency is the U.S. dollar. For the United States, Swedish, Chinese, Hong Kong and other Canadian subsidiaries, the functional currencies are the U.S. dollar, Swedish krona, Chinese renminbi (RMB), Hong Kong dollar and Canadian dollar (CDN), respectively. The balance sheet accounts of the Companys foreign operations for which the local currency is the functional currency are translated into U.S. dollars at year-end exchange rates, while income, expense and cash flows are translated at average exchange rates for the year. 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 consolidated statements of loss.

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.

Restricted cash

At December 31, 2007, the Company held the U.S. dollar equivalent of $2,740,702 (December 31, 2006 - $2,160,495) in RMB through its principal Chinese subsidiary Huayu Zi Software Technology (Beijing) Co. Ltd. (Huayu Zi) that was classified as restricted.  Due to Peoples Republic of China (PRC) government regulations pertaining to the capitalization of Chinese companies, these funds are available to fund the day-to-day operations of the Companys various Chinese subsidiaries and are not fully available to fund the non-Chinese operations of the Company.

Capital assets

The Company records capital assets at cost and provides for amortization over the useful lives of the assets using the declining-balance method at a rate of 30 percent for computer and office equipment, and furniture and fixtures.  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.

- 9 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

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

| | Customer agreements        | 4.5 years
| | -------------------------- | ---------
| | Patents and trademarks     | 11 years 
| | Software 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, such as, the loss of a patent litigation or a significant decline in the Companys revenue.

Impairment of long-lived assets

The Company annually reviews the carrying value of its long-lived assets, including intangible assets, on September 30 of each year and periodically reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future net cash inflows from such assets is less than the carrying amount, an impairment loss is recognized. The Company considers factors such as significant changes in the business climate and projected discounted cash flows from the respective assets in determining the fair value of the asset. The Company evaluated its remaining long-lived assets at September 30, 2007 and determined that no impairment had occurred.

Revenue recognition

Revenues from software licensing agreements related to the sale of the product in which the Companys technologies have been embedded are recognized in accordance with Statement of Position 97-2 Software Revenue Recognition (SOP 97-2).

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. For contracts with multiple obligations, the
Company allocates revenue to the undelivered elements of a contract based on vendor specific objective evidence of the fair value of those elements and allocates revenue to the delivered elements, principally license revenue, using the residual method as described in SOP 97-2. In addition, contracts involving significant modifications or customization of the software sold are accounted for under the guidelines of contract accounting.

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.

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.

The Company reports revenue on a gross basis in PRC. The amount of taxes collected from customers and remitted to the governmental authorities was $787,632, $595,157 and $522,278 for the three years ended December 31, 2007, 2006 and 2005 respectively.

Revenues from Oztime were recognized using the percentage of completion method, whereby revenue was recorded at the estimated realizable value of work completed to date and costs incurred to date were compared to total estimated contract costs to determine whether a loss was realized.  Estimated losses on contracts were recognized when they became known.   The Oztime product has been reported under discontinued operations as its operations were included with Archers (see note 4).

Revenues from Archer consist primarily of tuition and fees derived from courses taught in Archers colleges, schools, and training centers. Revenues from tuition fees are recognized pro-rata (on a straight-line basis) on a monthly basis over the relevant period attended by the student of the applicable course or program. If a student withdraws from a course or program, the paid but unearned portion of the students tuition is refunded. Refunds are calculated and paid in accordance with applicable provincial law and accrediting agency standards for refund policies. Textbook sales and other revenues are recognized as sales occur or services are performed and represent less than 10 percent of total revenues.  Revenues from Archer have been reported under discontinued operations (See note 20).

Allowance for doubtful accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The Company evaluates the creditworthiness of its customers prior to delivery of its software and based on these evaluations, adjusts credit limits to the respective customers. In addition to these evaluations, the Company conducts on-going credit evaluations of its customers payment history and current creditworthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible. To date, the actual losses have been within managements expectations.

Income taxes

On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The interpretation requires that the Company recognize the impact of a tax position in the financial statements if that position is more likely than not being sustained on audit, based on the technical merits of the position.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.  In accordance with the provisions of FIN 48, any cumulative effect resulting from the change in accounting principle is to be recorded as an adjustment to the opening balance of deficit.  The adoption of FIN 48 did not result in a material impact on the Companys financial position or results of operation.  Should the Company incur any interest and penalties related to unrecognized tax benefits, these amounts will be recorded in income tax expense (see note 11).

- 10 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

Leases

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

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 number of shares outstanding for the year. 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 (RSUs), and Restricted Stock Awards (RSAs), 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. Potentially diluted shares have not been used in calculating diluted loss per share for the years ended December 31, 2007, 2006 and 2005 as they were anti-dilutive as discussed in note 17.

Comprehensive income (loss)

Comprehensive income (loss) 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 statements of shareholders equity.

Gains on issuance of stock by subsidiaries

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

Financial instruments

Accounts receivable, cash equivalents, investments in significantly influenced companies, accounts payable, accrued liabilities, notes payable, and capital lease obligations constitute financial instruments. The carrying values of these financial instruments approximate their fair values 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 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, Asia, 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

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. Compensation expense related to the exercise of stock options previously credited to additional paid-in capital is credited to common stock. New common stock is issued upon exercise of stock options, RSUs and RSAs.

- 11 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

Effective January 1, 2006, the Company recognizes its stock-based compensation expense in accordance with Statement of Financial Accounting Standards, No. 123(R), Share Based Payment (SFAS 123(R)). This pronouncement requires companies to measure the cost of employee services received in exchange for an award of equity instruments (for example, stock options) based on the grant-date fair value of the award. The fair value is estimated using option-pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.

The adoption of SFAS 123(R) changes the accounting for stock options. SFAS 123(R) is effective for all stock options granted beginning January 1, 2006. For those stock option awards granted prior to January 1, 2006, but for which the vesting periods are not complete, the modified prospective transition method permitted by SFAS 123(R) is used. Under this method, the Company accounts for such awards on a prospective basis, with expense being recognized in the consolidated financial statements beginning in the first quarter of 2006 using the grant-date fair values previously calculated for pro forma disclosures. The Company has recognized the related compensation cost not previously recognized in the pro forma disclosures over the remaining vesting period. Stock options typically vest in equal installments over a service period. Expense related to each portion of an option grant is recognized over the specific vesting period for those options.

The fair value of options is determined at the grant date using the Black-Scholes closed-form model valuation technique, which requires the Company to make several assumptions. The risk-free interest rate is based on the Canadian benchmark bond yield curve in effect for the expected term of the option at the time of grant. The dividend yield on common stock is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. The market price volatility of common stock is based on the historical volatility of the Companys common stock over a time period equal to the expected term of the option and ending on the last date of the quarter in which the options were granted. The expected life and expected forfeiture rate of the options is based on the Companys historical experience and judgement for various categories of employees receiving stock option grants. The Company accounts for RSAs and RSUs in accordance with SFAS No. 123(R), and records the fair value of RSAs and RSUs equal to the market price on the date of grant with the related compensation expense recognized over the vesting period.

SFAS No. 123(R) also requires that the excess tax benefits related to stock compensation be reported as a cash inflow from financing activities rather than as a reduction of taxes paid in cash from operations.

Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method as prescribed by APB Opinion No. 25 and related interpretations. No stock-based compensation related to option grants to employees or directors was reflected in the net loss for the year ended December 31, 2005 as all stock options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123(R), the Companys net loss and basic and diluted net loss per share for the year ended December 31, 2005 would have been changed to the pro forma amounts indicated below:

|Year ended
    December 31,                                                                                                                                                                                                                                        |   | 2005       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | -----------
|                                                                                                                                                                                                                                                                   |   |            
|Net loss:                                                                                                                                                                                                                                                          |   |            
|As reported                                                                                                                                                                                                                                                        | $ | (5,317,423)
|Stock-based
    compensation expense                                                                                                                                                                                                                               |   | (2,874,033)
|Pro forma net
    loss                                                                                                                                                                                                                                             |   | (8,191,456)
|Net loss per
    common share:                                                                                                                                                                                                                                     |   |            
|As reported,
    basic and diluted                                                                                                                                                                                                                                 | $ | (0.12)     
|Stock-based
    compensation expense, basic and diluted                                                                                                                                                                                                            |   | (0.06)     
|Pro forma, basic
    and diluted                                                                                                                                                                                                                                   |   | (0.18)     
|Stock options and
    RSUs issued during the year                                                                                                                                                                                                                  |   | 940,375    
|Weighted average
    exercise price                                                                                                                                                                                                                                | $ | 3.22       
|Weighted average
    fair value of stock options granted during the year                                                                                                                                                                                           | $ | 2.22       
|                                                                                                                                                                                                                                                                   |   |            
|The above pro forma compensation expense
    related to options granted pursuant to Zis stock option plans was
    determined based on the estimated fair values using the Black-Scholes Option
    Pricing Model and the following weighted average assumptions:
|                                                                                                                                                                                                                                                                   |   |            
|                                                                                                                                                                                                                                                                   |   | 2005       
|Risk free
    interest rate                                                                                                                                                                                                                                        |   | 3.0-3.8%   
|Expected life in
    years                                                                                                                                                                                                                                         |   | 3.7        
|Expected dividend
    yield                                                                                                                                                                                                                                        |   | 0%         
|Expected
    volatility                                                                                                                                                                                                                                            |   | 82-116%    

- 12 -

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Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

Recent accounting pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No.115. The statement provides companies with an option to report selected financial assets and liabilities at fair value. This statement is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007.  The Company evaluated the SFAS 159 and determined that adopting it will not have a significant impact on the consolidated operations and financial position.

In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements, which is effective for fiscal years beginning after November 15, 2007. The statement provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.  The Company evaluated the SFAS 157 and determined that adopting it will not have a significant impact on the consolidated operations and financial position.

The Securities and Exchange Commission (SEC) commented that several registrants should have recorded share purchase warrants that were issued in a currency other than their functional currency as a derivative instrument in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, instead of shareholders equity, and adjusted to market value each reporting period. The FASB met and concluded that the position taken by the SEC was correct, but that entities would be allowed until 2008 to adopt it, and then would be able to do so as a change in accounting policy. Early adoption is not permitted. The Company has assessed what, if any, impact this change will have on its consolidated financial statements. The Company does not have warrants outstanding that meet the definition of a derivative under SFAS 133 as at December 31, 2007. However, the Company did in previous years have warrants that met this definition.  This issue has not been settled by the SEC and FASB.  As a result, the Company may be required to record a significant cumulative adjustment to its opening accumulated deficit in the quarter the issue is settled.

4.

Acquisitions

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

Acquisition of Decuma AB

On January 26, 2005, the Company purchased the assets of Decuma AB (Decuma), a Swedish company specializing in developing and marketing handwriting recognition software. The Company has accounted for the purchase under the purchase method of accounting, and accordingly, included the results of operations of Decuma in the consolidated operating results of the Company from the date of acquisition. As part of the acquisition, the Company acquired Decumas intellectual property and customer agreements. Amounts assigned to intangible assets were supported through discounted cash flow analyses. Patents and trademarks are amortized over 11 years. Customer agreements are amortized over the remaining life of the agreement (up to 4.5 years). The purchase price consideration included 146,929 common shares of the Company with a value of $1.0 million, cash consideration of $175,254 to settle certain working capital related adjustments and other costs and fees related to the purchase in the amount of $281,348 for a total acquisition cost of $1,456,602.

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

The purchase price is allocated as follows:

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


Pro forma information has not been presented showing the effect of a January 1, 2005 acquisition on the current years results as the effect is not material.

- 13 -

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Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

Acquisition of Archer Education Group Inc.

Archer was incorporated in February 2005 for the purpose of acquiring a number of educational learning institutions in Canada. Zi acquired 24.9 percent of Archers shares, through share subscription agreements in 2005. Consequently, Zi is a related party to Archer.

The Companys ownership of Archer increased primarily by the sale of its Beijing Oztime Education & Network Technology Co. Ltd. (Oztime) and EnglishPractice Inc. (EPI) subsidiaries to Archer.  At December 31, 2005, the Company held 53.2 percent of the outstanding shares of Archer. Zi therefore, accounted for its investment in Archer as a purchase under the purchase method of accounting. Zi included Archers results from December 21, 2005 (the date of acquisition) to December 31, 2005, and its assets and liabilities, net of minority interest at December 31, 2005.

Under the sale agreements, Zi received 6,140,000 shares of Archer, including contingent consideration of 1,000,000 shares placed in escrow and a RMB 1,000,000 non-interest bearing note receivable. The release of the escrowed shares is subject to performance criteria requiring revenues earned through Oztime related operations, from the date of purchase to December 31, 2006, to be $2,950,000 or more. The Company determined there was uncertainty that Oztimes revenues related to its operations would achieve the performance criteria and as such the contingent consideration was not considered as part of the sale proceeds.   As at December 31, 2006, Oztimes revenues earned did not reach the required level. As a result, the escrowed shares were cancelled.

On February 28, 2006, Archer raised additional capital through private placements of common shares at which point Zis interest in Archer was diluted to 49.9 percent. The Company has deconsolidated the results of Archer as of March 1, 2006, since it no longer absorbs a majority of the entities expected losses or residual returns, in the case of a VIE, and no longer has the ability to exert control over this subsidiary. The Company has accounted for its proportionate share of Archers net loss for the year ended December 31, 2006, using the equity method.

Through a further private placement of Archers common shares and exercise of stock options from March to December 2006, the Companys ownership in Archer was diluted to 42.2 percent. As the price of the shares issued by Archer is in excess of the book value of the underlying share, the Companys net investment in Archer increases resulting in a dilution gain to Zi of $758,903 as at December 31, 2006, which was recorded to additional paid-in capital.

Disposition of Archer Education Group Inc.

Effective March 27, 2007, the Company sold its minority interest in Archer for total proceeds of $632,601.  There were no contingent considerations or performance criteria in the sale agreement.

The Companys proportionate share of the loss from Archers operations for the period ended March 27, 2007 has not been recognized as the carrying value of the investment in Archer was nil and the Company had no commitment to fund this loss.  In addition, Archer did not complete any private placements between January 1, 2007 and March 27, 2007.  Therefore, the Company was not required to recognize any potential dilution gains resulting in an increase in its net investment in Archer.  As a result, the full amount of the proceeds was recognized as a gain on disposal of discontinued operations in the first quarter of  2007 (see note 20).

5.

Capital Assets

|                              |   |           | Accumulated  |           | Net
    book
|----------------------------- | - | --------- | ------------ | --------- | ------------
|                              |   | Cost      | amortization |           | value       
|2007                          |   |           |              |           |             
|Computer and office equipment | $ | 3,451,494 | $            | 2,524,131 | $           
|Leasehold improvements        |   | 652,821   |              | 648,263   |             
|                              | $ | 4,104,315 | $            | 3,172,394 | $           
|                              |   |           |              |           |             
|2006                          |   |           |              |           |             
|Computer and office equipment | $ | 3,160,556 | $            | 2,341,331 | $           
|Leasehold improvements        |   | 563,062   |              | 476,193   |             
|                              | $ | 3,723,618 | $            | 2,817,524 | $           

- 14 -

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Notes to the Consolidated Financial Statements

6.

Intangible Assets

|           |   |           | Accumulated  |         | Net
    book
|---------- | - | --------- | ------------ | ------- | ------------
|           |   | Cost      | amortization |         | value       
|2007       |   |           |              |         |             
|Patents    | $ | 1,929,014 | $            | 880,893 | $           
|Trademarks |   | 78,150    |              | 21,314  |             

|Customer agreements        |   | 206,669    |   | 135,275    |   | 71,394   
|-------------------------- | - | ---------- | - | ---------- | - | ---------
|Software development costs |   | 14,018,585 |   | 11,473,313 |   | 2,545,272
|                           | $ | 16,232,418 | $ | 12,510,795 | $ | 3,721,623
|                           |   |            |   |            |   |          
|2006                       |   |            |   |            |   |          
|Patents                    | $ | 1,762,051  | $ | 626,309    | $ | 1,135,742
|Trademarks                 |   | 73,050     |   | 13,282     |   | 59,768   
|Customer agreements        |   | 193,182    |   | 84,298     |   | 108,884  
|Software development costs |   | 10,875,561 |   | 8,758,238  |   | 2,117,323
|                           | $ | 12,903,844 | $ | 9,482,127  | $ | 3,421,717

During 2007, $1,638,390 (2006 -
$1,407,204) of software development costs were deferred and are being amortized
using the straight-line method over a three-year economic life. Amortization for
2007 includes $1,165,665 of amortization of deferred software development costs
and $165,411, $6,737 and $42,760, respectively, of amortization of patents,
trademarks and customer agreements. Amortization for 2006 includes $1,084,365 of
amortization of deferred software development costs and $153,492, $6,173 and
$39,180, respectively, of amortization of patents, trademarks and customer
agreements. The Company evaluated its other intangible assets at September 30,
2007 and 2006 and determined that no impairment had occurred.

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

|2008  | $ | 1,079,921
|----- | - | ---------
|2009  |   | 536,108  
|2010  |   | 178,873  
|2011  |   | 157,916  
|2012  |   | 131,804  
|Total | $ | 2,084,622

The estimated amortization expense
includes the amortization of deferred software costs whose products have been
commercially released.  The Company has deferred software costs for products
pending commercial release.  In addition, the Company continues to defer
software costs.  The additional cost and commercial release dates for these
products are uncertain; accordingly, the above table does not include the
estimated amortization expense for products pending commercial release.

7.

Bank Indebtedness

On December 12, 2007, the Company secured
a $2,000,000 credit facility agreement with its principal bank, HSBC Bank
Canada. The loan was secured by a single trade receivable which was insured by
the Export Development Canada. The outstanding amount on the loan was due on
demand, or the earlier of the collection of the receivable, or January 31, 2008.
 The loan was received and repaid in December 2007.  The proceeds of the loan
were used to augment the cash balances for operating purposes.

The loan was secured by a first priority
interest in all capital assets of the Company. The loan bore interest at the
banks U.S base rate plus 0.5 percent per annum. The loan agreement contains a
number of restrictive covenants, all of which were in compliance before
repayment.

On December 7, 2006, the Company entered
into a credit facility agreement (the Loan) with HSBC Bank Canada. Under the
Loan agreement, the lender provided a demand loan of $1.0 million based on a
single trade receivable of the Companys insured by the Export Development
Canada with proceeds assigned to the lender. The outstanding amount on the Loan
was due on demand or the earlier of the collection of the trade receivable or
March 1, 2007.  The proceeds of the Loan were used to fund the short-term
liquidity of the Company. The obligation under the Loan was secured by a first
priority interest in all present and after acquired personal property of the
Company and a floating charge over all the Companys present and after acquired
real property. The Loan bears interest at LIBOR, plus 2 percent per annum -
i.e., effective interest rate of 7.37 percent per annum.  The Loan agreement
contains a number of restrictive covenants, all of which the Company was in
compliance with as at December 31, 2006.  The Company repaid the Loan and
accrued interest on January 12, 2007.

-15-

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

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, 2007 was nil (2006  $1,833). The current portion at December 31,
2007 was nil (2006  $1,833).  There are no future minimum lease
payments applicable under the capital leases as at December 31, 2007.

Inducements for leasehold improvements
received by the Company upon entering into new leases as at December 31, 2007
was nil (2006  $28,634). The current portion at December 31, 2007 was nil (2006
 $28,634).

9.

Share Capital

Private Placement

On March 29, 2007, the Company completed a
brokered private placement in the United States and a non-brokered private
placement in Canada of a total of 3,776,848 units priced at $1.61 per unit for
net proceeds of $5,533,644. The Company agreed to pay a commission to the
placement agent involved in the private placement in the United States equal to
10 percent of the gross proceeds of such private placement, with eight percent
to be paid in the form of cash and two percent to be paid in the form of units
equal to the price paid per unit. Under the terms of the private placement, the
units sold in the private placement were subject to statutory restrictions on
resale, including hold periods.  The Company was required to register the shares
for resale in the United States with the Securities and Exchange Commission.
 The registration became effective on May 30, 2007.

Each unit issued in the private placements
consisted of two-fifths of a stock purchase warrant. Each whole stock purchase
warrant is exercisable to purchase one share of the Companys stock after six
months from the date of closing but before March 29, 2012, at an exercise price
of $2.14 per share.  An additional eight percent commission is payable to the
placement agent on the gross proceeds of the cash exercise of any share purchase
warrants held by investors during the first twelve months following the closing
of the private placement in the United States and four percent of the gross
proceeds of the cash exercise of any share purchase warrants held by investors
during the second twelve months following the closing of the private placement
in the United States. The placement agent has also been issued warrants to
purchase such number of common shares of the Company equal to eight percent of
the units issued in the private placement in the United States. As at December
31, 2007, there were 1,709,532 stock purchase warrants outstanding.

Nasdaq Listing

On August 10, 2007, the Company received a
Nasdaq Staff Deficiency Letter indicating that the Company was not currently in
compliance with the stockholders equity, market value of publicly held shares
and total asset and revenue requirements for continued listing on The Nasdaq
Global Market as set forth in Nasdaq Marketplace Rules 4450(a)(3), 4450(b)(1)(A)
and 4450(b)(1)(B).  The Company applied to transfer its listing to The Nasdaq
Capital Market, the continued listing requirements of which are less stringent
than The Nasdaq Global Market.  The application was approved by Nasdaq and
trading on The Nasdaq Capital Market commenced on September 5, 2007.

Stock-based Compensation

On July 26, 2007, the shareholders
approved a new stock-based compensation plan (the 2007 Plan), which replaces
and supercedes the previous stock-based compensation plans.  The 2007 Plan
provides that stock options, RSAs (in the case of participants subject to
taxation in the United States) and RSUs (in the case of participants subject to
taxation in Canada) may be granted by the Company to officers, directors,
employees and service providers of the Company, or of any affiliate or
subsidiary of the Company from time to time up to a maximum of fifteen (15%)
percent of the Companys issued capital.  The number of common shares which may
be reserved specifically for issuance in respect of RSAs and RSUs shall not
exceed 7,583,693 common shares.  Any expiration, cancellation or exercise of
stock options pursuant to the provisions of the 2007 Plan will allow the Company
to re-grant the options on a continuous revolving and reloading basis.  Any
expiration or cancellation of RSAs and RSUs become available for re-granting by
the Company.  Any increase in the issued and outstanding common shares will
result in an increase in the maximum number of common shares reserved for
issuance under the 2007 Plan.  As at December 31, 2007, the Company had
50,557,957 common shares issued and outstanding.  Accordingly, 7,583,693 common
shares may be reserved for issuance under the 2007 Plan as at that date.  The
2007 Plan is required to be re-approved by shareholders every three years.  At
December 31, 2007, the Company has 2,588,619 stock options, RSAs, and RSUs
(December 31, 2006  1,035,619 stock options and nil RSUs) which are available
for issuance in the future under the 2007 plan.

Stock options, RSAs and RSUs awarded under
the 2007 Plan may be subject to performance criteria before vesting.  Share
compensation expense is recorded if the performance criterion is likely to be
achieved.  Share compensation expense is not recorded if the performance
criterion is unlikely to be achieved.  Under the terms of the 2007 Plan,
options, RSAs and RSUs may be granted at the discretion of the Board of
Directors. The option price equals the greater of the five day weighted average
or closing price of the Companys shares on the day preceding the date of grant.
The stock options, RSAs and RSUs are not assignable except to a spouse, vest at
the discretion of the Board of Directors, and expire, at maximum, after the
tenth anniversary of the date of grant.

In 2007, 55,000 (2006  nil) stock options
were exercised for proceeds of $94,083 (2006  Nil).  In 2007 2,361,700 (2006 
1,493,000) stock options were granted by the Company.  As at December 31, 2007
and 2006, the Company has a total of 4,995,075 and 3,950,000 outstanding
options, respectively, which expire over a period of one to five years.

-16-

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

In 2007, 37,486 (2006 - 416,056) RSUs were
exercised for nil proceeds.  In 2007, nil (2006  87,468) RSUs were granted by
the Company.  As at December 31, 2007 and 2006, nil and 49,982 RSUs,
respectively, were outstanding.

Compensation expense related to stock
options, RSAs and RSUs is based on the fair value of the underlying shares on
the date of grant.   Compensation expense related to stock options, RSAs and
RSUs granted pursuant to the stock-based compensation plan was determined based
on the estimated fair values using the Black-Scholes Option Pricing Model and
the following assumptions:

2007
      2006Risk free interest rate
      3.58%-4.65%
      3.9% - 4.20%Expected term in years
      1.0-4.0
      3.0Expected
      dividend yield
      0%
      0%Weighted average volatility
      89%
      90%Expected volatility
      86% to 102%
      55% to 103%


Stock option, RSU activity and related information for 2007 and 2006 are as
follows:

2007Shares
      under options
      and RSUs
      Weighted
      average
      exercise 
      price
      Weighted
      average remaining
      contractual life
      Aggregate
      intrinsic
      valueOutstanding, beginning of year
      3,999,982
      $
      2.49Granted
      2,361,700
      
      1.37Exercised
      (92,486)
      
      (1.11)Forfeited
      (48,832)
      
      (1.84)Expired
      (1,225,289)
      
      (2.84)Outstanding, end of year
      4,995,075
      $
      2.25
      3.37 Years
      $
      Exercisable, end of year
      2,741,405
      $
      2.96
      2.35 Years
      $
      Weighted-average fair value of stock options granted during
      the year
      $
      0.73


2006Shares
      under options
      and RSUs
      Weighted
      average
      exercise 
      price
      Weighted
      average remaining
      contractual life
      Aggregate
      intrinsic
      valueOutstanding, beginning of year
      4,106,487
      $
      3.82Granted
      1,580,468
      
      1.41Exercised
      (416,056)
      
      Forfeited
      (187,583)
      
      (1.70)Expired
      (1,083,334)
      
      (7.34)Outstanding, end of year
      3,999,982
      $
      2.49
      2.85 Years
      $
      67,238Exercisable, end of year
      3,595,483
      $
      2.67
      2.66 Years
      $
      57,575Weighted-average fair value of stock options granted during
      the year
      $
      0.85


2005Shares
      under options
      and RSUs
      Weighted
      average
      exercise 
      price
      Weighted
      average remaining
      contractual life
      Aggregate
      intrinsic
      valueOutstanding, beginning of year
      4,911,972
      $
      3.82


Granted
      940,375
      
      1.41Exercised
      (290,967)
      
      (2.53)Forfeited
      or expired
      (1,454,893)
      
      (5.25)Outstanding, end of year
      4,106,487
      $
      3.82
      2.62 Years
      $
      635,999Exercisable, end of year
      3,990,321
      $
      3.83
      3.66 Years
      $
      NilWeighted-average fair value of stock options granted during
      the year
      $
      2.22


-17-

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

A summary of the status of the Companys unvested options as at December 31,
2007 and 2006, and changes during the twelve month periods then ended is
presented below:

2007Weighted averageShares
      grant dateunder options
      fair valueUnvested, beginning of year
      404,499
      $
      0.50Granted
      2,361,700
      
      0.73Vested
      (463,697)
      
      (0.74)Forfeited
      (48,832)
      
      (1.03)Unvested, end of year
      2,253,670
      $
      0.72


2006Weighted averageShares
      grant dateunder options
      fair valueUnvested, beginning of year
      116,166
      $
      2.31Granted
      1,580,468
      
      0.85Vested
      (1,104,552)
      
      (1.27)Forfeited
      (187,583)
      
      (1.21)Unvested, end of year
      404,499
      $
      0.50


The following table summarizes the exercise price ranges of outstanding and
exercisable stock options as at December 31, 2007:

|                                                                                                                      | Total stock options and RSUs outstanding |                   | Stock options and RSUs exercisable |                   
|--------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ----------------- | ---------------------------------- | ------------------
|                                                                                                                      |                                          | Weighted          |                                    |                   
|                                                                                                                      |                                          | average remaining | Weighted average                   |                   
|Range of
    exercise prices                                                                                          | Number outstanding                       | contractual life  | exercise price                     | Number outstanding
|$0.00  $2.02                                                                                                         | 2,323,200                                | 4.56 years        | $                                  | 1.24              
|$2.03  $3.03                                                                                                         | 1,275,500                                | 3.17 years        | $                                  | 2.28              
|$3.04  $4.04                                                                                                         | 1,040,500                                | 1.60 years        | $                                  | 3.52              
|$4.05 
    $8.06                                                                                                     | 355,875                                  | 1.53 years        | $                                  | 5.05              
|$0.00  $8.06                                                                                                         | 4,995,075                                | 3.37 years        | $                                  | 2.25              
|The stock-based compensation
    expense included in the Companys consolidated statement of loss was as
    follows:
|                                                                                                                     

2007
      
      2006Selling general and administrative
      $
      831,848
      $
      1,208,701Product
      research and development
      
      59,216
      
      336,054Total stock-based compensation expense
      $
      891,064
      $
      1,544,755


-18-

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

As at December 31, 2007, there was $1,122,368 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Companys stock option plans. That cost is expected to be recognized over a weighted-average period of 1.90 years. The total fair value of shares vested during the years ended December 31, 2007 and 2006 was $341,669 and $1,402,781, respectively.

10.

Equity Interest in Significantly Influenced Company

MLG ceased operations in July 2005 due to a substantial slow down in operations, its inability to raise sufficient capital and successfully market the companys product line. MLG retained legal counsel to commence voluntary liquidation and wind down procedures. The Company does not expect any recovery of funds from this process and had previously provided for impairment of amounts due from MLG. The Company holds a 40.4 percent interest in MLG, received upon the disposition of Magic Vision Media on November 7, 2002.  MLG was wound up and dissolved during the year ended 2006.  The Companys proportionate share of the loss from MLG operations for the year ended December 31, 2006, 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.

In April 2005, the Company advanced $250,000 under a secured loan agreement to MLG, which has been provided for (see note 12).

11.

Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007.  The implementation of FIN 48 did not result in any adjustment to the Companys beginning tax positions.  The Company continues to recognize its tax benefits which are offset by a valuation allowance to the extent that it is more likely than not that the future income tax assets will not be realized.  As of January 1, 2007 and December 31, 2007, there were no unrecognized tax benefits as 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.

The provision for income taxes reflects an effective tax rate that differs from the corporate tax rate for the following reasons:

|                                                                                        |   | 2007        |   | 2006        |   | 2005       
|--------------------------------------------------------------------------------------- | - | ----------- | - | ----------- | - | -----------
|                                                                                        |   |             |   |             |   |            
|Combined basic
    federal and provincial income tax rate                               |   | 33.40%      |   | 33.40%      |   | 33.62%     
|Expected combined
    Canadian federal and provincial tax recovery based on above rates | $ | (1,576,393) | $ | (3,268,251) | $ | (1,278,032)
|Enacted tax rate
    adjustment differences                                             |   | 54,194      |   | 104,426     |   |           
|Differences in
    foreign statutory tax rates                                          |   | (223,835)   |   | 373,247     |   | 459,992    
|Permanent
    differences                                                               |   | 3,645,392   |   | 1,440,996   |   | 218,924    
|Impairment of
    note receivable                                                       |   |            |   | 22,648      |   | 84,050     
|Tax exemption                                                                           |   | (442,286)   |   | 161,635     |   |           
|Other                                                                                   |   | 31,842      |   | (56,736)    |   | 256,037    
|Valuation
    allowance                                                                 |   | (1,101,734) |   | 2,107,119   |   | 946,544    
|Consolidated
    income tax before undernoted                                           |   | 387,180     |   | 885,084     |   | 687,515    
|Provision for
    cross border transactions                                             |   | 652,278     |   |            |   |           
|Total
    consolidated income tax                                                       | $ | 1,039,458   | $ | 885,084     | $ | 687,515    

- 19-

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

The components of future income taxes are as follows:

|As at December 31,              |   | 2007         |   | 2006         |   | 2005        
|------------------------------- | - | ------------ | - | ------------ | - | ------------
|Capital assets                  | $ | 154,977      | $ | 268,247      | $ | 201,201     
|Software development costs      |   | (667,964)    |   | (680,084)    |   | (636,633)   
|Deferred revenue                |   | 87,026       |   | (102,014)    |   | 322,027     
|Share
    issue costs           |   | 147,401      |   | 84,767       |   | 134,727     
|Other                           |   | (295,810)    |   | (337,855)    |   | 47,203      
|Loss
    carry-forwards         |   | 13,791,295   |   | 19,006,279   |   | 17,843,312  
|Valuation allowance             |   | (13,231,561) |   | (18,413,740) |   | (17,911,837)
|Net future income tax liability | $ | (14,636)     | $ | (174,400)    | $ |            

Income tax expense is comprised of the expense for the Companys profitable Chinese operations and a reserve for uncertain tax positions attributable to the review of the Companys international transfer pricing policies and procedures by a government agency.  The uncertainty relates to the treatment of the Companys international operations, including the allocation of income among different jurisdictions, and related penalties and interest.  The Company will monitor and adjust such reserves on receiving proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning the Companys transfer prices, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statutes of limitations.    Once a final outcome is determined, the Company will adjust its tax provision accordingly.

As at December 31, 2007, and 2006, the Company recorded future income taxes of $14,636 and $174,400, respectively.  Future income taxes result from differences in tax reporting with the Companys Chinese operations.  The Chinese tax authorities require the Companys Chinese operations to report earnings under PRC GAAP, which differs from U.S. GAAP.  Accordingly, deferred taxes are recorded when the Companys Chinese operations are adjusted to U.S. GAAP.

At December 31, 2007, the Companys Canadian subsidiaries have non-capital losses of $17,928,670, which expire between 2008 and 2015 and net capital losses of $51,611,692, which do not expire and are available to reduce Canadian taxable capital gains in future years.  The Company has foreign non-capital losses of $44,101,487 of which $37,229,070 does not expire and the balance of $6,872,417 relates to a U.S. subsidiary and expires between 2111 and 2027.

The following summarizes the non-capital losses that expire in each of the next five years:

|2008  | $ | 484,314  
|----- | - | ---------
|2009  |   | 1,710,526
|2010  |   | 996      
|2011  |   | 3.826.525
|2012  |   | 2,720,467
|Total | $ | 8,742,828

12.

Impairment of Note Receivable.

Archer (see note 20) was incorporated in February 2005 for the purpose of acquiring a number of educational learning institutions in Canada. Zi acquired 24.9 percent of Archers shares, through share subscription agreements in 2005. Consequently, Zi is a related party to Archer. The Companys ownership of Archer increased through the sale of its Oztime and EPI subsidiaries to Archer. Under the sale agreements, Zi received 6,140,000 shares of Archer, including contingent consideration of 1,000,000 shares placed in escrow and a RMB 1,000,000 non-interest bearing note receivable  December 31, 2006, U.S. dollar equivalent of $129,417.  At December 31, 2006, 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, the full amount of the note receivable was impaired and hence provided for.  At the time of the impairment, Archer had been unsuccessful in raising additional capital sufficient enough to repay the note and continued to post operating losses. Due to these factors it was probable that Archer would not have the necessary funds available to meet the requirements under the note.  In April 2007, Archer was able to repay the note receivable in full.  Accordingly, the Company recorded $130,931 for the recovery of the note receivable.

In April 2005, the Company advanced $250,000 under a secured loan agreement to MLG. The terms of the agreement required repayment on demand and provided the Company with a security interest in the assets of MLG. At June 30, 2005, the Company evaluated the note receivable for impairment and determined that the full amount of the note receivable including accrued interest was impaired and hence provided for. At the time of the impairment, MLG was under a going concern qualification and subject to ongoing operating cash requirements, continued operating losses and other debt to which the Company is subordinate. Due to these factors and the directive by Zis Board of Directors to not provide further funding to MLG, it was probable that MLG would not have the necessary funds available to meet the requirements under the note, including accrued interest.  As a result, in 2005 a provision for the full amount of the note receivable was made.

- 20 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

13.

Contingent Liabilities

On November 12, 2007, the Company became aware of a lawsuit filed by AutoText Technologies, Inc., claiming, among other things, that its patent had been infringed.  In January 2008, the Company received notice that the lawsuit had been dismissed by AutoText Technologies, Inc. against all defendants without prejudice.

Commencing on March 11, 2005, the Board of Regents of the University of Texas System (U of T) filed federal lawsuits against numerous alleged infringers of U.S. Patent No. 4,674,112 (112 Patent) in the U.S. District Court for the Western District of Texas, Austin Division. Of the named parties, the majority are customers of the Companys principal competitor in the text input market and a few are customers of the Company.

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

While the company is not a defendant, the validity of the Companys licensed software was legally challenged in the U of T filed federal lawsuit.  In order to defend the legitimacy of the licensed software and maintain the relationships with the licensees, the Company made the business decision to actively participate in the costs of the legal defense.

On May 2, 2007, the United States District Court for Western District of Texas issued an Order of Non-Infringement of U.S, Patent No. 4,674,112 against the Plaintiff, The Board of Regents of the University of Texas, and in favor of all remaining Defendants.  The plaintiff, however, has filed an appeal.  The court has not yet determined whether it will allow the appeal. Should the appeal be permitted the Company believes it will be successful in its defense.

On February 22, 2007, the Company entered into a settlement agreement with the Receiver for the Lancer Entities (the Receiver) to settle any and all outstanding claims and issues among the Receiver, the Lancer Entities and the Company subject to certain conditions.  On April 10, 2007, the settlement agreement became effective. Pursuant to the settlement agreement, the parties agreed to, among other things, immediately discontinue, with prejudice, all litigation and regulatory proceedings of any kind. In addition, the Receiver, the Company and certain current and former directors of the Company agreed to deliver mutual releases.

On November 18, 2005, the former President and Chief Executive Officer of the Company filed a wrongful termination lawsuit against the Company in the Court of Queens Bench of Alberta, Judicial District of Calgary. The Plaintiff was the President and CEO of Zi for the period from July 23, 2003 to May 26, 2005, when he submitted his resignation.  On December 9, 2005, the Company filed its Statement of Defense and Counterclaim, denying the Plaintiffs claims.  In March 2006, the Company settled these actions. The Company had accrued sufficient settlement costs related to this lawsuit as of December 31, 2005.

On December 4, 2003, the Company commenced a legal action against former counsel in respect of, among other things, their representation of the Company in a lawsuit, the outcome of which was unfavorable to the Company. As part of its defense, prior counsel filed a cross-complaint against the Company for $1.1 million in unpaid legal fees and costs, which had been accrued by the Company in its consolidated financial statements. On April 6, 2005, the Company settled this litigation. The Company recorded a gain of $1,415,616 for the year ended December 31, 2005.

From time to time, the Company is involved in other claims in the normal course of business. Management assesses such claims and where it is 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.

14.

Related Party Transactions

In the course of operations the Company has transactions with related parties.  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.

- 21-

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

The following table outlines
the Company's related party transactions for the years ended December 31

|                                                                                                                                                                                                                     |   | 2007      |   | 2006     |   | 2005    
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------- | - | -------- | - | --------
|Legal services provided by law firm in
    which a director is a partner                                                                                                                                             | $ | 26,382    | $ |         | $ |        
|Legal
    services provided by law firm in which a former director is a partner                                                                                                                                      | $ | 160,476   | $ | 158,078  | $ | 227,883 
|Fees paid on behalf of a significantly
    influenced company                                                                                                                                                        | $ |          | $ | 7,247    | $ | 760     
|Consulting fees paid to a firm in which an officer is a partner                                                                                                                                                      | $ | 296,328   | $ | 66,006   | $ |        
|Consulting fees paid to a firm owned
    by a former officer                                                                                                                                                         | $ |          | $ | 34,248   | $ | 49,333  
|                                                                                                                                                                                                                     |   |           |   |          |   |         
|In April 2005, the Company advanced $250,000 under a
    secured loan agreement to MLG. The full amount of the note receivable
    including accrued interest was impaired and hence provided for (see note
    12).
|                                                                                                                                                                                                                     |   |           |   |          |   |         
|The following table outlines the
    amounts payable to related parties at December 31:                                                                                                                              |   |           |   |          |  
|                                                                                                                                                                                                                     |   | 2007      |   | 2006     |   | 2005    
|Due to law firm in which a director is
    a partner                                                                                                                                                                 | $ | (1,938)   | $ |         | $ |        
|Due to
    law firm in which a former director is a partner                                                                                                                                                          | $ | (1,654)   | $ | (57,931) | $ | (47,388)
|Due to a firm in which an officer is a
    partner                                                                                                                                                                   | $ | (116,000) | $ | (56,188) | $ |        

15.

Off-Balance Sheet Arrangements, Commitments and Contractual Obligations

The Company rents premises and equipment under operating leases, which expire at various dates up to June 2012. The Company recorded rent expense for 2007 of $745,812 (2006  $641,113; 2005  $573,516).

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

|2008  | $ | 992,401  
|----- | - | ---------
|2009  |   | 836,424  
|2010  |   | 686,896  
|2011  |   | 675,074  
|2012  |   | 337,537  
|Total | $ | 3,528,332

From time to time the Company may enter into certain types of contracts that require it to indemnify parties against possible third party claims particularly when these contracts relate to licensing agreements.  The 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.  In order to contain the Companys liability exposure, the more recent licensing agreements generally provide a clause
nimimizing the Companys liability.  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.

16.

Segmented Information

Zi develops software designed to enhance the usability of mobile and consumer electronic devices through its Zi Technology business segment. Zi has a singular focus: to make mobile devices smarter and easier to use. Zi makes
intelligent interfaces - software products that simplify data entry and interaction on communications devices. The result is richer, more personalized interaction for quicker, easier communication in over 60 different language databases for use around the world.

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

Other operating expenses include unallocated segment expenses such as legal fees, public company costs and head office costs.  The accounting policies of each of the business segments are the same as those described in note 3.

The Companys primary operations are located in North America. The Company operates two reportable business segments in five reportable geographic segments:

- 22 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

|Revenues                                                |                                   |              |                         |                                   |              | Amortization            |   | VAT        |   | Other
    operating
    expenses |   | Operating profit
    (loss), before
    interest and
    other income
|------------------------------------------------------- | --------------------------------- | ------------ | ----------------------- | --------------------------------- | ------------ | ----------------------- | - | ---------- | - | -------------------------------- | - | ---------------------------------------------------------------------
|                                                        |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|2007                                                    |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|Zi Technology                                           | $                                 | 13,111,002   | $                       | 1,601,040                         | $            | 787,632                 | $ | 11,820,707 | $ | (1,098,377)                     
|Corporate                                               |                                   |              |                         |                                  |              | 106,512                 |   |           |   | 3,799,460                        |   | (3,905,972)                                                          
|Total                                                   |                                   |              | $                       | 13,111,002                        | $            | 1,707,552               | $ | 787,632    | $ | 15,620,167                       | $ | (5,004,349)                                                          
|Interest expense and interest and
    other income, net |                                   | 153,677     
|Recovery of impaired note receivable                    |                                   | 130,931     
|Loss before income taxes                                | $                                 | (4,719,741) 
|                                                        |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|2006                                                    |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|Zi Technology                                           | $                                 | 11,836,217   | $                       | 1,534,027                         | $            | 595,157                 | $ | 13,453,283 | $ | (3,746,250)                     
|Corporate                                               |                                   |              |                         |                                  |              | 173,185                 |   |           |   | 5,025,213                        |   | (5,198,398)                                                          
|Total                                                   |                                   |              | $                       | 11,836,217                        | $            | 1,707,212               | $ | 595,157    | $ | 18,478,496                       | $ | (8,944,648)                                                          
|Interest expense and interest and other income, net     |                                   | 209,556     
|Loss before income taxes                                | $                                 | (8,735,092) 
|                                                        |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|2005                                                    |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|Zi Technology                                           | $                                 | 10,614,043   | $                       | 975,867                           | $            | 522,278                 | $ | 11,603,694 | $ | (2,487,796)                     
|Corporate                                               |                                   |              |                         |                                  |              | 176,427                 |   |           |   | 1,455,940                        |   | (1,632,367)                                                          
|Total                                                   |                                   |              | $                       | 10,614,043                        | $            | 1,152,294               | $ | 522,278    | $ | 13,059,634                       | $ | (4,120,163)                                                          
|Interest expense and interest and other income, net     |                                   | 318,758     
|Loss before income taxes                                | $                                 | (3,801,405) 
|                                                        |                                   |              |                         |                                   |              |                         |   |            |   |                                  |   |                                                                      
|                                                        | 2007                              | 2006        
|                                                        | Capital and
    intangible assets | Other assets | Identifiable
    assets | Capital and
    intangible assets | Other assets | Identifiable
    assets
|Zi Technology                                           | $                                 | 4,364,019    | $                       | 9,155,516                         | $            | 13,519,535              | $ | 4,094,355  | $ | 9,520,898                        | $ | 13,615,253                                                           
|Corporate                                               |                                   | 289,525      |                         | 1,886,054                         |              | 2,175,579               |   | 233,456    |   | 698,361                          |   | 931,817                                                              
|Total                                                   | $                                 | 4,653,544    | $                       | 11,041,570                        | $            | 15,695,114              | $ | 4,327,811  | $ | 10,219,259                       | $ | 14,547,070                                                           

Corporate includes non-cash compensation expense related to issuance of employee stock options, RSUs and RSAs in 2007 of $831,848 (2006  $1,208,701; 2005  nil). All additions to software development costs of $1,638,390 in 2007 (2006  $1,407,204; 2005  $930,264) are part of Zi Technology operations.

- 23 -

---

Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

|Revenues                                                |                                   |              |                         |                                   |              | Amortization            |   | VAT       |              | Other
    operating
    expenses |             | Operating profit
    (loss), before
    interest and
    other income
|------------------------------------------------------- | --------------------------------- | ------------ | ----------------------- | --------------------------------- | ------------ | ----------------------- | - | --------- | ------------ | -------------------------------- | ----------- | ---------------------------------------------------------------------
|                                                        |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|2007                                                    |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|Canada                                                  |                                   |              | $                       | 5,513,032                         | $            | 1,434,083               | $ |          | $            | 9,239,551                        | $           | (5,160,602)                                                          
|China                                                   |                                   |              |                         | 5,977,217                         |              | 79,489                  |   | 787,632   |              | 3,026,743                        |             | 2,083,353                                                            
|U.S.A.                                                  |                                   |              |                         | 1,038,728                         |              | 6,077                   |   |          |              | 1,754,626                        |             | (721,975)                                                            
|Sweden                                                  |                                   |              |                         | 582,025                           |              | 181,905                 |   |          |              | 1,565,896                        |             | (1,165,776)                                                          
|Other                                                   |                                   |              |                         |                                  |              | 5,998                   |   |          |              | 33,351                           |             | (39,349)                                                             
|Total                                                   |                                   |              | $                       | 13,111,002                        | $            | 1,707,552               | $ | 787,632   | $ 15,620,167 | $                                | (5,004,349)
|Interest expense and interest and
    other income, net |                                   | 153,677     
|Recovery of impaired note receivable                    |                                   | 130,931     
|Loss before income taxes                                | $                                 | (4,719,741) 
|                                                        |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|2006                                                    |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|Canada                                                  |                                   |              | $                       | 5,832,869                         | $            | 1,417,331               | $ |          | $            | 11,628,079                       | $           | (7,212,541)                                                          
|China                                                   |                                   |              |                         | 4,751,684                         |              | 99,719                  |   | 595,157   |              | 2,811,919                        |             | 1,244,889                                                            
|U.S.A.                                                  |                                   |              |                         | 935,956                           |              | 6,606                   |   |          |              | 2,244,921                        |             | (1,315,571)                                                          
|Sweden                                                  |                                   |              |                         | 315,708                           |              | 169,160                 |   |          |              | 1,688,014                        |             | (1,541,466)                                                          
|Other                                                   |                                   |              |                         |                                  |              | 14,396                  |   |          |              | 105,563                          |             | (119,959)                                                            
|Total                                                   |                                   |              | $                       | 11,836,217                        | $            | 1,707,212               | $ | 595,157   | $ 18,478,496 | $                                | (8,944,648)
|Interest expense and interest and
    other income, net |                                   | 209,556     
|Loss before income taxes                                | $                                 | (8,735,092) 
|                                                        |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|2005                                                    |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|Canada                                                  |                                   |              | $                       | 4,175,334                         | $            | 905,639                 | $ |          | $            | 6,801,134                        | $           | (3,531,439)                                                          
|China                                                   |                                   |              |                         | 5,019,599                         |              | 53,971                  |   | 522,278   |              | 2,739,411                        |             | 1,703,939                                                            
|U.S.A.                                                  |                                   |              |                         | 1,021,769                         |              | 14,246                  |   |          |              | 2,024,754                        |             | (1,017,231)                                                          
|Sweden                                                  |                                   |              |                         | 397,341                           |              | 164,042                 |   |          |              | 1,406,772                        |             | (1,173,473)                                                          
|Other                                                   |                                   |              |                         |                                  |              | 14,396                  |   |          |              | 87,563                           |             | (101,959)                                                            
|Total                                                   |                                   |              | $                       | 10,614,043                        | $            | 1,152,294               | $ | 522,278   | $ 13,059,634 | $                                | (4,120,163)
|Interest expense and interest and
    other income, net |                                   | 318,758     
|Loss before income taxes                                | $                                 | (3,801,405) 
|                                                        |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|                                                        |                                   |              |                         |                                   |              |                         |   |           |              |                                  |             |                                                                      
|                                                        | 2007                              | 2006        
|                                                        | Capital and
    intangible assets | Other assets | Identifiable
    assets | Capital and
    intangible assets | Other assets | Identifiable
    assets
|Canada                                                  | $                                 | 3,382,152    | $                       | 3,844,589                         | $            | 7,226,741               | $ | 2,803,787 | $            | 4,637,029                        | $           | 7,440,816                                                            
|China                                                   |                                   | 117,690      |                         | 6,178,888                         |              | 6,296,578               |   | 192,608   |              | 5,059,157                        |             | 5,251,765                                                            
|U.S.A.                                                  |                                   | 17,117       |                         | 513,117                           |              | 530,234                 |   | 23,193    |              | 246,866                          |             | 270,059                                                              
|Sweden                                                  |                                   | 1,136,585    |                         | 501,236                           |              | 1,637,821               |   | 1,229,044 |              | 258,745                          |             | 1,487,789                                                            
|Other                                                   |                                   |             |                         | 3,740                             |              | 3,740                   |   | 79,179    |              | 17,462                           |             | 96,641                                                               
|Total                                                   | $                                 | 4,653,544    | $                       | 11,041,570                        | $            | 15,695,114              | $ | 4,327,811 | $            | 10,219,259                       | $           | 14,547,070                                                           

The Canadian and U.S. operations include the majority of the non-cash compensation expense related to issuance of employee stock options, RSUs and RSAs in 2007 of $891,064 (2006  $1,544,755; 2005  nil).  All additions to software development costs of $1,638,390 in 2007 (2006  $1,407,204) are part of Canadian and U.S. operations.

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Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

17.

Supplemental Financial Information

Accrued liabilities

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

|As at December 31,                                                                     |   |           |   | 2007      |   | 2006     
|-------------------------------------------------------------------------------------- | - | --------- | - | --------- | - | ---------
|Trade accounts payable                                                                 |   |           | $ | 1,539,077 | $ | 1,174,585
|Withholding tax and income taxes payable                                               |   |           |   | 1,456,586 |   | 876,546  
|Compensation                                                                           |   |           |   | 1,149,682 |   | 1,285,652
|Accounting and other compliance                                                        |   |           |   | 441,146   |   | 315,641  
|Litigation and legal                                                                   |   |           |   | 11,784    |   | 327,048  
|Other accrued liabilities                                                              |   |           |   | 78,732    |   | 66,550   
|Total                                                                                  |   |           | $ | 4,677,007 | $ | 4,046,022
|                                                                                       |   |           |   |           |   |          
|The following table high-lights the change in the Allowance for
    Doubtful Accounts:
|                                                                                       |   |          
|For the year ended December 31                                                         |   | 2007      |   | 2006      |   | 2005     
|Balance, beginning of year                                                             | $ | 936,731   | $ | 426,697   | $ | 154,108  
|Charged to costs and expenses                                                          |   | 192,938   |   | 750,535   |   | 278,589  
|Deductions and recovery                                                                |   | (675,598) |   | (240,501) |   | (6,000)  
|Balance, end of year                                                                   | $ | 454,070   | $ | 936,731   | $ | 426,697  

Loss per share

In 2007, anti-dilutive stock options, RSUs, RSAs, warrants and performance based escrowed shares of 6,704,607 have been excluded in the calculation of diluted loss per share (2006  3,999,982; 2005  4,959,869).

18.

Economic Dependence

In 2007, five Zi Technology customers accounted for 58 percent or $7,603,510 (2006  51 percent or $6,030,446; 2005  46 percent or $4,865,398) of the Companys total revenues.  The loss of one or more of these customers could significantly affect the Companys revenues.

19.

Subsequent Events

On February 1, 2008 the Company received a NASDAQ Staff Deficiency Letter dated January 30, 2008 stating that the bid price of Zis common shares had closed below U.S. $1.00 per share for 30 consecutive days. As a result, in accordance with Marketplace Rule 4310(c)(8) (the Rule), Zi is granted 180 calendar days, or until July 28, 2008, for the bid price of its common shares to close at U.S. $1.00 or more for a minimum of 10 consecutive business days. If the Rule requirements cannot be demonstrated by July 28, 2008, but Zi continues to meet the initial listing criteria, NASDAQ will provide an additional 180 calendar days to meet the Rule requirements. If during the first 180 day compliance period, or if applicable, the second 180 day compliance period, Zi does not meet the Rule requirements by trading above U.S. $1.00 for a minimum of 10 consecutive business days, NASDAQ will provide written notification that Zis common shares will be delisted from The NASDAQ Capital Market. If necessary, Zi would have the right to appeal the delisting notice to a NASDAQ Listing Qualifications Panel.

Zis listing is unaffected and will continue to trade on The NASDAQ Capital Market. As a result of the notice, Zi has an initial period of 180 days to meet the Rule requirement. Management will focus on continuing to improve the financial fundamentals of Zi and communicating results with shareholders and investors in order to meet the Rule requirements within the prescribed time period.

20.

Discontinued Operations

On March 12, 2007, Zi received an offer to purchase its minority interest in Archer.  The offer was presented and approved by the Companys Board of Directors on March 22, 2007.  Effective March 27, 2007, the Company sold its minority interest in Archer for total proceeds of $632,601.  There were no contingent considerations or performance criteria in the sale agreement.

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Notes to the Consolidated Financial StatementsFor the years ended December
31, 2007, 2006 and 2005 (All amounts expressed in United States of America
dollars except share amounts)

Because the Companys management had not previously been given a mandate by the Board of Directors to locate a purchaser for its investment in Archer, Archer was initially included in the Companys consolidated operating loss for all previous periods. For the years ended December 31, 2007, 2006, and 2005, Archers operating results have been reclassified to discontinued operations, net of income taxes (see note 11) and disclosures elsewhere to conform with this change.

|For the year ended December 31                                          |   | 2007    |   | 2006        |   | 2005       
|----------------------------------------------------------------------- | - | ------- | - | ----------- | - | -----------
|Revenues                                                                | $ | -       | $ | 555,523     | $ | 770,470    
|Cost of sales                                                           |   | -       |   | (22,696)    |   | (248,689)  
|Operating expenses                                                      |   | -       |   | (893,177)   |   | (1,368,110)
|Interest income                                                         |   | -       |   | 9,032       |   | 41,746     
|Non-controlling interest                                                |   | -       |   | -           |   | (23,920)   
|Equity interest loss in Archer (March 1, 2006 to December 31,
    2006) |   | -       |   | (893,973)   |   | -          
|Gain on disposal of discontinued operations                             |   | 632,601 |   | -           |   | -          
|Net loss                                                                | $ | 632,601 | $ | (1,245,291) | $ | (828,503)  

Prior to the completion of the sale, Archers operating results had been categorized as the Companys e-Learning business segment.

Prior to 2005, Zi conducted its e-Learning business segment through Oztime Education & Network Technology Co. Ltd. (Oz) and English Practice Inc. (EPI).  Archer was incorporated in February 2005 for the purpose of acquiring Oz and EPI and continuing the e-Learning Business Segment.  Effective March 1, 2006, Archer was deconsolidated and accounted for under the equity method.  See note 4 Acquisition of Archer Education Group Inc.

The Company has recognized its proportionate share of the loss of Archers operations for the period between March 1, 2006 and December 31, 2006, in the amount of $893,973, and appropriately reduced its investment in Archer by the same amount. As at December 31, 2006, the Company held 6,140,000 shares of Archer. Archer is a private company and as such the Company is unable to determine a fair value for this investment.  As at December 31, 2006,  the equity interest loss in Archer had exceeded Zis investment in Archer.  The Company does not recognize its proportionate share of losses that would result in a negative carrying value of its equity investment.  No further losses will be recognized as Zi has no commitment to fund further losses.  As a result, the full amount of the proceeds was recognized as a gain on disposal of discontinued operations for the period ended March 31, 2007.

As Archer was deconsolidated on March 1, 2006 and Zis equity interest in Archer was written down to nil value as at December 31, 2006, no assets or liabilities are applicable as at December 31, 2007 and 2006, as they were either written down or sold.



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