CONFIDENTIAL

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 20-F

|( )   | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
    (g) OF THE SECURITIES EXCHANGE ACT OF 1934                                        
|----- | ------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                           
|( X ) | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934 
    For the fiscal year ended: December 31, 2003
|      |                                                                                                                                           
|( )   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934                                              

Commission file number: 000-24018

Zi Corporation
(Exact name of Registrant as specified in its Charter)

Alberta, Canada
(Jurisdiction of incorporation or organization)

2100, 840 - 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.

None

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

Common Shares, no par value
(Title of Class)

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

None

Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of December 31, 2003.

39,406,560 Common Shares, no par value

Page 1 of 131

The Exhibit Index appears on page 121

1



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

( X ) Yes ( ) No

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

( ) Item 17 ( X ) Item 18

2

TABLE OF CONTENTS

|                                                                | Page
|--------------------------------------------------------------- | ----
|Part I*                                                         | 6   
|                                                                |     
|Introduction*                                                   | 6   
|                                                                |     
|Forward Looking Information*                                    | 6   
|                                                                |     
|Item 1 - Identity of Directors, Senior Management and
Advisers* | 7   
|                                                                |     
|Item 2 - Offer Statistics and Expected Timetable
*              | 7   
|                                                                |     
|Item 3 - Key Information*                                       | 7   
|                                                                |     
|A. Selected Financial Data *                                    | 7   
|                                                                |     
|B. Capitalization and Indebtedness
    *                        | 9   
|                                                                |     
|C. Reasons for the Offer and Use of Proceeds
    *              | 9   
|                                                                |     
|D. Risk Factors *                                               | 9   
|                                                                |     
|Item 4 - Information on the Company
*                           | 19  
|                                                                |     
|A. History and Development of the Company
    *                 | 19  
|                                                                |     
|B. Business Overview *                                          | 26  
|                                                                |     
|C. Organizational Structure *                                   | 32  
|                                                                |     
|D. Property, Plant and Equipment *                              | 32  
|                                                                |     
|Item 5 - Operating and Financial Review and Prospects
*         | 33  
|                                                                |     
|A. Operating Results *                                          | 33  
|                                                                |     
|B. Liquidity and Capital Resources
    *                        | 43  
|                                                                |     
|C. Research and Development, Patents and Licenses, etc.
    *   | 46  
|                                                                |     
|D. Trend Information *                                          | 47  
|                                                                |     
|E. Off-Balance Sheet Arrangements *                             | 51  
|                                                                |     
|F. Tabular Disclosure of Contractual Obligations
    *          | 51  
|                                                                |     
|G. Safe Harbour *                                               | 51  
|                                                                |     
|Item 6 - Directors, Senior Management and Employees
*           | 52  
|                                                                |     
|A. Directors and Senior Management
    *                        | 52  

3

|                                                                 |   
|---------------------------------------------------------------- | --
|B. Compensation *                                                | 54
|                                                                 |   
|C. Board Practices *                                             | 60
|                                                                 |   
|D. Employees *                                                   | 63
|                                                                 |   
|E. Share Ownership *                                             | 63
|                                                                 |   
|Item 7 - Major Shareholders and Related Party Transactions*      | 66
|                                                                 |   
|A. Major Shareholders *                                          | 66
|                                                                 |   
|B. Related Party Transactions *                                  | 67
|                                                                 |   
|C. Interests of Experts and Counsel
    *                        | 68
|                                                                 |   
|Item 8 - Financial Information*                                  | 68
|                                                                 |   
|A. Consolidated Statements and Other Financial
    Information * | 68
|                                                                 |   
|B. Significant Changes *                                         | 70
|                                                                 |   
|Item 9 - The Offer and Listing*                                  | 70
|                                                                 |   
|A. Offer and Listing Details - Stock Price History
    *         | 70
|                                                                 |   
|B. Plan of Distribution *                                        | 72
|                                                                 |   
|C. Markets *                                                     | 72
|                                                                 |   
|D. Selling Shareholders *                                        | 72
|                                                                 |   
|E. Dilution *                                                    | 72
|                                                                 |   
|F. Expenses of the Issue *                                       | 72
|                                                                 |   
|Item 10 - Additional Information*                                | 72
|                                                                 |   
|A. Share Capital *                                               | 72
|                                                                 |   
|B. Memorandum and Articles of Association
    *                  | 72
|                                                                 |   
|C. Material Contracts *                                          | 78
|                                                                 |   
|D. Exchange Controls *                                           | 79
|                                                                 |   
|E. Taxation *                                                    | 79
|                                                                 |   
|F. Dividends and Paying Agents *                                 | 83
|                                                                 |   
|G. Statement by Experts *                                        | 84
|                                                                 |   
|H. Documents on Display *                                        | 84

4

|                                                                                        |    
|--------------------------------------------------------------------------------------- | ---
|I. Subsidiary Information *                                                             | 84 
|                                                                                        |    
|Item 11 - Quantitative and Qualitative Disclosure About
Market Risk*                    | 84 
|                                                                                        |    
|A. Financial Instruments *                                                              | 84 
|                                                                                        |    
|B. Foreign Currency *                                                                   | 85 
|                                                                                        |    
|Item 12 - Description of Securities Other than Equity
Securities*                       | 85 
|                                                                                        |    
|Part II*                                                                                | 85 
|                                                                                        |    
|Item 13 - Defaults, Dividend Arrearages and Delinquencies
*                             | 85 
|                                                                                        |    
|                                                                                        |    
|Item 14 - Material Modifications to the Rights of Security
Holders and Use of Proceeds* | 85 
|                                                                                        |    
|Item 15 - Controls and Procedures
*                                                     | 85 
|                                                                                        |    
|Item 16 - [Reserved]*                                                                   | 86 
|                                                                                        |    
|Item 16A - Audit committee financial expert
*                                           | 87 
|                                                                                        |    
|Item 16B - Code of Ethics*                                                              | 87 
|                                                                                        |    
|Item 16C - Principal Accountant Fees and Services
*                                     | 87 
|                                                                                        |    
|Item 16D - Exemption from the Listing Standards for Audit
Committees*                   | 87 
|                                                                                        |    
|Item 16E - Purchases of Equity Securities by the Issuer and
Affiliated Purchasers*      | 87 
|                                                                                        |    
|Part III*                                                                               | 87 
|                                                                                        |    
|Item 17 - Financial Statements*                                                         | 87 
|                                                                                        |    
|Item 18 - Financial Statements*                                                         | 87 
|                                                                                        |    
|Item 19 - Exhibits*                                                                     | 121
|                                                                                        |    
|SIGNATURE*                                                                              | 121
|                                                                                        |    
|CERTIFICATION*                                                                          | 122

5





Part I

Introduction

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

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

The Company's Consolidated Financial Statements are prepared
in accordance with accounting principles generally accepted in the United States
of America ("US GAAP") and are presented in Canadian dollars unless otherwise
indicated. All references in this Form 20-F to financial information concerning
the Company refer to such information in accordance with US GAAP and all dollar
amounts in this Form 20-F are in Canadian dollars unless otherwise indicated.
Prior to the preparation of the Consolidated Financial Statements for the year
ended December 31, 2003, the Consolidated Financial Statements of Zi Corporation
were prepared in accordance with Canadian GAAP with an annual reconciliation of
the Company's financial position and results of operations as calculated using
U.S. GAAP. In order to provide information on a more comparable basis with its
industry peers and to better assist with the understanding of the financial
statements to the majority of users, who are in the United States, effective
December 31, 2003, the Company began reporting its financial position, results
of operation and cash flows under U.S. GAAP in its Consolidated Financial
Statements. The effects on net loss arising from differences in generally
accepted accounting principles between the United States of America and Canada
are outlined in note 17 to the Consolidated Financial Statements.



On May 12, 2004, the exchange rate for the United States of
America ("US") dollar was US$0.7205 = CDN$1.00. Please see Item 3 - Key
Information - Selected Financial Data for more detailed US dollar to
Canadian dollar exchange rate information.

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

Forward Looking Information

This Form 20-F annual report contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Shareholders can identify these forward looking statements when they
see us using words such as "expect", "anticipate", "estimate", "believe", "may",
"potential", "intends", "plans" and other similar expressions or statements that
an action, event or result "will", "may", "could" or "should" be taken, occur or
be achieved, or the negative thereof or other similar statements. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by these
forward-looking statements. These factors include, among others, the following:
the "going concern" comments in the auditors' report accompanying our financial
statements and our plans to

6

address our need for additional capital resources;
our history of operating losses and uncertainty of future profitability;
uncertainty as to the degree of and continuing market acceptance of our products
and services; uncertainties relating to product development; risks associated
with the number, amount and timing of new product introductions; uncertainty
regarding patents, proprietary rights and software piracy; variability in
customer demand; our dependence on third party performance under marketing and
licensing arrangements; risks associated with the contingent nature of continued
performance under major sales contracts; rapid technological change and
competition; uncertainty regarding the pricing and collection of accounts; risks
associated with dependence on sales in foreign countries; the potential for
adverse developments in pending litigation; risks associated with the settlement
of a US patent infringement lawsuit; fluctuations in foreign exchange rates;
uncertainties associated with changes in government policy and regulation,
particularly in the People's Republic of China ("PRC" or "China"); adverse
changes in general business conditions in any of the countries in which we do
business; changes in our size and structure; the effectiveness of our management
and our strategic relationships, investment risks associated with our e-Learning
investments and other risks and uncertainties described under "Item 3 - Key
Information - Risk Factors" and elsewhere in this report.

Forward-looking statements are based on the beliefs, opinions
and expectations of our management on the date the statements are made. Although
we believe that the forward-looking statements presented in this document are
reasonable, we do not guarantee that they accurately or completely predict,
reflect or state future results, levels of activity, performance, achievements
or occurrence and we do not assume responsibility for failure to do so. Except
as required by law we do not undertake to update forward-looking information to
reflect actual results, new information, occurrence of future events, or changes
in management's beliefs, opinions or expectations. No undue reliance should be
placed on such forward-looking statements.

Item 1 - Identity of Directors, Senior
Management and Advisers

Not applicable.

Item 2 - Offer Statistics and Expected
Timetable

Not applicable.

Item 3 - Key Information

A.     Selected Financial Data

The following table summarizes certain of our selected
financial information (stated in thousands of Canadian dollars) prepared in
accordance with US GAAP. The information in the table was extracted from the
more detailed financial statements for the fiscal year ended December 31, 1999
through the fiscal year ended December 31, 2003, 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 selected data for fiscal years 1999, 2000,
and the consolidated balance sheet selected data as of December 31, 1999 and
December 31, 2000 and December 31, 2001, 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.

7



2003
    2002
    2001
    2000
    1999(in thousands of Canadian dollars except per share data)Revenue from continuing
    operations
    14,491
    13,204
    5,379
    6,515
    2,092Operating loss from continuing
    operations(1)
    (3,520)
    (30,877)
    (13,586)
    (8,689)
    (6,034)Operating loss from continuing
    operations per share
    (0.11)
    (0.82)
    (0.37)
    (0.24)
    (0.20)Net loss from continuing
    operations(1)
    (4,392)
    (31,169)
    (12,264)
    (5,422)
    (5,900)Net loss from continuing
    operations per share
    (0.11)
    (0.83)
    (0.33)
    (0.15)
    (0.19)Net loss(2)
    (4,392)
    (40,247)
    (20,222)
    (11,912)
    (5,900)Basic and diluted net loss per
    share
    (0.11)
    (1.07)
    (0.54)
    (0.33)
    (0.19)Total assets
    13,644
    18,264
    47,900
    62,609
    33,044Capital stock
    134,977
    130,145
    128,273
    125,378
    86,676Accumulated deficit and other
    comprehensive 
     income
    (129,400)
    (124,784)
    (84,579)
    (65,959)
    (55,512)Net assets
    5,576
    5,361
    43,694
    59,419
    31,164Outstanding shares, in thousands
    39,372
    37,914
    37,544
    36,991
    34,819






|    |                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2002 operating and net loss from continuing operations
  includes litigation and judgment settlement costs of $10.8 million and
  impairment of intangible assets of $4.6 million;
|(2) | 2002 net loss includes loss from discontinued operations of
  $9.1 million (2001 - $8.0 million; 2000 - $6.5 million).                                                            



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 our
operating and financial condition.

Currency and Exchange Rates

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



US Dollars Per One Canadian Dollar
    Year Ended December 312003
    2002
    2001
    2000
    1999End of period
    0.7713
    0.6339
    0.6275
    0.6666
    0.6925Average for the period
    0.7158
    0.6369
    0.6461
    0.6740
    0.6744






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



US Dollars per One Canadian DollarNovember
    2003
    December
    2003
    January
    2004
    February
    2004
    March
    2004
    April
    2004High for the month
    0.7698
    0.7704
    0.7867
    0.7631
    0.7646
    0.7638Low for the month
    0.7471
    0.7478
    0.7519
    0.7472
    0.7421
    0.7296






8

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
May 12, 2004 as reported by the United States Federal Reserve Bank of New York
for the conversion of United States dollar into Canadian dollars was US$1.00 =
CDN$1.3879.

B.     Capitalization and Indebtedness

Not applicable.

C.     Reasons for the Offer and Use
    of Proceeds

Not applicable.

D.Risk Factors

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

If the Company cannot continue as a going concern, a
significant loss to the Company may result.

The Company's ability to continue operations is dependent on
its ability to realize its plans to monetize certain assets, and to secure
additional financing. The Company has prepared the Consolidated Financial
Statements on a "going concern" basis, which implies that the Company will
continue realizing assets and discharging its liabilities in the normal course
of business (See Note 1 to the financial statements). If the Company
cannot realize its plans, monetize certain assets or secure additional
financing, the Company may have to reduce its operations, which may result in a
significant loss to the Company.

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

Our Company was formed in 1987 and has a limited operating
history. Our consolidated net losses amounted to approximately $4.4 million in
our fiscal year ended December 31, 2003, approximately $40.2 million in our
fiscal year ended December 31, 2002, and approximately $20.2 million in our
fiscal year ended December 31, 2001. Net losses may continue. We face
significant and potentially costly challenges in simultaneously pursuing key
research and development goals and attracting customers for our products and
services. As a result, we may not become profitable in the future. Even if we
become profitable, we may not be able to maintain profitability, as our
operating results are, and will continue to be, difficult to predict.

Our shareholders may face dilution in future financings and
our business may be restricted by future borrowings.

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

9

The price of our common shares and our ability to access
capital markets may be affected by Lancer's ownership of our common shares.

In August 2003 we learned that a group of funds, including
  Lancer Partners LP and Lancer Offshore Inc. (collectively, the "Lancer
  Funds"), had accumulated a significant percentage of our outstanding common
  shares. This disclosure followed the appointment in July 2003 of a receiver
  for the Lancer Funds who was appointed as a result of an SEC enforcement
  proceeding which alleged securities law violations by the management of the
  Lancer Funds. In December 2003, we learned that the Lancer Funds' ownership
  amounted to approximately 49% of our outstanding shares. While the enforcement
  proceeding did not allege wrongdoing in connection with our common shares, the
  accumulation was done in apparent violation of U.S. and Canadian securities
  laws, and without our knowledge or assistance, we believe we may be adversely
  affected in the following ways:

- the price of our common shares may have been affected by
  periodic news reports relating to the legal proceedings affecting the Lancer
  Funds;
- Certain investors have been reluctant to invest in our
  securities due to uncertainties regarding potential market or other sales of
  Zi common shares by the receiver for the Lancer Funds;
- We are potentially subject to disputes with the receiver
  relating to the Lancer Funds' ownership of shares in the Company.

There can be no assurance that our share price or our access to the capital
markets will not continue to be affected by the Lancer Fund's ownership of our
common shares.

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

The development of our input technology market depends upon:

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



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

The market for our products has been characterized by:

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

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

- enhance our existing products;
- successfully develop new products or additional localized
  versions that meet increasingly demanding customer requirements; and

10

- gain market acceptance.

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

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

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

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

We operate in an intensely competitive environment and there
can be no assurance that we can compete successfully or gain market acceptance.

The software industry is intensely competitive and is
characterized by rapid technological advances, evolving industry standards and
technological obsolescence. Other corporations with greater financial and
technical resources and larger marketing organizations could enter the market
and pose a potential threat if they can develop technologies and products that
can rival those developed by us or under license to us. We understand that major
Asian and North American software and technology companies engage in development
of input or other interface software. Our actual or potential input technology
competitors include, but are not limited to: Motorola; Tegic/AOL; Nokia; Airtx;
Apple; Microsoft; Research in Motion and Digit Wireless (Fastap). Many of our
competitors have longer operating histories and have greater financial,
technical, sales, marketing and other resources. To a great extent, our ability
to compete will depend on such factors as product features, technical
superiority, ease of use, price, quality, technical support and services,
product development capabilities, marketing, distribution channels, and ability
to meet delivery schedules. There can be no assurance that our products and
services can compete successfully or gain market acceptance.

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

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

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

A key element of our business strategy is the formation of
collaborative relationships with other leading companies. We believe that
success will depend, in part, on our ability to maintain these relationships and
to cultivate additional corporate alliances with such companies. There is no
assurance

11

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

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

Furthermore, our products and technologies sold and
integrated into customer applications are subject to both customer production
schedules and customer success in marketing the products and generating product
sales. Our revenues are thus subject to delays and possible cancellation
resulting from customer integration risks and delays. We may not be successful
in continuing to be selected as the language enabling technology for these OEMs,
and the failure to be selected by our OEM customers would have a material
adverse effect on our sales. In addition, the resolution of a patent
infringement claim restricts the Company and its affiliates from using and
selling certain earlier versions of eZiText for Latin-based languages in the
United States. Furthermore, due to our royalty-based revenue model, the failure
of our key OEMs to achieve market acceptance of products incorporating our
software could have a material adverse effect on our business, operating results
and financial condition.

Due to these factors, our sales cycles are long and
unpredictable. As a result, our revenues may fluctuate from quarter to quarter
and we may be unable to adjust our expenses accordingly. This would cause our
operating results and stock price to fluctuate. OEMs and service providers
typically perform numerous tests and extensively evaluate products before
incorporating them into products. In addition, we expect that the delays which
are inherent in our sales cycle could raise additional risks of service
providers deciding to cancel or change their product plans. Our business would
be adversely affected if a significant customer reduces or delays orders during
our sales cycle or chooses not to deploy products incorporating our technology.

Some of our major direct customers are not profitable and are
subject to reduced demand for products and services currently affecting the
telecommunications industry. In 2003, we derived 26 percent of our total revenue
for all business units from two customers compared to 25 percent of our total
revenue from two customers during the year ended December 31, 2002, and
44 percent of our total revenue from two customers in the year ended
December 31, 2001. Because of our dependence on royalties and licensing fees
from OEMs that incorporate our eZiText technologies into their products,
relatively few

12

potential customers have in the past accounted for a significant
portion of our revenues. Our reliance on a limited number of customers has been
significantly reduced over the past three years; however, 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 eZiText technologies. Our inability to continue to secure and
maintain a sufficient number of contracts from such dominant OEM players would
have a material adverse effect on our business, financial condition, operating
results and cash flows derived from eZiText technologies. Moreover, our success
will depend in part upon our ability to obtain orders from new customers, as
well as the financial condition and success of our customers and general
economic conditions. Moreover, certain of our key OEM licenses are at the end of
their license terms and it is uncertain whether we will be successful in
negotiating renewals with these customers.

Our overall market breadth for language input 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 have developed technologies, filed
patent applications or received patents on various technologies that may be
related to our business. Some of these technologies, applications or patents may
conflict with our technologies or intellectual property rights. Such conflicts
could limit the scope of the patents, if any, that we may be able to obtain or
result in the denial of our patent applications altogether.

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

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

13

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

As described in Item 4 - Information on the Company -
Intellectual Property Litigation, the Company and America Online Inc.
("AOL") settled the U.S. based litigation by a written settlement agreement
dated December 6, 2002. The Company has made all the payments contemplated under
the Settlement Agreement and the Security Agreements have been released by AOL,
also as contemplated under the Settlement Agreement.

By the terms of settlement, the Company was required to pay a
certain amount to AOL on execution of the settlement agreement and then make
subsequent instalment payments (the "Outstanding Balance") according to a
payment schedule starting in June 2003 and terminating on January 2, 2004
(collectively, the "Settlement Amount"). The Settlement Amount was less than the
damages award of US$9,000,000 entered in judgement in this lawsuit (the "Damages
Award"). The settlement agreement stipulates that in the event that any of the
scheduled Outstanding Balance payments was not made within ten days of the
payment date, then the amount of the Damages Award less all payments made to AOL
on account of the Settlement Amount (the "Default Payment Amount") would be
immediately due and payable by the Company to AOL and the security agreements
granted by the Company and its affiliate Zi Corporation of America, Inc. to
secure payment of the Default Payment Amount would become enforceable. Upon
payment of the Outstanding Balance to AOL in full on or before the scheduled
payment dates, the security agreements granted by the Company and its affiliate,
Zi Corporation of America, Inc., to AOL would then be terminated and the Company
released from any obligation to pay to AOL the Default Payment Amount.

The injunction under the Consent Judgement which prohibits
the sale or use in the United States of eZiText refers only to earlier versions
of the Company's eZiText product which are not currently sold or offered for
sale or used by the Company in the United States. This injunction does not apply
to or prohibit the sale or use of such earlier versions of the Company's eZiText
product in countries other than the United States. See Item 4 - Information
on the Company - Intellectual Property Litigation.

In the ordinary course of business, the Company, Tegic and
others seek to protect their intellectual property in various countries and
jurisdictions through administrative proceedings and civil litigation. The
settlement of the Tegic lawsuit dealt only with certain patent infringement
claims in the United States. There can be no assurance that we will be
successful in various challenges we have filed in respect of certain of Tegic's
patent claims outside of the United States. The outcome of any of these
proceedings, if determined adversely, raises the possibility that additional
civil action could follow. See Item 4A - Information on the Company - History
and Development of the Company.

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

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

14

If we are unable to manage future growth effectively, our
business, operating results and financial condition may be materially adversely
affected.

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

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

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

Our success will be dependent, in part, on the performance of
our personnel who develop our technology and manage our business. We have
personnel that we believe are competent in the development of our technology,
services and software related products and have endeavoured to hire and retain
qualified managerial and technology development services people for the
development and expansion of the Zi Technology business. Nevertheless, failure
to retain their expertise or to attract and retain key personnel with necessary
technological and marketing skills, in addition to Mike Donnell, President and
Chief Executive Officer, and Dale Kearns, Chief Financial Officer, could have a
materially adverse effect upon our ability to grow and operate profitably.

Subsequent to December 31, 2002, several key personnel left
the Company, including Gary Kovacs, former President, whose contract expired on
October 15, 2003; Todd Simpson, the Company's Chief Technology Officer, who no
longer serves the Company in the capacity of Chief Technology and has not been
replaced, although he continues to provide consulting services to the business;
and the Company's former Chief Operating Officer, George Tai, who left the
Company in May, 2003. In addition, Michael Lobsinger resigned his position as
CEO, a role now assumed by Mike Donnell, and remains in his capacity as Chair of
the Board.

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

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

- Our global business may be materially adversely affected by:
- political and economic changes and disruptions in the
  countries into which we sell products or have operations;
- limits on repatriation of earnings;
- changes in various regulatory requirements and the cost of
  compliance with a wide variety of laws;
- difficulties in enforcing contracts;
- difficulties in protecting intellectual property
- governmental currency controls;
- export/import controls;
- tariff regulations and other trade barriers;

15

- costs and risks of localizing products for foreign
  countries;
- difficulties in staffing and managing operations in
  multiple locations in many countries;
- greater difficulties in trade accounts receivable
  collection; or
- possible adverse tax consequences.



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

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

Capital Requirements

We require capital to finance the continued growth of
operations. To date, we have financed the majority of our growth largely through
private placements of common shares. As of April 30, 2003, our cash position was
approximately $3 million. Unless and until 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 until December 31, 2004, assuming
stable revenue and absent unexpected costs or expenses. See Item 5 -
Operating and Financial Review and Prospects - Liquidity and Capital Resources.
Thereafter, we may still require additional financing to support our continued
operations. There can be no assurance that sufficient financing will continue to
be available to sustain our operations and growth, to develop new and existing
markets or to complete development of products that fully exploit our owned or
licensed technologies. Failure to obtain adequate additional financing on a
timely basis could have a material adverse effect on our business.

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

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

- dependence on the market acceptance and sales of our
  licensees' products in which eZiText is embedded;
- seasonality of sales of our licensees' products;
- changes in the demand for our technology;
- the introduction or enhancement of products and services by
  us and our competitors and market acceptance of those enhancements or
  products;
- delays in the introduction of products or enhancements by
  us or our competitors;
- the timing of significant orders, delivery and
  implementation of our products;
- the gain or loss of any significant customer;
- changes in our pricing policies or those of our
  competitors;
- the mix of distribution channels through which products are
  sold and the mix of products and services sold;
- the mix of international and North American revenues;

16

- exchange rate fluctuations;
- the timing of any acquisitions and related costs;
- foreign currency exchange rates and general economic
  conditions; and
- legal and other costs associated with defence and
  resolution of patent infringement claims.



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

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



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

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

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

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

17

different and therefore unpredictable relative to US
practice. International litigation is often expensive, distracting and time
consuming. These consequences could be particularly disruptive to us given our
relatively small size of operations and limited resources. Accordingly, any
occurrence of the foregoing could have a material adverse effect on our
business.

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

A significant portion of our revenues and expenses have been, and will likely
continue to be, incurred in currencies other than the Canadian dollar,
principally the U.S. dollar, Hong Kong dollar and Chinese renminbi. Our results
are reported in Canadian dollars. Accordingly, fluctuations in exchange rates
could have a material effect on our results of operations. To date, we have not
engaged in foreign currency exchange rate hedging activities. If we implement
hedging techniques in the future with respect to foreign currency transactions,
there can be no assurance that we will be successful in such hedging activities.
Conversion of the Chinese renminbi to other currencies is subject to approval by
the government of China. Foreign exchange gains or losses for the past three
years have been: a loss of $224,272, a gain of $42,088 and a gain of $1,601,573
in each of 2003, 2002 and 2001, respectively.

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

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

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



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

Further, the per share value of common shares held by our
existing Shareholders will 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, cash equivalents and short-term investments. Acquisition financing may not
be available on acceptable terms, if at all.

We may not be able to realize value from our investments in
Oztime and Magic Lantern Group.

18

We have significant investments in two e-Learning businesses,
our wholly-owned subsidiary, Oztime, and Magic Lantern Group, Inc., an
AMEX-listed company of which we own approximately 45% of its outstanding shares.
During 2003 we determined to concentrate on our core Zi Technology business
unit. In order to effect this strategy, we have considered the monetization of
the e-Learning investments, consistent with maximization of value to the Company
and our shareholders. Market and industry conditions may limit our ability to
achieve these goals. Furthermore, we may be required to invest additional
resources in order to preserve their value. There can be no assurance that we
will be able to realize value from our affiliates.

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

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

Item 4 - Information on the Company

A.     History and Development of the
    Company

Our head and principal office is located at Suite 2100, 840 -
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 National 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. In
June, 1990, we changed our name to Multi-Corp Inc. and thereafter changed our
name to Zi Corporation in June, 1997.

From 1993 to 1997, we were active in pursuing opportunities
in the telecommunications industry, purchasing and ultimately disposing of
several privately held companies involved in the telecommunications business. In
one of these acquisitions, we acquired all of the shares in the capital of Miami
International Gateway, Inc. ("MIG"), a US-based company engaged in the
telecommunications business. The MIG acquisition cost was $1,775,967, of which
$339,475 was paid in cash and 350,000 common shares at a deemed price of $3.95
per share. In March, 1997, we sold all of the shares in MIG to Custom Technology
Communication, a private Florida based company. From 1994 to 1998, we provided
limited translation services from our office in Hong Kong for Chinese-to-English
and English-to-Chinese using the translation capability of the Chappell/Yates
Translation Technology described below. We discontinued translation services in
1998.

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

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

19

Acquisition of Input Technology

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

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

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

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

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



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

On December 17, 1997, we acquired full ownership rights to
United States patent number 5,109,352 (the "352 Patent" or the "O'Dell Patent")
which is entitled "System For Encoding A Collection Of Ideographic Characters".
The 352 Patent can be generally described as a computer input system for Chinese
and Japanese characters where the different strokes for composing the characters
are classified into different groups, each identified by a code number. The
string of code numbers representing each character follows exactly a traditional
writing sequence of the character from the very first stroke to the end of the
string of code numbers. The computer usually identifies the character before the
entire writing sequence is completed. Certain aspects of our eZiText products
are based on the intellectual property covered under the 352 Patent.

On December 25, 2001, Taiwanese patent No. NI139820 was
issued to the Company. In January 2003, Chinese patent ZL99-1-00625.9, "Method
and Apparatus of Chinese Character Text Input," was issued to the Company. These
patents protect the unique implementation of our Chinese language input

20

technology on cellular phones and other wireless devices and, in particular,
protect those combinations of elements which are of particular help to a user in
improving the speed of text creation. The Company was also granted an equivalent
of this patent in Hong Kong as patent number **HK1020216** on
August 22, 2003. In addition, the Company has a number of patent applications
pending in the United States and Europe based on ideographic language input
networks and software utilities which use text as a key part of their operation.



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



Acquisition of Oztime

In October 1999, we acquired all of the shares of 845162
Alberta Ltd. ("845") from Oz New Media Inc. ("ONM") in consideration for 100,000
of our common shares issued from treasury. Immediately prior to this
acquisition, ONM caused the sale, assignment and transfer of the five percent
interest in Beijing Oz Education Network System Co. Ltd. ("Beijing Oz") (a
People's Republic of China joint venture company formed under the People's
Republic of China Foreign-Invested Business Act) held by Beijing Senmo Ltd.
("Senmo") to ONM. ONM subsequently sold, assigned and transferred its resulting
100 percent interest in Beijing Oz to 845, making representations and warranties
to Zi of the validity of such actions. In addition, we also advanced US$375,000
for, and on behalf of, Beijing Oz to pay the balance of the registered capital
investment required under the joint venture contract that was entered into to
form Beijing Oz.

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

In order to address this situation, on July 31, 2001, the
Company caused one of its subsidiaries to incorporate Beijing Oztime Education &
Network Technology Co., Ltd. ("Oztime"), a Wholly Foreign Owned Enterprise
formed under the laws of the People's Republic of China. Since this event, all
substantive business, including product and business development, has been
carried out through this new entity, which is intended to mitigate possible
consequences of the lack of proper Chinese registration of the Company's
interest in Beijing Oz. Beijing Oz is currently inactive and carries on no
business operations in China. We received confirmation in 2003 that Beijing Oz
has now been officially dissolved.

Concurrent with the acquisition, 845 entered into a license
agreement (the "845 License") with ONM under which 845 was appointed as the
exclusive distributor and manufacturer of the following software products in
China, Japan, Korea, Taiwan, Singapore, Malaysia and Thailand (the "Territory"):
(i) Career Options On-Line, an online educational product developed by ONM for
The Alberta Education Career and Technology Studies Curriculum; (ii) English as
a Second Language, an online educational product developed by ONM for the
Chinese market; and (iii) On-Line Webstories for Learning, an online educational
product addressing the language arts grades 3 and 4 literacy curriculum for the
United Kingdom (the foregoing products hereinafter collectively referred to as
the

21

"Products"). Singapore and Thailand are specifically excluded from the
Territory in respect of on-line webstories for learning. ONM granted 845, among
other things, the exclusive right to use, market, promote, distribute, sell,
sublicense, manufacture and modify the products and to use the intellectual
property within the Territory and to bundle the products with other computer
programs of 845. The 845 License is for a term of 50 years.

We and ONM also entered into an option agreement (the
"Option") under which we were granted an irrevocable option to purchase all of
the assets of ONM for a purchase price of US$5,000,000 exercisable at any time
on or before December 13, 1999. We did not exercise the option which has now
expired.

Acquisition of EnglishPractice Inc.

On June 15, 2000, we acquired all of the outstanding shares
of EnglishPractice.com Inc., which subsequently changed its name to
EnglishPractice Inc., on August 8, 2001 ("EPI"), an online content and services
host for English as a Second Language ("ESL") training. EPI was acquired
primarily to complement Oztime's education portal business and provide ESL
content, with the possibility of EPI independently earning revenues based upon a
dotcom business model. We acquired EPI in exchange for $332,220 cash and 250,000
of our common shares. We also agreed to commit up to $1.0 million ("EPI Funding
Commitments") in further funding to assist in achieving certain revenue
milestones. Of the shares we issued as consideration, 80,000 Zi shares were
issued to the EPI founders upon closing and the remainder were escrowed pending
achievement of the revenue milestones. Certain of the EPI founders were retained
as employees as part of the acquisition.

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

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

In late 2001, the EPI operations were moved from Calgary to
share offices with Oztime in Beijing and EPI's technology and business has been
integrated into Oztime's business plan. See Item 4 - Information on the
Company - B. Business Overview.

22

Intellectual Property Litigation

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

|(i)  | Asian Communications Pty Ltd., and Tegic
    Communications, Inc. v. Zi Corporation and Zi Corporation of America, Inc.Pursuant to a Complaint for Patent Infringement filed on March 21, 2000
    in the United States District Court in and for the Northern District of
    California, Asian Communications Pty. Ltd. ("Asian Communications") and
    Tegic alleged that the Company and its affiliate, Zi Corporation of America,
    Inc.("Zi America") infringed certain Tegic patents in the United States (
    the "Tegic Lawsuit"). The Company defended this lawsuit.                                                                                                                                                                                                                                                                                                                                                 
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | On February 21, 2002, the District Court granted a
    summary judgement order which held that the Company's then current
    version 4.5 eZiText product for alphabetic languages did not infringe the
    Tegic patents in this lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The trial in this action was held in August, 2002. On
    September 4, 2002, the jury in this lawsuit found that certain earlier
    versions of the Company's eZiText product infringed Tegic's US patents and
    awarded Tegic US$9 million in damages ( the "Damages Award") At a post-trial
    hearing held on November 8, 2002, the presiding trial judge in this lawsuit
    upheld the jury's damages verdict and denied the Company's motions to
    invalidate Tegic's US patents and to set aside the Damages Award.                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The Company settled all claims in this lawsuit with AOL
    by a written settlement agreement dated December 6, 2002. As part of the
    settlement, a Consent Judgement was entered on December 20, 2002. The
    settlement of this lawsuit deals with patent infringement claims in the
    United States. The settlement in relation to the US Restricted Versions of
    eZiText prohibits the sale or any use of such products by the Company in the
    United States only. The sale, use and licensing of such versions of the
    Company's eZiText product by the Company and its affiliates in countries
    other than the United States is not affected. The ability of the Company and
    its affiliates to sell, license and make use of its current eZiText product
    (versions 4, 5 and higher) in all countries of the world, including the
    United States, is not limited or restricted by the settlement.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(ii) | Asian Communications Pty. Ltd. and Tegic
    Communications, Inc. v. Zi Corporation (Hong Kong) Ltd. The Company was
    also served with a Writ of Summons filed on March 30, 2000, by Asian
    Communications and Tegic in the High Court of the Hong Kong Special
    Administrative Region Court of First Instance seeking, among other things, a
    declaration that one of the plaintiffs' patents is valid and that the same
    has been infringed by Zi. A Statement of Claim dated May 10, 2000 was
    subsequently served on the Company. We are defending this lawsuit and filed
    a Defence and Counterclaim. To date, to the best of the Company's knowledge,
    no further action or proceeding has been undertaken in this lawsuit by
    either party.                                                                                                                                                      

Dispositions and Discontinued Operations

Telecom Technology Corporation Limited

On July 22, 2000, we acquired all of the outstanding shares
of Telecom Technology Centre, Limited ("TTC"), an engineering and design
services provider in exchange for $4,744,771 in cash. The acquisition cost was
offset by TTC's cash position of $1,931,435. As a result of this acquisition, we

23

added over 30 Hong Kong based telecom technology engineers with the ability to
develop and produce customized solutions for BluetoothTM
applications, Wireless Access Protocol (WAP) and VoIP.

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

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

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

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

The Magic Lantern Group of Companies

On March 19, 2002, Zi acquired MagicVision Media Inc. ("MagicVision"),
a company formed by the senior management of Magic Lantern Communications Ltd.
("Magic Lantern") and its primary holding, Magic Lantern, together with Magic
Lantern's 100 percent interest in Tutorbuddy Inc. ("Tutorbuddy") and 75 percent
interest in Sonoptic Technologies Inc. ("Sonoptic") (collectively referred to as
the "Lantern Group"). The Government of New Brunswick owns 25 percent of
Sonoptic. Zi acquired MagicVision by issuing 100,000 common shares of Zi (35,000
of these shares which were subject to performance escrow based on revenue
targets being achieved and have since been cancelled) and paying approximately
$2.5 million to subscribe for shares of MagicVision. Of these subscription
proceeds, $1.85 million was used to facilitate the buyout by MagicVision of
Magic Lantern and its subsidiaries from the previous owners. The remainder of
the subscription proceeds were used principally to pay the fees of an advisor
retained by MagicVision and to pay a portion of MagicVision's legal fees. The
founders and key employees of the Magic Lantern group of companies were
retained. Magic Lantern was acquired to give Zi a North American based company
with which to leverage its relationships in China and capitalize on our Oztime
e-learning investment.

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

Subsequent to the closing, it was learned that MLG's
then-controlling shareholder, an affiliate of Michael Lauer and several funds
known as the Lancer Group, on an undisclosed basis, had acquired what was
subsequently disclosed to be a 49.3% interest in Zi. There is no material impact
on the

24

financial statements of Zi as a result of the sale of the Lantern Group,
to what is now known to be a related party, since no gain was recognized on the
disposition of the Lantern Group.

Acquisition of Zi Shares by the Lancer Funds

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

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

The court appointed receiver (and party in control with
respect to the Lancer Funds under creditor protection; collectively referred to
herein as the "Receiver") filed an initial report on September 8 in the U.S.
District Court in Florida, noting, among other things, that numerous substantial
investment position discrepancies had been identified in many of the funds'
holdings. The Receiver remained uncertain of the funds' ownership interest in
many of those portfolio companies, including the Company. The initial report
also disclosed that the Receiver could apply to the court for abatement of its
obligation to make regulatory filings with the U.S. Securities and Exchange
Commission or other appropriate agencies. The Company offered assistance to the
Receiver to determine the extent of the Lancer Fund holdings in the Company,
including the provision of copies of its shareholder records.
On December 3, 2003, a statement of beneficial ownership on Schedule 13D was
filed by the Receiver with the SEC. According to the Schedule 13D, the receiver
reported that it owned, through four Lancer entities, 19,407,364 common shares
of the Company, or approximately 49 percent of the total issued and outstanding
common shares of the Company.

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

The following is an excerpt from the Schedule 13D:

"The purpose of the appointment of the Reporting Person
    as Receiver was to administer and hold the assets of the Receivership
    Entities. In the course of the administration of the assets of the
    Receivership Entities, the Reporting Person has hired an investment manager
    and has charged its investment manager generally with the task of proposing
    strategies for maximizing

25

the net present value obtainable from the assets
    of the Receivership Entities over the next five years. The Reporting Person
    currently does not intend to dispose of a substantial portion of the Common
    Stock of the Issuer held by the Receivership Entities in the public markets.
    The Reporting Person may from time to time seek to sell or transfer a
    limited amount of the Common Stock of the Issuer held by the Receivership
    Entities in the public markets based on its evaluation of the business
    prospects of the Issuer and upon other factors, including but not limited
    to, general economic and business conditions and stock market conditions."The Receiver has charged its investment manager generally with the task
    of proposing strategies for maximizing the net present value obtainable from
    the assets of the Lancer Entities over the next five years and currently
    does not intend to dispose of a substantial portion of the Common Stock of
    the Company in the public markets."

Principal Capital Expenditures and Divestiture

During the years ended December 31, 2000, 2001, 2002, 2003
and up to April 30, 2004 our principal capital expenditures were as follows:



Amount of Expenditure (Divestiture)Description of Expenditure
    To April 30, 2004
    2003
    2002
    2001
    2000Capitalized Software Development
   
    Costs
    $3,380
    $67,451
    $978,161
    $7,796,943
    $4,626,449Acquisition of Oztime
    Nil
    Nil
    Nil
    Nil
    NilAcquisition of English Practice
    Nil
    Nil
    Nil
    Nil
    $2,158,652Acquisition of Telecom
    Technology 
   Center, Limited
    Nil
    Nil
    Nil
    Nil
    $4,744,771Acquisition of Magic Lantern
    Nil
    Nil
    $2,525,149
    Nil
    NilComputer & office equipment
    $ 854
    $ 1,410
    $1,060,012
    $1,192,244
    $1,989,221






During the years ended December 31, 2000, 2001, 2002, 2003
and up to April 30, 2004 the Company did not have any significant capital
divestitures other than the disposition in 2002 of the Magic Lantern Group of
Companies as previously described and its accumulated capital investment of
$3,498,602.

See Item 18 - Financial Statements - Note 4 for a
detailed description of the acquisitions.

In 2004 the Company's principal capital expenditures in
progress are Software Development Costs. The Company expects these expenditures
will be incurred primarily in Canada.

B. Business Overview

Zi in General

The business of our Company is organized as follows.

The principal business unit of the Company is the Zi
Technology business unit in which our core eZiText business is carried on. Our
core technology product, eZiText, and its companion application, eZiTap, are
predictive text input solutions that predict words and/or phrases for use in
messaging and

26

other text applications in over 40 languages and dialects. By
offering word candidates as text is being entered, eZiText increases the ease,
speed and accuracy of text input on any electronic device for applications such
as short messaging, e-mail, e-commerce and Web browsing.

In addition to our Zi Technology business unit, we hold two
separate investments in e-Learning. As discussed above in Item 4A - History
and Development of the Company, we hold a substantial minority equity
interest in MLG which owns and operates the business of the Magic Lantern Group
of Companies in the e-Learning field in North America. We also hold a 100%
equity interest in Oztime which includes EnglishPractice and carries on business
activities in the e-Learning field in Asia and integrates the business
activities of EnglishPractice in North America. Together, these investments in
e-Learning business provide e-Learning technology, content and customer service
as well as educational content and distribution channels to offer learning
management systems, interactive online courses and network education solutions
to meet diverse client requirements.

Zi Technology Business Unit

Description of eZiText and eZiTap

Although eZiText can be used in over 40 written languages, it
was initially developed in an effort to resolve the problem of inputting
ideographic-based languages, such as Chinese, into a computer or other
electronic device with an alphanumeric keyboard. The following example
illustrates how eZiText Chinese is applied to resolve this challenge and
illustrates how the principles of eZiText Chinese can also be applied to
alphabet-based languages.

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

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

eZiText has evolved. In addition to offering completed
characters, eZiText 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.

27

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

eZiText can now be used in the following languages: Arabic,
Chinese (PRC, Hong Kong and Taiwan), Croatian, Czech, Danish, Dutch, English
(British, American and Asian), Finnish, French (European and Canadian), German,
Greek, Hebrew, Hindi, Hungarian, Indonesian, Italian, Japanese, Korean, Malay,
Norwegian, Polish, Portuguese (European and Brazilian), Romanian, Russian,
Serbian, Slovak, Slovenian, Spanish (European and Latin American), Swedish,
Tagalog, Thai, Turkish, Ukrainian and Vietnamese. Although we are constantly
updating and maintaining our language databases, we have ceased to actively
develop further linguistic databases on the basis that our language database
portfolio now covers the majority of commercially feasible languages. We develop
new languages databases only upon specific customer request or definitive market
requirements.

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
intuitively language-enabled. eZiText technology is distributed through
licensing agreements.

In 2003, Zi released new versions of eZiText and eZiTap to
deliver additional benefits to the user, device manufacturer and network
operator. For the user, new features deliver increased text input speed and more
opportunities for personalized text entry. For a device manufacturer, additional
memory efficiencies, software enhancements and new man-machine interface (MMI)
capabilities support learning and prediction with less memory. For a network
operator, improved text entry speed and capabilities promote more utilization of
services such as short messaging, multi-media messaging, web-browsing and more.

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

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

In 2002, Zi announced its development of a network-based
platform that enables the integration of wireless communication devices with the
network called eZiNet. In 2003, the Company focused the majority of its effort
on the development and expansion of its core products, eZiText and eZiTap, and
did not undertake significant incremental effort to develop or license eZiNet.

28

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

Licensing of eZiText

As of April 30, 2004, Zi has entered into licenses with
approximately 103 licensees who are typically original equipment manufacturers
to embed eZiText into their respective products. These licensees include among
others, cellular phone manufacturers, set-top box manufacturers and personal
digital assistant manufacturers.

To the best of our knowledge, approximately 45 licensees have
completed implementation of eZiText to date on at least one of their respective
products. The majority of our revenues are derived from licensing agreements. In
addition to licensing of our technology, we have also entered into various
strategic alliances to expand the reach of our technology. In 2003, we derived
approximately 94 percent of our total revenue from eZiText licensing fees and
royalties. The majority of our eZiText customers are OEMs for cellular
telephones. The majority of licensees pay us, among other fees, a royalty fee
for every unit upon which eZiText is embedded. The royalty amount varies from
customer to customer and varies in accordance with unit volumes produced by the
licensee. Since cellular phones are consumer products, our revenues are subject
to seasonality associated with cellular phone sales and are highly dependent on
the market presence, marketing prowess, manufacturing and distribution
capabilities of the OEMs, and consumer acceptance and demand for our licensees'
finished cellular telephone product. In the year ended December 31, 2003, two
customers, Kyocera Corporation and LG Electronics Inc., accounted for 26 percent
of our total revenue.

Investment in Oztime

Our Oztime subsidiary represents our investment in China's
e-Learning market. Oztime was organized by the Company in July 2001 following
our acquisition of the business of Oztime in 1999 by our acquisition of Beijing
Oz. See Item 4 - Information on the Company - Acquisition of Oztime. In
the past 12 months, Oztime has refined its business focus, transformed its
senior management team to better address the development of its evolving
businesses, and has integrated EnglishPractice as part of its business. Based in
Beijing with over 50 employees, Oztime currently focuses on the development of
3 main business areas:

Learning Management System ("LMS")

Building Online Courseware

29

English Teaching on the Internet

Oztime's clients for its current products include the
People's Liberation Army, National Statistics Bureau, Zhejiang Electric, Hainan
High Court and Legend. Oztime is focused on expanding this client list in each
of its three business areas.

Oztime's business strategy is to focus development of its
three business areas and, based on the quality of its product and approach to
e-Learning, establish Oztime as a dominant e-Learning brand in China.

Oztime's business is subject to the laws and regulations
governing the PRC. The Internet industry is heavily regulated in China. The
State Council and Ministry of Information Industry periodically promulgate
regulations related to the Internet to address public policy considerations.
There can be no assurance that the Chinese government will not attempt to
regulate on-line education programs or educational content. Such regulation may
have an adverse effect on Oztime and our business.

The Company is actively seeking to divest its interest in
Oztime, consistent with achieving value for the Company and its shareholders.

Investment in MLG

The Company holds a 45% interest in MLG which holds the Magic
Lantern Group of companies. The primary operating company in the Magic Lantern
Group, Magic Lantern Communications Ltd. ("Magic Lantern"), was founded in 1975
and is a distributor of educational content, primarily distributing videos to
educational institutions. Magic Lantern has exclusive distribution rights to
over 300 film producers representing over 14,000 titles, and its customers
include 9,000 of 12,000 English schools in Canada, Canadian Learning Television,
TV Ontario and History Television. Magic Lantern's subsidiary, Tutorbuddy Inc.,
is an Internet based content delivery service that aims to provide content and
related educational services on demand to students, teachers and parents. Magic
Lantern holds a 75 percent interest in Sonoptic Technologies Inc. and the
Government of New Brunswick holds the remaining 25 percent interest in Sonoptic.
Sonoptic provides high quality, state-of-the-art digital video encoding services
and has developed a proprietary video base indexing software that allows users
to easily and quickly aggregate, bookmark, e-sort and add their own comment
boxes to pre-existing content.

The Company intends to monetize its interests in MLG, as
market conditions permit, to focus on its Zi Technology business unit.

30

Geographic Segments

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



Revenue(4)License and implementation fees
    Software and 
    other
    Total
    Operating
 profit (loss)
    Identifiable 
    assets2003
    Canada(1)
    $ 5,034,099
    $ 19,709
    $ 5,053,808
    $ (4,248,186)
    $10,836,288China(2)
    4,616,417
    914,349
    5,530,766
    (86,256)
    1,618,342USA(3)
    3,906,814
    
    3,906,814
    1,045,494
    991,352Other
    
    
    
    (230,829)
    198,075Total
    $13,557,330
    $ 934,058
    $14,491,388
    $ (3,519,777)
    $13,644,0572002
    Canada(1)
    $ 3,634,538
    $2,573,660
    $ 6,208,198
    $(20,312,686)
    $13,491,016China
    2,146,176
    463,375
    2,609,551
    (9,987,175)
    2,059,054USA(3)
    4,385,848
    -
    4,385,848
    290,298
    2,449,365Other
    -
    -
    -
    86,7497)
    264,478Total
    $10,166,562
    $3,037,035
    $13,203,597
    $(30,877,060)
    $18,263,9132001
    Canada(1)
    $ 2,777,720
    $41,443
    $ 2,819,163
    $(7,450,808)
    $30,650,257China
    1,303,993
    206,908
    1,510,901
    (1,155,851)
    15,820,841USA(3)
    1,022,436
    -
    1,022,436
    (2,662,962)
    624,304Other
    26,404
    -
    26,404
    (2,316,818)
    804,277Total
    $ 5,130,553
    $ 248,351
    $ 5,378,904
    $(13,586,438)
    $47,899,679




Notes:

|(1) | The actual geographic markets for the products
    licensed under licensing agreements between OEMs and Zi Corporation of
    Canada, Inc. are in Asia and Europe.                                                                                                                                                                                                                                                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(2) | Other product revenue recorded by the Company is mainly comprised
    of revenue for the e-Learning business segment.                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(3) | The actual geographic markets for products licensed
    under licensing agreements between OEMs and Zi Corporation of America, Inc.
    are in Asia and the United States.                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(4) | The Company discontinued the operations of its Zi
    Services business unit in December 2002. Revenues of Zi Services for 2002
    and 2001 were $239,308 and $852,864 respectively. Operating losses of Zi
    Services for 2002 and 2001 were $9,077,079 and $7,957,967, respectively.
    Identifiable assets of Zi Services for 2002 and 2001 were $nil and
    $7,373,128 respectively. All Zi Services revenues, operating losses and
    identifiable assets would be included in China's geographical segment.

31

C.     Organizational Structure

The following table lists our subsidiaries as of April 30,
2004. Unless otherwise indicated, Zi, or one of its subsidiaries, owns
100 percent of the outstanding shares of the subsidiary.



Name of Subsidiary
    Country of IncorporationMulti-Corp International Ltd.
    BarbadosZi Corporation of Canada, Inc.
    CanadaZi Corporation of America, Inc.
    USAAsia Translation &
    Telecommunications Limited
    Hong KongZi Corporation (H.K.) Limited
    Hong KongHuayu Zi Software Technology
    Limited.(1)
    Hong KongHuayu Zi Software Technology
    (Beijing) Co., Ltd.(2)
    ChinaEnglishPractice Inc.
    Canada845162 Alberta Ltd.
    CanadaBeijing Oztime Education &
    Network Technology Co., Ltd.
    ChinaZi Oztime Corporation Ltd.
    BermudaZi (Bermuda) Corporation Ltd.
    BermudaZi Technology Corporation Ltd.
    BermudaTelecom Technology Corporation
    Limited
    Hong KongMagic Lantern Group, Inc.(3)
    USA






Notes:

|(1) | Zi Corporation (H.K.) Limited holds eighty-five
    percent (85%) of Huayu Zi Software Technology Limited. The balance of
    fifteen percent (15%) is held by China Huayu (Hong Kong) Limited, a third
    party investor.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                            
|(2) | Huayu Zi Software Technology (Beijing) Co., Ltd., is
    wholly owned by Huayu Zi Software Technology Limited.                                                                                                             
|    |                                                                                                                                                                                                                            
|(3) | Zi Corporation holds forty-five percent (45%) of
    Magic Lantern Group, Inc.                                                                                                                                             

D. Property, Plant and
    Equipment

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



Location
    Purpose
    Owned or leased
    Approximate square footageCalgary, Alberta
    Corporate head office and
    engineering office
    Lease expires June 30, 2007
    13,348 sq ftWalnut Creek, California(1)
    North American sales office
    Rental license
    300 sq ftHong Kong, SAR
    Asia Pacific sales and
    engineering office
    Lease expires August 31, 2004
    1,988 sq ftBeijing, PRC
    PRC sales and engineering office
    Lease expires March 31, 2005
    4,994 sq ftBeijing, PRC
    Oztime office
    Lease expires September 14, 2004
    8,138 sq ft




Note:

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

32

We believe our facilities are adequate for our operations and
have no plans to add facilities during 2004.

Item 5 - Operating and Financial
Review and Prospects

A.     Operating Results

Executive Summary of Results of Operations



For the years
    ended December 31 (thousands except per share amounts)
    
    2003
    
    2002
    
    2001Revenue
    $
    14,491
    $
    13,204
    $
    5,379Gross Margin
    
    13,888
    
    11,576
    
    3,739Net loss from
    continuing operations
    
    (4,392)
    
    (31,169)
    
    (12,264)Discontinued
    operations
    
    -
    
    (9,077)
    
    (7,958)Net loss
    $
    (4,392)
    $
    (40,247)
    $
    (20,222)Total assets
    $
    13,644
    $
    18,264
    $
    47,900Net loss per
    share from continuing operations - basic and diluted
    $
    (0.11)
    $
    (0.83)
    $
    (0.33)Net loss per
    share - basic and diluted
    $
    (0.11)
    $
    (1.07)
    $
    (0.54)Outstanding
    shares, weighted average
    
    38,720
    
    37,767
    
    37,191Outstanding
    shares, end of period
    
    39,372
    
    37,914
    
    37,545






Zi develops intelligent interface solutions to enhance the
usability of mobile and consumer electronic devices. The Company's embedded
software products make electronic devices such as mobile phones, personal
digital assistants, voice over internet protocol phones and television set-top
boxes easier to use in 41 unique language databases. The Company's core
technology products, eZiText and eZiTap, are predictive text input solutions
that permit easy input of words on small form factor devices that have limited
keypads such as a mobile phone. The Company's products predictively complete
words and automatically learn new user-created personal language. By
predictively offering word candidates as text is being entered, eZiText and
eZiTap significantly increase the ease, speed and accuracy of text input on
electronic devices for applications such as short messaging, e-mail, e-commerce,
Web browsing, and similar applications in almost any written language



At December 31, 2003, Zi has signed 98 license agreements
with customers. Zi's eZiText and eZiTap customers are predominately original
equipment manufacturers (OEMs) and original design manufacturers (ODMs) and
include licensees such as Sony Ericsson, Samsung, LG Electronics, Sanyo,
Alcatel, Kyocera, Fujitsu, UTStarcom, Ningo Bird, TCL and DBTel. Substantially
all of the Zi-enabled devices have been sold in the Asian market. With the
progressive development of smart phones in the wireless industry, there is
increasing adoption of Zi technologies for these data centric devices in both
Asia and other parts of the world.



In addition to its core Zi Technology business, Zi's
e-Learning investments include its wholly owned subsidiary, Oztime and a 45
percent equity interest in MLG. Oztime is a leading e-Learning provider in
China, combining technology, content and customer service for Chinese
organizations, enterprises and individuals. MLG is a Canadian based provider of
educational video and video streamed content.

33



Zi made a number of important operating and marketing gains
in its Zi Technology business in 2003. Zi continued to sign important licensing
agreements with key customers, develop alliance relationships with key wireless
industry players and expand into other geographic markets and industry segments.



Zi expanded into the rapidly growing Chinese Handyphone
System (PHS) market with market leaders such as UTStarcom, Sanyo, Fujitsu
I-Network Systems and China Putian's subsidiary, ChinaYoutong. The Company
expanded its penetration into the mobile phone space and also made strides into
the North American market with handset introductions with leading innovators
such as Samsung and Kyocera.



Zi also grew the Company's presence and reach by expanding
its partnership community by signing several alliance agreements in 2003.
Through new alliances, Zi can expand the reach of its product suite through
third party integrations into handset manufacturers. Two examples of this
include the launch of an eZiTap front end processor (FEP) for the Symbian
platform and the pre-integration of Zi's products as standardized text input
interfaces in Wavecom's Open MMI software development kit. These relationships
with key industry players are important as the handset supply chain is rapidly
changing and consolidating to address the handset manufacturers' need for more
complete solutions and faster time-to-market.



On the product front, Zi further advanced the development of
its core technologies with the roll-out of Version 6 of eZiText and Version 2 of
eZiTap to customers and new licensees around the world. Zi collaborated with
customers, focusing Version 6 development efforts on delivering enhanced
languages and end user functionality while reducing overall memory requirements.
Zi also concentrated on improving customer service by deploying additional
technical support, tools and documentation to shorten the implementation time of
products and to reduce customers' engineering efforts. Zi expanded the
distribution channel of product offerings with the introduction of a
downloadable version of the eZiTap application for Sony Ericsson's product line
of P800 and P900 smart phones.



Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and
results of operations for the three years ended December 31, 2003, 2002 and
2001, should be read in conjunction with the Consolidated Financial Statements
and related notes in this report. The effects on net loss arising from
differences in generally accepted accounting principles between Canada and the
United States are outlined in note 17 to the Consolidated Financial Statements.

The Company's accounting principles are described in note 3
of the notes to the Consolidated Financial Statements in Item 18. The Company
prepares its Consolidated Financial Statements in accordance with US GAAP. The
preparation of the Company's financial statements requires the use of estimates
and judgements that affect its reported amount of assets, liabilities, revenues
and expenses. On an ongoing basis, the Company evaluates its estimates,
including those related to asset impairment, revenue recognition, contingencies
and litigation. These estimates are based on information that is currently
available to the Company and on various other assumptions that it believed to be
reasonable under the circumstances. Actual results could vary from those
estimates under different assumptions and conditions.

The Company has identified the following critical accounting
policies that affect the more significant estimates and judgements used in
preparation of its Consolidated Financial Statements.

34

Going Concern Basis

The Company's audited 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. The Company has incurred operating
losses on a recurring basis. On December 19, 2003, the Company borrowed US$1.0
million through the issuance of a demand note payable on terms described in note
8 to the Company's audited Consolidated Financial Statements. At present, Zi has
not arranged replacement financing to repay the note and there can be no
assurance that Zi will be successful in its efforts to complete such
refinancing. On December 6, 2002 the Company settled a judgment in favour of
Tegic Communications Inc. ("Tegic"), a division of AOL Time Warner ("AOL") as
discussed in note 13 to the Company's audited Consolidated Financial Statements.
Under the terms of the settlement agreement, the Company, among other things, is
obliged as at December 31, 2003, to pay a final instalment of US$750,000 which
was paid on January 2, 2004.

Continuing operations are dependent on the Company achieving
profitable operations in the coming year, being able to refinance its
borrowings, pay the remaining scheduled payment due under the settlement
agreement with AOL and increase revenue and achieve profitability. The Company's
audited Consolidated Financial Statements do not include any adjustments to the
amounts and classifications of assets and liabilities that may be necessary
should the Company be unable to raise additional capital to meet the repayment
of the note payable, increase revenue and continue as a going concern.

Software Development Costs

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

Revenue Recognition

The Company recognizes revenue when it is earned and realized
in a manner consistent with interpretations in Staff Accounting Bulletin No. 104
of the U.S. Securities and Exchange Commission as further described in note 3 to
the audited Consolidated Financial Statements. Revenue from licensed software is
recognized in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition."

Under software licensing arrangements, the Company recognizes
revenues provided that: a 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

35

obligations exist. Any revenue associated with contracts
having multiple elements is deferred and recognized rateably over the period of
the contract unless clear evidence exists with respect to the fair value of each
separate element of the contract. In addition, contracts involving significant
modifications or customization of the software sold are accounted for under the
guidelines of contract accounting.

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

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

Stock-based Compensation Plan

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

The Company has a stock-based compensation plan, which is
described in note 10 to the Company's 2003 audited Consolidated Financial
Statements. Any consideration paid by employees on exercise of stock options or
purchase of stock is credited to share capital. If stock or stock options are
repurchased from employees, the excess of the consideration paid over the
carrying amount of the stock or stock option cancelled is charged to retained
earnings.

Under SFAS No. 123, as amended by SFAS No. 148, "Accounting
for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123", companies that elect a method other than the fair value
method of accounting are required to disclose pro forma net loss and loss per
share information, using an option pricing model such as the Black-Scholes
model, as if the fair value method of accounting had been used.

Discontinued Operations

Through the Company's discontinued Zi Services business
segment, Zi provided specialized product development and customized solutions in
BluetoothTM, VoIP and man-machine interface design to the
telecommunications industry.

On June 30, 2002, the Board of Directors of the Company
approved the adoption of a plan to dispose of its Zi Services business segment,
the telecom engineering division of the Company operated by TTC. Accordingly,
the results of operations of these businesses were accounted for on a
discontinued basis as at June 30, 2002. On July 1, 2002, the Company announced
that it had signed a letter of intent to sell Zi Services. On October 31, 2002
the letter of intent expired and the sale was not executed. Management
determined that the carrying value of Zi Services, consisting of deferred
software development costs of $3,289,922, goodwill of $753,140, capital assets
of $54,734 and net current

36

assets of $335,727 were no longer recoverable. As a result,
the Company recognized a charge of $4,433,523 in 2002. As at December 31, 2002,
the Company has sold the remaining assets of this business segment and no longer
carries on any related business activities.

Net Loss

In 2003, the Company significantly reduced its net loss to
$4.4 million from $40.2 million in 2002. Contributing factors to the
year-over-year decrease in the net loss were the absence of discontinued
business segments and write-offs associated with impairment of intangible assets
and litigation and judgement settlement costs as experienced in 2002. This was
also accomplished by the continued focus on the Company's core Zi Technology
business segment with added emphasis on reducing selling, general and
administration costs ("SG&A") and research and development costs.

In 2002, the financial impact of the loss at trial under the
patent infringement suit required the Company to assess its ability to fund an
appeal of the jury verdict, as well as its other businesses and investments.
Consequently, included in the net loss of $40.2 million is provision for net
losses in the aggregate amount of $24.9 million in respect of VoIP and Bluetooth
technology business (our former Zi Services business segment) and Oztime, legal
fees and judgment settlement costs.

Results from Continuing Operations

The continued growth of Zi's customer base and the increase
in licensees' models delivered to market has resulted in an increase in revenue
from our core technology business of 33 percent to $13.6 million over 2002
revenue of $10.2 million. Revenue from all segments increased 10 percent to
$14.5 million from $13.2 million in 2002. Excluding 2002 revenue from Magic
Lantern Communications Ltd. ("Magic Lantern") of $2.5 million, which was
divested in November 2002, the year over year increase is $3.8 million or 36
percent. The increase is primarily due to Zi's growing customer base with 69
customers contributing to revenue compared to 47 in 2002 and 45 of these
customers paying royalties in 2003 compared to 30 in 2002.

Revenue from continuing operations for 2002 rose to
$13.2 million, increasing 145 percent from $5.4 million in 2001. The increase is
due primarily to the increase in size of the Company's eZiText customer base,
with 30 licensees paying royalties in 2002, compared to 14 in 2001, and revenue
associated with operations of Magic Lantern acquired in 2002 and included as
part of Zi's e-Learning business segment from the date of acquisition in March
2002 until its sale in November 2002.

The net loss from continuing operations for 2003 was $4.4
million compared to $31.2 million in 2002. Loss per share from continuing
operations was $0.11 in 2003 compared to $0.83 in the prior year. This decrease
was accomplished by the continued focus on the Company's core Zi Technology
business segment with added emphasis on reducing SG&A and research and
development costs. Other contributing factors to the year over year decrease in
the net loss from continuing operations were the absence of write offs
associated with impairment of intangible assets of $4,269,857 and litigation and
judgement settlement costs of $10.8 million as experienced in 2002.

The net loss from continuing operations for 2002 was
$31.2 million compared to $12.3 million in 2001. Loss per share from continuing
operations was $0.83 in 2002 compared to $0.33 in the prior year. The increase
in net loss from continuing operations was largely due to $11.8 million in legal
fees and litigation settlement costs, impairment of goodwill of $2 million,
impairment of deferred software development costs of $2.4 million and higher
losses from e-Learning investments.

37

Revenue

Revenue from continuing operations rose $1.3 million to
$14.5 million in 2003, or 10 percent over 2002. License and implementation fees
rose $3.4 million to $13.6 million in 2003, or 33 percent over 2002. Other
product revenue of $0.9 million relates to our e-Learning business segment and
has decreased by $2.1 million over 2002 due to the disposition of Magic Lantern
in November 2002. By adjusting other product revenue for 2002 to exclude $2.5
million related to Magic Lantern, other product revenue rose $0.4 million or 83 percent
to $0.9 million in 2003. This increase is attributable to an increase in Oztime
customer contracts.

License and implementation fees reflect royalties earned from
45 eZiText licensees in 2003, compared to 30 licensees in the same period a year
earlier. During 2003, 182 new handset models embedded with eZiText were released
into the market, bringing the total at December 31, 2003, to 398 compared to 216
a year earlier

The Company has increased its market penetration and is
reducing its dependence on the Asian market through the increasing usage of
eZiText by our customers on new devices introduced into the North American and
European markets.

In 2002, revenue from continuing operations rose $7.8 million
to $13.2 million, or 145 percent over 2001. License and implementation fees rose
$5 million to $10.2 million in 2002, or 98 percent over 2001. Other product
revenue, including $2.5 million from MLG, rose $2.8 million to $3 million in
2002.

License and implementation fees reflect earned royalties from
30 eZiText licensees in 2002, compared to 14 in the same period a year earlier.
During 2002, 154 new handset models embedded with eZiText were released into the
market, bringing the total at December 31, 2002 to 216 compared to 62 a year
earlier.

In 2001, revenue from continuing operations decreased
$1.1 million or 17 percent from 2000. License and implementation fees decreased
$1.1 million or 18 percent over 2000. Other product revenue remained unchanged
over the prior year. License and implementation fees reflect revenue from
14 licensees, compared to three a year earlier.

Cost of Sales and Gross Margin

In 2003, gross margin from continuing operations increased
$2.3 million to $13.9 million, or 20 percent over the 2002 level. Cost of sales
includes the allocation of research and development expenditures associated with
projects carried out to modify existing products to meet specific customer
requirements. As a percentage of revenue from continuing operations, gross
margin from continuing operations increased to 96 percent from 88 percent in
2002.

Gross margin from license and implementations fees in 2003
remained unchanged at 96 percent of revenue from 2002. This is due to the fact
that in both years more of the revenue was royalty based as opposed to services
based. This reflects the increased royalty-generating eZiText implementations on
handset models now penetrating the market and the fact that, implementations
have a higher cost of sales than royalties generated through our licensees.

In 2002, gross margin from continuing operations increased
$7.8 million to $11.6 million, or 210 percent over the 2001 level. As a
percentage of revenue from continuing operations, gross margin from continuing
operations increased to 88 percent from 70 percent in 2001.

38

Gross margin from license and implementations fees in 2002
increased to 96 percent of revenue from 72 percent of revenue in 2001. This was
due to the fact that in 2002 more of the revenue was royalty based as opposed to
services based. This reflected the increased royalty-bearing eZiText
implementations on handset models penetrating the market and the fact that
implementations have a higher cost of sales than license fees. This increase was
partially offset by a lower gross margin as a percentage of revenue attributable
to Magic Lantern than is attributed to Zi Technology software.

In 2001, gross margin from continuing operations decreased
$1.5 million or 29 percent from the level in 2000. As a percentage of revenue,
gross margin decreased to 70 percent from 81 percent in 2000.

Selling, General and Administrative ("SG&A") Expenses

SG&A from continuing operations decreased $6.5 million or
36 percent to $11.4 million in 2003 over 2002. The decrease is partially
attributable to the reduction of $3.2 million realized through the disposal of
Magic Lantern operations in November 2002. As well, SG&A decreased due to the
continued efforts by management to rationalize operations to effect a more
competitive and profitable structure and by concentrating resources on the
Company's core technology business.

SG&A from continuing operations increased $7.6 million or
75 percent to $17.8 million in 2002 over 2001. The increase was partially
attributable to SG&A of $3.2 million from the acquired Magic Lantern operations.
As well, SG&A increased due to severance costs from downsizing of operations
throughout 2002, higher sales commissions and withholding taxes and allowance
for potentially uncollectible customer accounts.

SG&A from continuing operations increased $4.1 million or
66 percent to $10.2 million in 2001 from $6.2 million in 2000. The increase in
SG&A was due to a concerted effort to increase marketing activities in Japan,
Sweden and the United States.

Legal

Legal costs for 2003 decreased $10.6 million to $1.2 million
in 2003 over 2002. The decrease in legal fees is related primarily to the
settlement in 2002 of the patent litigation as discussed in note 13 "Contingent
Liabilities" to the Company's December 31, 2003 audited Consolidated Financial
Statements.

Legal costs for 2002, as discussed in note 13 "Contingent
Liabilities" to the Company's December 31, 2003 audited Consolidated Financial
Statements, increased $8.7 million to $11.8 million in 2002 over 2001.

During 2001, legal costs increased $1.4 million to
$3.1 million compared to the previous year. The increase in legal costs was
related primarily to the patent litigation as discussed in note 13 "Contingent
Liabilities" to the Company's December 31, 2003 audited Consolidated Financial
Statements.

Product Research and Development Expense

Product research and development expense from continuing
operations decreased to $2.9 million in 2003 from $4.4 million in 2002. Product
research and development costs relate to the development of new, but not yet
commercialized products and to the ongoing cost of development and enhancement
of products that are already in the market and available for sale.

39

In 1999, eZiText was in the early stages of its life cycle
and substantially all development costs were deferred. In 2000, the Company
continued to refine and develop eZiText, and certain costs related to eZiText
were expensed to reflect the maintenance and upgrade nature of the expenditure.
In 2001, 2002 and 2003 this trend continued.

In the Oztime business unit, all of the product research and
development costs prior to 2001 were expensed. In 2001, Oztime achieved the
critical milestone of proving technical feasibility and commercial viability
through customer acceptance of its technology and commenced deferral of product
development costs. At September 30, 2002, as a result to the unfavourable
litigation outcome, the Company determined that recovery of these costs was
uncertain and recorded a $2.3 million provision for impairment of all
capitalized costs within Oztime.

Product research and development expense from continuing
operations rose to $4.4 million in 2002 from $1.0 million in 2001. In 2001,
product research and development expense from continuing operations decreased
$1.6 million or 61 percent from 2000, primarily as a result of deferral of
product research and development costs related to Oztime.

Depreciation and Amortization

Depreciation and amortization from continuing operations
decreased in 2003 by $2.0 million or 51 percent to $1.9 million from
$3.8 million in 2002. The decrease is due to the decrease in the remaining
unamortized eZiText related deferred software development costs and decreased
depreciation related to unamortized leasehold improvements. In 2002,
depreciation and amortization from continuing operations was $3.8 million, an
increase of $0.8 million or 26 percent from the level in 2001. The increase was
due to increased amortization of eZiText® and Oztime related deferred software
development costs.

In 2001, depreciation and amortization from continuing
operations was $3.1 million, a decrease of $0.5 million or 14 percent from the
level in 2000.

Impairment of Goodwill

In 2002, as a result of the unfavourable litigation outcome,
the Company determined that recovery of goodwill related to Oztime was uncertain
and recorded an impairment charge of $2 million.

Impairment of Intangible Assets

In 2002, as a result of the unfavourable litigation outcome,
the Company determined that the recovery of deferred software development costs
related to Oztime was uncertain and recorded an impairment charge of
$2.3 million.

Interest and Other Income

The reduction in interest income to $33,685 in 2003 from
$0.3 million in 2002 is due to the Company's overall net cash indebtedness
throughout most of 2003. Cash resources were used to meet ongoing operating cash
usage requirements and to repay outstanding debt obligations.

The reduction in interest income to $0.3 million in 2002 from
$1.6 million in 2001 was due to lower interest rates on lower cash balances. In
2002, interest rates earned on funds on deposit and other liquid investments
ranged between one and three percent.

40

The reduction in interest income to $1.6 million in 2001 from
$3.3 million in 2000 was due to declining interest rates on lower cash balances.
Interest rates earned on funds during 2000 were in the range of five to six
percent. In 2001, interest rates dropped to a low of 2.5 percent.

Interest Expense

Other interest expense increased $0.5 million to $0.9 million
reflecting interest paid and financing fees amortized on a note payable of
US$3.3 million until its refinancing on May 7, 2003, and on US$1.9 million until
June 20, 2003, after which it was repaid. Interest on long-term debt from
continuing operations in 2003 represents interest on capital lease obligations.
These obligations relate to the purchase of computer and communications
equipment.

Interest on long-term debt from continuing operations in 2002
included $0.1 million of interest on debt owed by Magic Lantern. In 2002, other
interest expense from continuing operations included the amortized portion of a
deferred financing cost of US$0.3 million and interest expense both related to a
note payable of US$3.3 million outstanding at December 31, 2002.

Interest on long-term debt from continuing operations in 2001
represents interest on capital lease obligations.

Income Tax Expense

As an international company subject to income tax rates in
different countries, Zi's consolidated effective tax rate is the blend of
varying rates on pre-tax profits and losses in several tax jurisdictions.
Utilization of previous years' tax loss carryforwards, changes in income sources
and applicable rates result in fluctuations in the effective tax rate. In 2003,
2002 and 2001, Zi incurred losses for tax purposes, the benefit of which has not
been reflected in these financial statements. A valuation allowance equivalent
to the full value of the future tax assets of $18.8 million is reflected in note
13, to the Company's audited Consolidated Financial Statements.

Zi has tax loss carryforwards of approximately $65.2 million,
which can be applied against future years' taxable income in their respective
jurisdictions. Taxable income earned by Zi's foreign subsidiaries is subject to
the Canadian foreign affiliate rules. For Canadian companies, there is no
additional Canadian income tax on repatriated profits from active business
operations in countries with which Canada has a tax treaty.

Net Loss from Continuing Operations

Zi's net loss from continuing operations decreased to
$4.4 million in 2003 from $31.2 million in 2002. The decrease in loss of
$26.8 million was due to:

- $6.5 million decrease in SG&A costs;
- $10.6 million decrease related to legal expenditures;
- $1.4 million decrease in product research and development
  expense;
- $2.0 million increase in depreciation and amortization;
- $2.0 million decrease due to no impairment of goodwill
  charge;
- $2.3 million decrease due to no impairment of intangible
  assets charge;
- $0.3 million decrease due to no loss from equity of
  significantly influenced company, and;
- $2.3 million increase in gross margin, offset by;
- $0.3 million increase in interest expense, and;
- $0.3 million decrease in interest income.



41

Zi's net loss from continuing operations increased to
$31.2 million in 2002 from $12.3 million in 2001. The increase in loss of
$18.9 million was due to:

- $7.6 million increase in SG&A costs, which included
  $3.2 million as a result of the acquisition of Magic Lantern operations;
- $8.7 million increase related to legal expenditures;
- $3.4 million increase in product research and development
  expense;
- $0.8 million increase in depreciation and amortization;
- $2.0 million impairment of goodwill charge;
- $2.3 million impairment of intangible assets charge;
- $0.5 million increase in interest expense;
- $1.3 million decrease in interest income, and;
- $0.3 million equity in net loss of significantly influenced
  company, offset by;
- $7.8 million increase in gross margin, and;
- $0.2 million decrease in income taxes.



Zi's net loss from continuing operations increased to
$12.3 million in 2001 from $5.4 million in 2000. The increase in loss of
$6.9 million was due to:

- $4.1 million increase in SG&A costs;
- $1.4 million increase in legal costs;
- $1.7 million decrease in interest income;
- $0.1 million increase in interest expense;
- $0.2 million increase in income taxes;
- $1.5 million decrease in gross margin, offset by; and
- $1.6 million decrease in product research and development
  expense;
- $0.5 million decrease in depreciation and amortization.



Impact of Inflation and Changing Prices

Inflation is not a major factor affecting continuing
operations.

Foreign Currency

The foreign operations of the Company are translated into
Canadian dollars for financial statement presentation. Consequently, movements
in exchange rates may have a significant impact on financial results.
Substantially all of the Company's product revenues are denominated in US
dollars while expenses are denominated in Canadian dollars, Hong Kong dollars,
US dollars and Chinese renminbi. Based on the 2003 distribution of revenues and
cash flows, a one percent change in the Canadian dollar relative to the US
dollar is estimated to affect revenues by $136,000 and expenses by $37,000.

Impact of Governmental Policies and Other Factors on
Operations and Investments

We operate primarily in Canada, the United States of America,
China and Hong Kong. The market for the Company's products includes all of the
developed and many of the less developed countries in the world. Accordingly
changes in governmental trade, fiscal and other policies could have an impact on
sales and on the ability of the Company to transfer funds and/or manage foreign
operations.

42

B.     Liquidity and Capital Resources

Financial Condition and Liquidity

At December 31, 2003, Zi had cash and cash equivalents of
$3.1 million. The objective of Zi's investment policy for funds is to preserve
capital and maintain short-term liquidity while earning reasonable investment
returns.

At December 31, 2002, Zi had cash and cash equivalents of
$5.3 million. The objective of Zi's investment policy for funds is to preserve
capital and maintain short-term liquidity while earning reasonable investment
returns.

Cash Requirements Outlook

During the past three years, our cash requirements have been
met through revenues from operations, proceeds from issuance of common shares,
private placements and the exercise of common share purchase warrants and
options. See Item 18 - Financial Statements.

Net cash utilized by the Company in 2003 was $1.7 million.
The principal uses of funds were to pay instalments due under a litigation
settlement and fund the Company's e-Learning business segment.

The Zi Technology business segment that offers the eZiText
product operates at a positive cash flow level while maintaining a modest level
of investment in future technology initiatives.

Capital requirements in 2004 include debt repayment, a final
payment under the AOL settlement and costs to carry Oztime.

At current revenue and expense levels, including maintaining
current discretionary expense levels for research and development and marketing
expenses, the Company is able to fund its continuing operations and meet its
current obligations.

While cash generated from operations and our existing cash
resources are adequate to meet our current liquidity needs, we have been
evaluating potential acquisitions and expansion opportunities, which, if
successful, will require additional capital. We have been engaged in discussions
with investment banking firms and institutional investors regarding potential
financing. Our financing efforts to date have been hampered by the investment
community's concern over the potential impact on our company of the substantial
ownership of our shares by the receiver for the Lancer group of funds. While we
have been in discussions with the receiver and his advisors to reach an
agreement to ameliorate these concerns, there can be no assurance that we will
be able to reach such an agreement or that we will be able to attract needed
growth capital on acceptable terms.

On December 19, 2003, the Company borrowed US$1.0 million
through the issuance of a demand loan payable. The note payable has an interest
rate of prime plus one percent payable monthly. The loan is secured by a first
security interest in 5,000,000 shares of MLG, held by the Company.

On December 6, 2002, the Company settled a judgment in favour
of AOL, as discussed in note 13, "Contingent Liabilities" to the Company's
December 31, 2002, audited Consolidated Financial Statements. Under the terms of
the settlement agreement, the Company was obliged to pay a further
US$1.5 million by way of three installments between June 2003 and January 2004.
The Company was successful in paying these instalments in accordance with the
payment schedule and AOL has returned the security instruments it held pursuant
to the settlement agreement.

43

Operating Activities

Cash applied to operations in 2003 decreased to $2.5 million
from $20.3 million in 2002. The $17.8 million year over year decrease in cash
applied to operations was due to the decrease in net loss, adjusted for non-cash
items of $2.7 million and by $0.8 million of cash used from non-cash working
capital.

In 2003, non-cash working capital used $0.8 million in cash.
This was due to the decrease in accounts payable at December 31, 2003, of
$1.4 million and increase in accounts receivable by $0.8 million partially
offset by an increase in deferred revenue of $0.6 million and a decrease in work
in progress and prepaid expenses of $0.8 million. The decrease in accounts
payable relates to accrued settlement and representation costs, the increase in
accounts receivable relates to a higher volume of revenue in the fourth quarter
of 2003 over the same quarter of the prior year.

Cash applied to operations in 2002 increased to $20.3 million
from $7.8 million in 2001. The $12.5 million year over year increase in cash
applied to operations was due to the increase in net loss, adjusted for non-cash
items of $9.0 million and offset by $1.9 million of cash generated from non-cash
working capital. Cash applied to operations in 2001 increased to $7.8 million
from $2.9 million in 2000. The $4.9 million year over year increase in cash
applied to operations was due to the increase in net loss, adjusted for non-cash
items of $3.0 million, offset by $1.4 million of cash generated from non-cash
working capital.

In 2002, non-cash working capital generated $1.9 million in
cash. This was due to the increase in accounts payable at December 31, 2002 of
$3.6 million partially offset by an increase in accounts receivable of
$1.7 million. The increase in accounts payable relates to accrued settlement and
representation costs, the increase in accounts receivable relates to a higher
volume of revenue in the fourth quarter of 2002 over the same quarter of the
prior year.

In 2001, non-cash working capital generated $1.4 million in
cash. This was due to the increase in deferred revenue of $0.6 million at
December 31, 2001. The deferred revenue at December 31, 2001, relates primarily
to prepaid annual maintenance fees for eZiText licensees.

Financing Activities

The Company has financed its operating and investing
activities during the last three years principally as follows:



Year
    Method of financing
    Amount2003
    issuance of common shares
    pursuant to a private placement and exercise of stock options
    $ 4.0 millionissuance of demand note payable
    $ 1.3 million2002
    issuance of a note payable and
    issuance of common shares pursuant to exercise of stock options
    $ 6.2 million2001
    issuance of common shares
    pursuant to exercise of stock options
    $ 2.6 million






Investing Activities

In 2003, cash generated from investing activities was
$0.5 million, as compared to $4.1 million in 2002. Excluding short-term
investments, cash used in investing activities decreased $5.0 million from

44

$4.5 million cash used in investing activities in 2002 to
$0.5 million cash generated in investing activities in the current year.

In 2002, cash generated from investing activities was
$4.1 million, as compared to $13.6 million used in investing activities in 2001.
Excluding short-term investments, cash used in investing activities was
$4.5 million in 2002 compared to $5 million in the prior year.

In 2001, cash used in investing activities was $13.6 million,
as compared to cash generated from investing activities of $0.6 million in 2000.
Excluding short-term investments, cash used in investing activities was
$5.0 million in 2001 compared to $5.6 million in the prior year.

The decrease of $5.0 million in 2003 over 2002 cash used in
investing activities is due to no acquisitions or dispositions of subsidiaries'
related activity in 2003 and decreased investment in software development and
capital assets as compared to 2002 activity.

The decrease of $0.5 million in 2002 over 2001 cash used in
investing activities is due to a $2.4 million increase in acquisitions and
dispositions of subsidiaries and a $0.5 million increase in the purchase of
capital assets, offset by a $3.3 million decrease in software development costs
and a $0.1 million decrease in other deferred costs.

In 2002, $0.2 million of the deferred software developments
costs related to eZiText as compared to $1.9 million in 2001. In 2001,
$1.9 million of the deferred software development costs related to eZiText
compared to $4.6 million in 2000.

Deferred software development costs related to Oztime
decreased to $0.4 million in 2002 from $2.6 million in 2001. Deferred software
development costs related to Oztime increased from nil in 2000 to $2.6 million
in 2001. In Oztime, software development costs related primarily to Oztime's
proprietary Learning Management System.

Long Term Debt and Capital Lease Obligations

Zi has no long-term debt or long-term liabilities other than
capital lease obligations at December 31, 2003. During 2002 and 2001, we entered
into Canadian dollar leases for computer equipment with payment terms over three
years. The obligation, including the current portion, totalled $32,977 at
December 31, 2003. The future minimum lease payments under the capital leases
are as follows:



2004
    $
    30,9792005
    
    4,444Total minimum lease payments
    
    35,423Amount representing interest
    
    2,446Amount included in current
    liabilities
    
    28,647$
    4,330






Financial Instruments

At December 31, 2003, Zi had cash, cash equivalents and
short-term investments of $3.1 million. Surplus funds are held primarily in US
dollars and are converted into Canadian dollars, Hong Kong dollars and Chinese
renminbi as required by the head office and operating divisions in those
countries. The Controller, in consultation with the Chief Financial Officer and
within the objectives of the

45

Company's investment guidelines, is responsible for
the day-to-day management of surplus funds. The objectives of Zi's investment
policy for surplus funds are to preserve capital and maintain short-term
liquidity while earning reasonable investment returns.

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

The Company has no off-balance sheet financing arrangements.

Capital Expenditure Commitments

Our operations are people intensive and only require limited
capital expenditures to support the productive enterprise of its staff. This
includes offices, furniture and equipment, primarily computers. Most of this
equipment is purchased as required and does not require long order times.

C.     Research and Development,
    Patents and Licenses, etc.

The Company's intellectual property may be grouped into the
following product areas: (1) text entry and other user interface components and;
(2) educational products and corporate materials. It includes patents,
copyrights, trademarks, domain names and trade secrets (people, technical
know-how and documents). Historically most of Zi's research and development
activity was dedicated to text input technology.

Research costs are expensed as incurred. Development costs
incurred prior to the establishment of the technological and financial
feasibility of a project are expensed as incurred. Software development costs
are capitalized when the technological and financial feasibility of a project is
established. These costs are subsequently amortized using the straight-line
method over the related product's estimated economic life.

Expenditures for research and development costs, including
deferred software development costs and research and development expenses
including software development costs for our former Zi Services business unit,
and for acquired IP during the past three years are as follows (in thousands of
Canadian dollars):



R & D2003
    $
    3,0082002
    $
    7,3002001
    $
    11,500






Research and development expenditures will depend upon our
available capital resources during the year ending December 31, 2004, and will
primarily relate to our research and development efforts on our eZiText
technology. We may also expend additional resources on research and development
of related or complementary technologies, although we have no current plans to
do so.

46

D. Trend Information

Revenues and Expenses

For the years ended December 31, 2003, 2002 and 2001 our
revenue by geographical market and category consisted of:



Revenue(3)License and implementation fees
    Software and
 other
    Total2003
    Canada(1)
    $ 5,034,099
    $19,709
    $ 5,053,808China
    4,616,417
    914,349
    5,530,766USA(2)
    3,906,814
    -
    3,906,814Total
    $13,557,330
    $934,058
    $14,491,3882002
    Canada(1)
    $ 3,634,538
    $2,573,660
    $ 6,208,198China
    2,146,176
    463,375
    2,609,551USA(2)
    4,385,848
    -
    4,385,848Total
    $ 10,166,562
    $ 3,037,035
    $ 13,203,5972001
    Canada(1)
    $ 2,777,720
    $ 41,443
    $ 2,819,163China
    1,303,993
    206,908
    1,510,901USA(2)
    1,022,436
    -
    1,022,436Other
    26,404
    -
    26,404Total
    $ 5,130,553
    $ 248,351
    $ 5,378,904




Notes:



|(1) | The actual geographic markets
    for the products licensed under licensing agreements between OEMs and Zi
    Corporation of Canada, Inc. are in Asia and Europe.                                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                      
|(2) | The actual geographic markets for products licensed
    under licensing agreements between OEMs and Zi Corporation of America, Inc.
    are in Asia and the United States.                                                                                           
|    |                                                                                                                                                                                                                                                                      
|(3) | The Company discontinued the operations of its Zi
    Services business unit in December 2002. Revenues of Zi Services for 2002
    and 2001 were $239,308 and $852,864 respectively. All Zi Services revenues
    would be included in China's geographical segment.

The growth in commercialization of Zi's technology in its
core eZiText related business generated a 33 percent increase in revenue over
that in 2002. License and implementations fees rose $3.4 million to
$13.6 million in 2003. The increase is primarily due to Zi's growing customer
base with 69 customers contributing to revenue compared to 47 in 2002 and 45 of
these customers paying royalties in 2003 compared to 30 in 2002.

Zi's technology generated a 98 percent increase in revenue
from continuing operations in 2002 over that in 2001. License and implementation
fees rose $5 million to $10.2 million in 2002. The increase is due primarily to
the increase in size of our eZiText customer base through increased global
demand, with 47 licensees contributing to revenue in 2002, compared to
34 licensees in 2001 and 30 of these customers paying royalties in 2002 compared
to 14 in 2001. We expect that customer applications will

47

to continue to increase through the growth in global demand
but be partially offset by an industry wide trend of decreasing per unit royalty
amounts.

In 2001, revenue from continuing operations decreased
$1.1 million or 17 percent from 2000. License and implementations fees decreased
$1.1 million or 18 percent from 2000. Other product revenue remained unchanged
over the prior year. The increase was primarily due to the increase in size of
our eZiText customer base, with 34 licensees contributing to revenue in 2001,
compared to 22 in 2000 and 14 of these customers paying royalties in 2001
compared to three in 2000.

This revenue comes from our OEM customers. The majority of
our Zi-enabled products have been sold in Asia and Europe. Many of our new OEM
customers' and existing OEM customers' products are now being sold outside of
Asia including being sold into the North American market. As more of our
customers' products enter the marketplace, we anticipate this trend to continue
with respect to our eZiText product line.

In 2003, gross margin from continuing operations increased
$2.3 million to $13.9 million, or 20 percent over the 2002 level. As a
percentage of revenue from continuing operations, gross margin from continuing
operations increased to 96 percent from 88 percent in 2002. Gross margin from
license and implementations fees in 2003 remained unchanged at 96 percent of
revenue from 2002. This is due to the fact that in both years more of the
revenue was royalty based as opposed to services based. This reflects the
increased royalty-bearing eZiText implementations on handset models now
penetrating the market and the fact that, implementations have a higher cost of
sales than royalties generated through our licensees continued implementations
of eZiText® on their devices. The Company anticipates this trend to continue
with respect to our eZiText product line.

SG&A from continuing operations decreased $6.5 million or
36 percent to $11.4 million in 2003 over 2002. The decrease is partially
attributable to the reduction of $3.2 million realized through the sale of Magic
Lantern operations in November 2002. As well, SG&A decreased due to the
continued efforts by management to rationalize operations to affect a more
competitive and profitable structure and by concentrating resources in the
Company's core technology business.

Prior to 2003, our SG&A costs had increased year over year
for the prior three years. SG&A from continuing operations increased
$7.6 million or 75 percent to $17.8 million in 2002 over 2001. The increase is
partially attributable to SG&A of $3.2 million from the acquired Magic Lantern
operations. As well, SG&A increased due to severance costs from downsizing of
operations throughout 2002, higher sales commissions and withholding taxes and
allowance for potentially uncollectible customer accounts. SG&A from continuing
operations increased $4.1 million or 66 percent to $10.2 million in 2001 from
$6.2 million in 2000. The increase in SG&A was due to a concerted effort to
increase marketing activities in Japan, Sweden and the United States.

As a result of the reductions that we have made in SG&A
costs, we anticipate that the Company will continue to keep these costs at or
near current year levels. Zi believes that it now has an operating structure and
cost base that will support further revenue growth without significant expense
increases. This means that even though we may need to invest additional
resources at times to meet specific revenue opportunities, as we generate
incremental revenue it will have an increasingly positive impact on future
operating results.

Product research and development expense from continuing
operations decreased to $2.9 million in 2003 from $4.4 million in 2002. Prior to
2003, our product research and development expenses had increased over the prior
three years. As eZiText matures, we anticipate continued investment into

48

developing enhanced and related new technologies provided
that capital resources are available to further finance those product research
and development activities. We anticipate that our research and development
spending will moderately increase over the 2003 level depending on the
availability of capital and resources required by specific revenue generating
opportunities.

Depreciation and amortization from continuing operations
decreased in 2003 by $2.0 million or 51 percent to $1.9 million from
$3.8 million in 2002. The decrease is due to the decrease in the remaining
unamortized eZiText related deferred software development costs and decreased
depreciation related to unamortized leasehold improvements. Prior to 2003,
depreciation and amortization from continuing operations increased in 2002 by
$0.8 million or 26 percent to $3.8 million from $3.0 million in 2001. Given the
decrease in deferred costs and capital assets, we anticipate that our
depreciation and amortization expense will continue to decrease in 2004.

In 2003, the Company significantly reduced its net loss to
$4.4 million from $40.2 in 2002. This was accomplished by the continued focus on
the Company's core Zi Technology business segment with added emphasis on
reducing SG&A and research and development costs. For the three years prior to
2003, our net loss had increased year over year. We anticipate that in 2004, the
Company will continue to reduce its losses and approach achieving our goal of
becoming profitable. We anticipate that an increase in sales combined with
relatively level SG&A expenditures, declining depreciation and moderate
increases in product research and development costs will assist in the
achievement of this trend in 2004.

Capturing Opportunities in the Wireless Market

Growth in wireless markets has been driven by a number of
factors including increased competition, lower pricing, greater geographic
coverage and the emergence of feature rich products. Carriers and manufacturers
have traditionally competed largely on price, but we believe this is changing as
technologies improve and market participants examine new ways to increase
margins and expand market share through product differentiation. The current
shift from voice to data communications is expected to accelerate over the next
few years creating opportunities for industry participants to offer a broader
range of services. The expansion of Zi's global operations was financed through
a private placement of $36.8 million completed in February 2000.

Enabling Interactivity Globally

As manufacturers work to expand market share they are
increasingly targeting global markets. Success in these markets requires a high
degree of localization and personalization. Zi is providing OEMs and Original
Design Manufacturers ("ODMs") with software for mobile handset devices that
allow them to compete successfully. Securing a broad customer list that includes
many of the industry's most respected players gives us the opportunity to build
on our leading position as a supplier to mobile handset manufacturers and expand
into other wireless devices.

Korea continues to be one of the key global manufacturing
centres for mobile devices for both domestic consumption and export. In 2003, we
continued to expand our relationships with our Korean customer base to introduce
increasing numbers of Zi technology enabled devices worldwide. Examples include
LG Electronics and Samsung: LG Electronics introduced over six CDMA device
models embedded with eZiText for Chinese markets. Samsung introduced the i-500
smart phone with Palm OS for the US market. And we continued to sign licensing
agreements with new Korean manufacturers such as Codacom, Axess Telecom and
Westech.

49

China is a core manufacturing centre for domestic consumption
and is also emerging as an exporter for Europe and the Americas in the near
future. In 2003, local Chinese manufacturers experienced exponential growth over
foreign nationals competing in the same market, and as a key technology provider
Zi was a part of this. Examples of Chinese manufacturers introducing Zi
technology enabled devices in the Chinese market include: CEC, Haier, Amoisonic,
Ningbo Bird and HiSense. Zi's extensive language expertise positions the company
to support Chinese OEMs' plans to expand internationally. New Chinese customers
in 2003 include UTStarcom China, Goldwiz, Chitwing and NGT.

Zi is gaining market acceptance in Europe through the
licensing of technologies to Spain based Vitelcom and Israeli based Alphacell.
Vitelcom is manufacturing devices for the European and Latin/South American
markets while Alphacell is targeting the United Kingdom and their domestic
market.

An increasing number of our customers are now introducing Zi
technology enabled products to the commercial market. At year end 2003, 45 out
of our 98 licensees introduced devices and paid Zi royalties, a significant
increase over the 30 licensees paying royalties in 2002. During 2003, 182 new
handset models embedded with Zi technology were released into the market,
bringing the total to 398 at 2003 year end compared to 216 in the prior year.
Examples of customers releasing products include Samsung, LG Electronics,
Alcatel, Kyocera, Capitel, Amoisonic, Ningbo Bird, VK Corp, Haier, Lenovo,
HiSense, Konka, TCL Mobile, UTStarcom and ZTE.

Zi enabled devices have been introduced in the markets of
every major continent around the world. In 2003, a new device model with our
technology embedded was introduced approximately every two days.

Litigation/ Indemnification

We describe the legal actions undertaken by the Company in
protecting its intellectual property and our risks relating to indemnification
of its intellectual property pursuant to our licensing agreements under Item 8 - Financial Information - Legal Proceedings.

We have not determined whether we will be required to
indemnify Alcatel and Ericsson with respect to these patent infringement claims.
Both patent infringement claims relate to our eZiText technology, our principal
product..In 2003, the Company derived approximately 15 percent of its
total revenues from licenses with Ericsson and Alcatel. In the event Zi's
eZiText technology is found to infringe on the patents of others in these legal
proceedings, the Company's revenues would be adversely affected.

Zi has also undertaken considerable expense in actively
protecting its intellectual property and defending against alleged infringement
claims by Tegic. Zi has incurred substantial costs related to patent
infringement litigation in the sum of $394,000 for 2003 for the defence of such
claims (in 2002, Zi incurred costs of $10.8 million of which approximately $7.1
million was for settlement costs).The US$9.0 million damages judgment
award to Tegic was settled pursuant to a written settlement agreement with AOL
dated December 6, 2002, and a consent judgement (the "Consent Judgment") dated
December 20, 2002. Settlement costs were included as part of legal and
litigation costs as at December 31, 2002, including US$0.75 million (the
"Outstanding Balance"), which was paid on January 2, 2004. See Item 5 -
Operating and Financial Review and Prospects - Operating Results.

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

50

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.

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

E.     Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet
arrangements at December 31, 2003.

F.     Tabular Disclosure of
    Contractual Obligations

The obligation, including the current portion, totalled
$32,977 at December 31, 2003. The future minimum lease payments under the
capital leases are as follows:



2004
    $
    30,9792005
    
    4,444Total minimum lease payments
    
    35,423Amount representing interest
    
    2,446Amount included in current
    liabilities
    
    28,647$
    4,330






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



2004
    $
    630,8532005
    
    390,2102006
    
    363,3172007
    
    181,6582008
    
    -Total
    $
    1,566,038






G.     Safe Harbour

Not applicable.

51



Item 6 - Directors, Senior Management
and Employees

A.     Directors and Senior Management

Each director is generally elected by a vote at the annual
meeting of shareholders in service for a term of one year. Each executive
officer will serve until his/her successor is elected or appointed by the Board
of Directors or his/her earlier removal or resignation from office. There are no
family relationships between any of our executive officers and our directors.
The following table lists the directors and senior management of the Company
together with their respective positions as of April 30, 2004:



Name
    PositionMichael E. Lobsinger
    Calgary,
    Alberta
    Chairman and DirectorDerrick R. Armstrong(3)
    Calgary, Alberta
    Director and SecretaryRod Love(2)
    Calgary, Alberta
    DirectorThompson MacDonald(1)(2)(3)
    Calgary, Alberta
    DirectorAngus Michael Roderick Mackenzie(1)(2)
    Englefield Green, Surrey, U.K.
    Director and Director of three Bermuda subsidiariesHoward R. Balloch
    Beijing, PRC
    Director and Chairman of Oztime subsidiaryH. Donald Hyde(1)(2)(4)
    DirectorMike D. Donnell(5)
    President, Chief Executive OfficerDale Kearns
    Chief Financial OfficerGary Mendel
    Dublin,
    California, U.S.A.
    Vice President, Sales and Marketing




Notes:

(1)     Member of the Audit Committee during 2003.

(2)     Member of Compensation Committee during 2003.

(3)     Member of Corporate Governance and Nominating
    Committee during 2003.

(4)     Donald Hyde was appointed to the Board at the Annual
    General Meeting held on June 11, 2003

(5)     Mike Donnell joined the Company as President and
    Chief Operating Officer on July 25, 2002 and was appointed 
          Chief Executive
    Officer effective November 19, 2003.

MICHAEL E. LOBSINGER was the chief executive officer of the
Company from 1993 to November, 2003 and President of the Company from 1993 to
2000. Mr. Lobsinger has been a director of the Company since 1987. Prior to
joining the Company, Mr. Lobsinger was an entrepreneur with experience in real
estate development and the oil and gas industry. Mr. Lobsinger was appointed a
director of Magic Lantern Group, Inc. in November 2002. Effective November 19,
2003, Mr. Lobsinger and the Company agreed that the positions of Chairman of the
Board and Chief Executive Officer would be separated, such that Mr. Lobsinger
would no longer be Chief Executive Officer of the Company but would remain
Chairman of the Board.

52

MIKE D. DONNELL was named President and Chief Operating
Officer of the Company on July 25, 2003 and was appointed as Chief Executive
Officer on November 19, 2003. Mr. Donnell is a veteran of the telecommunications
industry with eighteen years of experience in the business. Prior to joining Zi,
Mr. Donnell held senior positions with such companies as Cellular One, San
Francisco where he was the chief executive officer and PageNet where he was the
president.

DALE KEARNS has been the Chief Financial Officer of the
Company since April 2, 2001. Mr. Kearns is responsible for all financial,
treasury, investor relations, administration and human resources functions
within the Company. Mr. Kearns has over 20 years of professional experience with
publicly traded North American companies, most recently as the senior financial
executive at O&Y Properties Corporation. Mr. Kearns has been a certified
management accountant since 1985.

DERRICK R. ARMSTRONG has been a director and secretary of the
Company since 1993. Mr. Armstrong is a lawyer and partner with Borden Ladner
Gervais LLP, Barristers & Solicitors, practicing primarily in securities and
corporate commercial law. Mr. Armstrong is also a director of Veteran Resources
Inc., and Centurion Energy International Inc., both publicly traded resource
companies.

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

ROD LOVE was elected as a director at the Company's annual
general meeting held in June 2001. Mr. Love has been President of Rod Love
Consulting Inc., since 1998, specializing in strategic planning in political
affairs, communications and organizational change. Mr. Love served as the Chief
of Staff to the Premier of Alberta from 1992 to 1998.

THOMPSON MACDONALD has been a director of the Company since
1993. Mr. MacDonald is a Communications Consultant and has run his own
consulting practice since 1988.

ANGUS MICHAEL R. MACKENZIE was elected as a director at the
Company's annual general meeting held in June, 2001. Mr. MacKenzie has been the
Director General and Managing Partner of Champagne Jacquesson & Fils, Dizy since
1998. Mr. MacKenzie was the Director of Jefferies Pacific Limited, Hong Kong,
from 1994 to 1997 and is the Chairman of Mayfair Cellars Group, London and of
Tasmanian Vineyards Pty. Mr. MacKenzie has served as director of three of our
Bermuda subsidiaries since July 2000 and as director of Magic Lantern Group,
Inc. since November 2002. He is also a Director of The Lindsell Train Investment
Trust PLC since 2000.

HOWARD R. BALLOCH was elected as a director on August 4,
2001. Mr. Balloch served as Canada's Ambassador to China for more than 5 years,
retiring from the Canadian Foreign Service in August, 2001. In August, 2001 he
was also appointed Chairman of Oztime, a subsidiary of Zi Corporation. Mr. Balloch
was appointed a director of Magic Lantern Group, Inc. in November 2002.

GARY MENDEL is the Vice President, Sales and Marketing. Prior
to joining Zi in May 2001, Mr. Mendel had over 12 years senior marketing and
sales management experience in the wireless communications industry. Prior to
joining Zi Corporation. Mr. Mendel was the Senior Director of Marketing and
Sales for the Western US with Sprint PCS. Mr. Mendel holds a Bachelor of Science
from Miami University and a Masters of Business Administration from Baylor
University.

53

B. Compensation

Note: All currency amounts are expressed in Canadian dollars
unless otherwise stated.

(a)     Compensation of Directors

On September 26, 2001, the Compensation Committee
recommended, and the Board approved, remuneration for non-management directors,
effective January 1, 2002, of US$10,000 per annum, payable in bi-annual
instalments on the 1st days of January and July of each year. All travel and
other expenses of directors while conducting business on behalf of the Company
are reimbursed by the Company.

Executive officers of the Company who also act as directors
of Zi, do not receive any additional compensation for services rendered in such
capacity, other than as paid by the Company to such executive officers in their
capacity as executive officers. During the fiscal period ended December 31,
2003, stock options to purchase 260,000 shares were granted to directors of the
Company, not including options granted to Michael E. Lobsinger in his capacity
as Executive Officer of the Company.

(b)     Compensation of Executive Officers

1.       Summary Compensation

The following table sets forth, in accordance with the
Regulations to the Securities Act (Ontario), a summary of compensation
earned during each of the last three fiscal years by the Chief Executive Officer
and the four highest paid executive officers of the Company receiving
remuneration exceeding $100,000 (collectively, the "Named Executive Officers").

54

Summary Compensation Table



Annual Compensation(7)
    Long-Term CompensationAwards
    PayoutsName and principal
    position
    Year
    Salary
    ($)
    Bonus
    ($)
    Other annual compensation
    ($)
    Securities under options/
    SARs granted
    (#)
    Restricted shares or restricted share units
    (#)
    LTIP payouts
    ($)
    All other compensation
    ($)Michael E. Lobsinger(1)
    Chairman
    2003
    2002
    2001
    496,897
    505,960
    456,286
    32,413
    60,000
    75,000
    Note (6)
    Note (6)
    Note (6)
    250,000
    nil
    100,000
    128,571
    nil
    nil
    nil
    nil
    nil
    nil
    nil
    nilGary Kovacs(2)
    President
    2003
    2002
    2001
    304,517
    353,331
    365,230
    55,531
    54,963
    38,727
    Note (6)
    Note (6)
    Note (6)
    150,000
    nil
    100,000
    8,571
    nil
    nil
    nil
    nil
    nil
    nil
    nil
    nilGary Mendel(3)
    Vice
    President, Sales and Marketing
    2003
    2002
    2001
    230,505
    259,110
    157,936
    52,868
    39,259
    nil
    Note (6)
    Note (6)
    Note (6)
    37,500
    10,000
    60,000
    nil
    nil
    nil
    nil
    nil
    nil
    nil
    nil
    nilMike Donnell(4)
    Chief Executive Officer
    2003
    139,431
    nil
    Note (6)
    740,000
    nil
    nil
    nilTodd Simpson(5)
    Chief Technology Officer
    2003
    2002
    2001
    191,975
    200,000
    113,808
    25,000
    15,000
    nil
    Note (6)
    Note (6)
    Note (6)
    100,000
    nil
    120,000
    7,813
    nil
    nil
    nil
    nil
    nil
    nil
    nil
    nil




Notes:

|(1) | On January 1, 2000 Mr. Lobsinger was appointed
    Chairman and Chief Executive Officer of the Company. On November 19, 2003,
    Mr Lobsinger resigned as Chief Executive Officer. In 2003, Mr. Lobsinger
    agreed to defer CDN$220,734 of his 2003 salary, included as part of his
    annual compensation, payable to him under his employment agreement until
    December 31, 2006, unless the directors determined to pay it earlier.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | Gary Kovacs was appointed Vice-President, Sales and Marketing on
    February 21, 2000 and President on October 15, 2000. Mr. Kovacs completed
    his contract October 15, 2003 and is no longer employed by the Company.                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | Gary Mendel was appointed Vice President, Sales and Marketing on
    May 22, 2001.                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Mike Donnell was appointed President and Chief Operating Officer
    on July 23, 2003 and Chief Executive Officer on November 19, 2003.                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(5) | Todd Simpson was appointed Vice President, Product
    Development on April 23, 2001 and Chief Technology Officer on December 6,
    2001. Mr Simpson resigned as Chief Technology Officer on December 12, 2003,
    and is no longer employed by the Company, but continues to provide
    consulting services under a contract.                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(6) | Other annual compensation is less than $50,000 and less than 10%
    of the salary and bonus of the respective Named Executive Officer.                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(7) | For 2003 compensation, all US dollar denominated compensation was
    converted to Canadian dollars at 1.3970, the average conversion rate for
    2003.                                                                                                                                                                                                                                                                                     

2.     Stock Options

The following table sets forth, in accordance with the
Regulations to the Securities Act (Ontario), information in respect of
all stock options granted to the Named Executive Officers of the Company during
the fiscal year ended December 31, 2003.

55



Name
    Securities under Options/SARs granted
    (#)
    % of total Options/SARs granted to employees in financial
    year(1)
    Exercise or base price
    ($/Security)
    Market value of securities underlying Options/SARs on the
    date of grant
    ($/Security)
    Expiration dateMichael E. Lobsinger (2)
    378,571
    16.2%
    Note (2)
    Note (2)
    Note (2)Gary Kovacs (3)
    158,571
    6.8%
    Note (3)
    Note (3)
    Note (3)Gary Mendel(4)
    37,500
    1.6%
    Note (4)
    Note (4)
    Note (4)Mike Donnell(5)
    740,000
    31.6%
    Note (5)
    Note (5)
    Note (5)Todd Simpson(6)
    107,813
    4.6%
    Note (6)
    Note (6)
    Note (6)




Notes:

|(1) | During the fiscal period ended December 31, 2003,
    stock options and RSU's exercisable into a total of 2,342,532 common shares
    were granted to directors, officers, and employees of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(2) | During the year, the Corporation issued the following
    stock options and RSU's to Mr. Lobsinger: options to acquire 50,000 common
    shares at $4.40 expiring January 1, 2006; options to acquire 100,000 common
    shares at $2.56 and RSU's to acquire 28,571 common shares at nil
    consideration, both expiring April 17, 2008; options to acquire 100,000
    common shares at $3.43 and RSU's to acquire 100,000 common shares at nil
    consideration, both expiring June 11, 2008. The market value of common
    shares at the date of the grant was the same as the exercise price for all
    stock options granted in 2003.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | During the year, the Corporation issued the following
    stock options and RSU's to Mr. Kovacs: options to acquire 50,000 common
    shares at $4.40 expiring January 1, 2006; options to acquire 50,000 common
    shares at $2.56 and RSU's to acquire 8,571 common shares at nil
    consideration, both expiring April 17, 2008; options to acquire 50,000
    common shares at $3.43 expiring June 11, 2008. The market value of common
    shares at the date of the grant was the same as the exercise price for all
    stock options granted in 2003.                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(4) | During the year, the Corporation issued the following stock
    options to Mr. Mendel: options to acquire 12,500 common shares at $2.56
    expiring April 17, 2008; options to acquire 25,000 common shares at $3.43
    expiring June 11, 2008. The market value of common shares at the date of the
    grant was the same as the exercise price for all stock options granted in
    2003.                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(5) | During the year, the Corporation issued the following stock
    options to Mr. Donnell: options to acquire 250,000 common shares at $4.94
    expiring July 24, 2008; options to acquire 490,000 common shares at $3.50
    expiring November 17, 2008. The market value of common shares at the date of
    the grant was the same as the exercise price for all stock options granted
    in 2003.                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(6) | During the year, the Corporation issued the following
    stock options and RSU's to Mr. Simpson: options to acquire; options to
    acquire 50,000 common shares at $2.56 and RSU's to acquire 7,813 common
    shares at nil consideration, both expiring April 17, 2008; options to
    acquire 50,000 common shares at $3.43 expiring June 11, 2008. The market
    value of common shares at the date of the grant was the same as the exercise
    price for all stock options granted in 2003.                                                                                                                                          

The following table sets forth, in accordance with the
Regulations to the Securities Act (Ontario), information in respect of
all stock options and RSU's, which were either exercised or not exercised by the
Named Executive Officers during the Company's fiscal year ended December 31,
2003.

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

56



Name
    Securities acquired on exercise
    (#)
    Aggregate value realized(1)
    
    ($)
    Unexercised Options/SARS/RSU's as at December 31, 2003
    exercisable/
    unexercisable
    Value of unexercised
 in-the-Money Options/SARs/RSU's at
    December 31, 2003(2) exercisable/
    unexercisableMichael E. Lobsinger
    nil
    nil
    Exercisable 1,328,571
    Unexercisable nil
    Exercisable 1,156,784
    Unexercisable nilGary Kovacs
    33,571
    77,356
    Exercisable -
    Unexercisable
    nil
    Exercisable nil
    Unexercisable
    nilGary Mendel
    nil
    nil
    Exercisable 107,500
    Unexercisable nil
    Exercisable 8,375
    Unexercisable nilMike Donnell
    nil
    nil
    Exercisable 83,333
    Unexercisable 656,667
    Exercisable nil
    Unexercisable
    nilTodd Simpson
    36,813
    34,868
    Exercisable 191,000
    Unexercisable nil
    Exercisable 14,070
    Unexercisable nil






|    |                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The aggregate of the difference between the market value of the underlying
    securities at the time of exercise and the exercise price.                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                               
|(2) | "In-the-money" options refer to those options in respect of which the market
    value of the underlying security as at the financial year end, exceeds the
    exercise or base price of the option, being the aggregate of the difference
    between the market value of the securities as at December 31, 2003 and the
    exercise price.

3.     Long-term Incentive Plans

The Company currently has no long-term incentive plans, other
than stock options granted from time to time by the Board under the provisions
of the Company's incentive share option plans.

4.     Stock Appreciation Rights and Restricted Shares

No stock appreciation rights were granted by the Company to
the Named Executive Officers of the Company during the last fiscal year ended
December 31, 2003 or since incorporation. In 2003, 162,532 RSU's were granted
and issued without performance criteria attached and at no cost to the grantee.

5.     Stock Option and SAR Repricing

No re-pricing took place during the last fiscal year ended
December 31, 2003 with respect to stock options held by the Named Executive
Officers.

6.     Pension and Retirement Plans and Payments made upon
    Termination of Employment

The Company does not have any pension or retirement plan
which is applicable to the Named Executive Officers other than as described
below. The Company 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 Company, in connection with or related to the
retirement, termination or resignation of such person other than as described in
the succeeding paragraph and the Company has provided no compensation to such
persons as a result of a change of control of the Company, its subsidiaries or
affiliates. The Company 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 in Section 7 below and in the succeeding paragraph.

57

Zi Corporation of America, Inc. ("Zi America") has
established a 401(k) plan for its employees. Two of the Named Executive
Officers, Gary Kovacs and Gary Mendel, are eligible to participate in this
401(k) plan. Gary Kovacs's contract was not renewed upon its expiration on
October 15, 2003. No contributions have been made by Zi America.

7.     Employment Contracts

The Corporation entered into an employment agreement with
Michael E. Lobsinger dated December 31, 1999 for a term that commenced on
January 1, 2000 and ended on December 31, 2002. The agreement provided for an
automatic renewal for a further three years on the same terms and conditions
except for remuneration which is to be renegotiated. Mr. Lobsinger was appointed
Chairman of the Board of the Corporation and Chief Executive Officer. The terms
of the agreement provided that Mr. Lobsinger be paid an amount equal to
US$300,000 per annum plus transportation and travel allowances. Effective May 1,
2003, Mr. Lobsinger agreed to defer each month two-thirds of his remuneration
until a later date, and the Corporation ceased paying Mr. Lobsinger the full
amount of his salary. Effective November 20, 2003 Mr. Lobsinger and the
Corporation agreed that the positions of Chairman of the Board and Chief
Executive Officer would be separated, such that Mr. Lobsinger would no longer be
Chief Executive Officer of the Corporation but would remain as Chairman of the
Board. The Corporation and Mr. Lobsinger entered into an Amending Agreement that
amended the terms of his employment agreement effective November 20, 2003 (the
"Amending Agreement"). (Mr. Mike Donnell became Chief Executive Officer of the
Corporation on that date). Mr. Lobsinger agreed to amend the terms of his
employment to reduce his salary to an annual compensation of CDN$225,000 per
year effective November 20, 2003. In consideration for this pay reduction, the
Corporation agreed that Mr. Lobsinger would be issued 400,000 options and
250,000 RSUs. In addition, as of November 20, 2003, Mr. Lobsinger had deferred
CDN$240,340 in salary payable to him under his employment agreement, which he
agreed to further defer until December 31, 2006, unless the directors determine
to pay it earlier. Mr. Lobsinger agreed to forego any additional options that he
would have been entitled to under his existing employment agreement. Although
his salary was fixed at CDN$225,000 per annum, he continues to defer a portion
of his salary. Under the Amending Agreement, following a change of control Mr. Lobsinger
has the right, exercisable within 60 days of a change of control, to consider
his employment to have been terminated. In the event the Corporation terminates
Mr. Lobsinger's employment (or Mr. Lobsinger elects to treat his employment as
terminated on a change of control) the Corporation is required to pay him an
amount equal to three times his current annual salary and at Mr. Lobsinger's
discretion, an amount equal to the difference between the fair market value of
all options, whether vested or not, and the exercise price. In addition, any
salary amounts deferred by Mr. Lobsinger as of the date of his termination
becomes payable upon such termination.

The Corporation entered into an employment agreement with
Gary Kovacs effective February 21, 2000 for a term to February 21, 2003.
Mr. Kovacs was appointed Vice-President Sales and Marketing, based in San
Francisco, California. The terms of the agreement provided that Mr. Kovacs be
paid US$160,000 per annum. In the event of a change of control of the
Corporation, all options would vest immediately. Mr. Kovacs was required to
execute a Confidentiality and Non-Competition agreement. Effective October 15,
2000 the above agreement was amended to appoint Mr. Kovacs President of the
Corporation, increase his annual salary to US$225,000 and provide a monthly
transportation allowance of US$750, extend the term to October 15, 2003, provide
for a bonus of up to 50% of annual salary, payable in cash and/or options, based
upon the performance of mutually agreed milestones, and, subject to regulatory
approvals, to grant Mr. Kovacs stock options, as detailed below, to purchase
common shares in the capital of the Corporation at a price equal to the market
price of the Corporation's shares on the Toronto Stock Exchange on the date
preceding the date of the grant.

58

Effective October 1, 2000 Mr. Kovacs was granted 200,000
options for a five year term. The amendment provides for the following
additional grants: effective January 1, 2001, 50,000 options; effective
January 1, 2002, 50,000 options; effective January 1, 2003, 50,000 options. The
Corporation and Mr. Kovacs did not renew his contract at October 15, 2003, and
Mr. Kovacs left the employ of the Corporation on that date.

The Corporation entered into an employment agreement with
Gary Mendel effective May 22, 2001. Mr. Mendel was appointed Vice President,
Sales and Marketing of the Corporation. The terms of the agreement provided that
Mr. Mendel be paid US$165,000 per annum and provide for a bonus of up to 50% of
annual salary based upon the performance of mutually agreed milestones, payable
in cash or stock options as follows: 50% to be paid in cash or options at the
discretion of the employee and 50% at the discretion of the reporting manager.
The bonus will be payable bi-annually. Options will be valued based on current
pricing models. The Corporation agreed, subject to regulatory approvals, to
grant Mr. Mendel stock options to purchase 60,000 common shares in the capital
of the Corporation. The Corporation may terminate Mr. Mendel's employment upon
90 days' written notice, or payment of three months base salary. In the event of
a change of control of the Corporation, Mr. Mendel may, at his discretion,
terminate the agreement. In addition, his options will all become immediately
exercisable and he will have 90 days to exercise those options. Mr. Mendel was
required to execute a Confidentiality and Non-Competition agreement.

The Corporation entered into an employment agreement with
Todd Simpson effective April 23, 2001. Mr. Simpson was appointed Vice-President,
Product Development. The terms of the agreement provided that Mr. Simpson be
paid CDN$165,000 per annum. The Corporation agreed, subject to regulatory
approvals, to grant Mr. Simpson stock options to purchase 30,000 common shares
in the capital of the Corporation and upon completion of the first three months
of employment, to grant additional stock options to purchase 30,000 common
shares in the capital of the Corporation. Mr. Simpson was required to execute a
Confidentiality and Non-Competition agreement. Effective December 6, 2001 the
above agreement was amended to appoint Mr. Simpson Chief Technology Officer of
the Corporation, increase his annual salary to CDN$200,000, provide for a term
to December 6, 2004, provide for a bonus of up to 50% of annual salary, payable
in cash and/or options, based upon the performance of mutually agreed
milestones, and, subject to regulatory approvals, to grant Mr. Simpson 60,000
options to purchase common shares in the capital of the Corporation at a price
equal to the market price on the date preceding the date of the grant. On
December 15, 2003, Mr. Simpson resigned his position from the Corporation. Upon
leaving the Company, Mr Simpson received a final payment of $25,769.

The Corporation entered into an employment agreement with
Michael D. Donnell on July 23, 2003 pursuant to which Mr. Donnell was appointed
President and Chief Operating Officer of the Corporation. The terms of the
agreement provided for Mr. Donnell to be paid US$225,000 per annum. The
Corporation may terminate Mr. Donnell's employment upon payment of three month's
salary. The Corporation agreed, subject to regulatory approvals, to grant
Mr. Donnell stock options to purchase 250,000 common shares in the capital of
the Corporation. On November 23, Mr. Donnell was appointed Chief Executive
Officer at which time he was awarded 490,000 options to purchase shares of the
Corporation and his salary increased to US$300,000 per annum. Mr. Donnell has
agreed to defer a portion of the increase in salary to be paid at a later date,
with no terms of repayment having been fixed. Pursuant to Mr. Donnell's
employment contract, in the event of a change of control of the Corporation all
of his options would vest immediately. Mr. Donnell was required to execute a
Confidentiality and Non-Competition agreement.

59

(c)     Plans and Share Options

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

The following summarizes stock option plan activity during
the fiscal years ending December 31, 2000, 2001 and 2002:



2003
    2002
    2001Options outstanding, beginning
    of year
    5,135,700
    5,874,852
    5,486,151Granted
    2,342,532
    306,666
    1,893,498Cancelled
    (1,667,701)
    (741,218)
    (976,114)Exercised
    (335,627)
    (304,600)
    (528,683)Options outstanding, end of year
    5,474,904
    5,135,700
    5,874,852






(d)     Other Compensation

During the Company's fiscal year ended December 31, 2003, the
Company accrued and/or paid legal fees to a law firm of which one of the
directors of the Company is a partner, amounting, in the aggregate, to $154,569.

A management fee was paid by the Company to a consulting firm
owned by a director amounting to $166,773 during the fiscal year ended
December 31, 2003.

The Company has set forth in this report 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 ended December 31, 2003.

C.     Board Practices

(a)     Board of Directors

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

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

Audit Committee

The Audit Committee consists of three members. Mr. Donald
Hyde, who is a chartered accountant in private practice, joined the Board in
June, 2003 and was immediately appointed Chairman of the Audit Committee. Mr.
Hyde was specifically recruited to the Corporation's Board of Directors for his
financial and accounting skills. Other members of the Audit Committee are
Thompson MacDonald and Michael McKenzie, both of whom have public company
experience and are considered financially literate. All members of the Audit
Committee are outside and unrelated directors and independent from

60

any interest in the Corporation. The Committee met four times
in 2003 and all members attended all of the meetings.

The Corporation adopted an Audit Committee charter in June,
2000. The stated purpose of the Audit Committee is to serve as an independent
and objective party to monitor the integrity of the Corporation's financial
reporting process and system of internal controls, to review, appraise and
monitor the independence and performance of the Corporation's independent
auditors and to provide an avenue for open communication among the independent
auditors, management and the Board of Directors. All members of the Audit
Committee must have a basic understanding of finance and accounting and must be
able to read and understand fundamental financial statements. In addition, the
Audit Committee reviews the independence and performance of its auditors and
approves the fees and other significant compensation to be paid to the
independent auditors. The Audit Committee has direct access to the independent
auditors at all times and has the ability to retain, at the Corporation's
expense, special legal, accounting or other consultants or experts it deems
necessary in the performance of its duties. The Corporate Governance and
Nominating Committee has been asked to review and update the Audit Committee's
Charter in response to the recent introduction of MultiLateral Instrument 52-110
and the new NASDAQ rules, in order to effect compliance with such new
requirements by the appropriate effective date.

Compensation Committee

The Compensation Committee consists of Michael McKenzie, as
Chairman, Rod Love and Donald Hyde. All three members are considered unrelated
and independent directors. Under its charter, the Compensation Committee is
responsible for reviewing management prepared policies and recommending to the
Board of Directors on compensation policies and guidelines for seasoned senior
officers and management personnel, corporate benefits, incentive plans,
evaluation of the performance and compensation of the Chief Executive Officer
and other senior management, compensation level for members of the Board of
Directors and committee members, a succession plan for the Chief Executive
Officer and key employees of the Corporation and any material changes in human
resources policy, procedure, remuneration and benefits.

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

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

In connection with determining base salaries, the Company
maintains an administrative framework of job levels into which positions are
assigned based on internal comparability and external market data. Because of
the Company's lean organizational structure and growth in the international
arena, the Compensation Committee's goal is to provide base salaries, for its
top performing employees, that are competitive with the Company's peers and
which also recognizes the differentials from such peers. The

61

Committee
references outside data consisting of management compensation surveys and
reports compiled by such organizations as Korn-Ferry International Consultants,
The Wynford Group Management Consulting, Haygroup Ltd., Watson Wyatt, Western
Compensation and Benefits Consultants and KPMG LLP and compared the base
salaries of the Company's executive officers with compensation data for
comparable organizations available from such surveys and reports.

Annual cash incentive awards are given pursuant to an
Incentive Compensation Plan, approved by the Board. Participation is determined
according to job level and is intended to reward those individuals who have had,
and will have a significant impact on business results. The total amount of cash
available for annual incentive awards is determined by the Compensation
Committee by evaluating a combination of financial and non-financial criteria,
including net income/operating profit, cash flow, net asset value growth and
achievement of specific strategic goals. Individual target award levels increase
in relation to job responsibilities so that the ratio of at-risk versus fixed
compensation is greater for higher levels of management. Individual awards are
intended to reflect a combination of personal, business unit and total company
performance. In 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 Company and that their interest should be aligned with the
interest of the Company's stockholders. To this end, the Committee selects those
executives and key employees whose decisions and actions can most directly
impact business results to participate in the Stock Option Plans. Under the
Stock Option Plans, officers, consultants, and key employees who are selected to
participate are eligible to receive stock options that are granted subject to a
vesting period determined by the Company and approved by the Board to create a
long-term incentive to increase shareholder value. Awards of stock options are
supplementary to the cash incentive plan and are intended to increase the
pay-at-risk component for officers and key employees.

We have employment agreements or remuneration arrangements
with all of our executive officers. Each agreement or arrangement provides for
salary, benefits, bonuses and incentive stock option grants for the executive
officer, and for compensation if his or her employment is terminated. For
employment agreements of Named Executive Officers see Item 6 - Compensation
of Executive Officers. Except as described herein, there are no agreements
or other remuneration arrangements with any of our directors. The Company has
entered into a consulting agreement with a firm owned by one of our directors,
Howard Balloch, for services related to our Oztime subsidiary. See Item 7 -
Related Party Transactions and Exhibit 4.15.

Corporate Governance and Nominating Committee

This Committee has three members. Derrick Armstrong, who is
the Chairman of the Committee, Thompson MacDonald and Howard Balloch. The
Corporation had adopted a charter for this committee, but it is not yet
available on its website. Pursuant to its charter, the Corporate Governance and
Nominating Committee takes responsibility for preparing the disclosure in the
Information Circular concerning corporate governance, and for developing and
monitoring the Corporation's general approach to corporate governance issues as
they arise. It also assumes responsibility for assessing current members and
nominating new members to the Board of Directors and ensuring that all board
members are informed of and are aware of their duties and responsibilities as a
director of the Corporation. The Corporate Governance and Nominating Committee
takes responsibility for the adoption of adequate policies and procedures to
allow the Corporation to meet its continuous disclosure requirements, manage the
principal risks of the Corporation, review the strategic plan on a

62

timely basis,
develop and monitor corporate policies relating to trading in securities,
ensuring the Board annually reviews organizational structure and succession
planning, reviews areas of potential personal liability of directors and ensures
reasonable protective measures are in place and causes the Board to annually
review its definition of an unrelated director. The Committee met formally one
time in 2003 and, in view of its size, communicated informally from time to
time. Only one of the members of the Corporate Governance Committee, Mr.
MacDonald, is clearly unrelated and independent from management. However, the
Board considers both Mr. Armstrong and Mr. Balloch effective members of the
Corporate Governance Committee notwithstanding that they are not considered
independent. Mr. Armstrong is a securities lawyer experienced in corporate
governance matters, and Mr. Balloch has served in positions of public trust in
the past as Canada's former ambassador to China which requires him to be
knowledgeable about and adhere to the highest ethical standards in international
dealings.

The Company's approach to corporate governance with reference
to the TSE Guidelines is set out in the Company's Management Information
Circular. See Exhibit 10.1.

D. Employees

As of April 30, 2004, we had 104 regular, full-time
employees:



ZI TECHNOLOGYAsia
    North America
    Europe
    TotalSales & Marketing
    4
    3
    1
    8Technical
    5
    20
    -
    25Admin/Corp
    6
    11
    -
    17ZI TECHNOLOGY TOTAL
    15
    34
    1
    50








OZTIMEAsia
    North America
    Europe
    TotalSales & Marketing
    15
    1-
    -
    16Technical
    32
    -
    -
    32Admin/Corp
    6
    -
    -
    6OZTIME TOTAL
    53
    -
    -
    54






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, 2002, we had 103 regular, full-time employees; at December 31,
2001, we had 168 regular, full-time employees; and at December 31, 2000, we had
219 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 at April 30, 2004.

63



Name
    Number of Shares Beneficially Owned*
    Percentage of
    Class**Michael E. Lobsinger
    6,054,671(1)
    14.6%Derrick R. Armstrong
    315,000(2)
    0.8%Howard R. Balloch
    275,350(3)
    0.7%H. Donald Hyde
    50,000(4)
    0.1%Rod Love
    275,000(5)
    0.7%Thompson MacDonald
    80,000(6)
    0.2%Angus Michael Roderick Mackenzie
    475,000(7)
    1.2%Gary Mendel
    107,500(7)
    0.3%Mike D. Donnell
    83,333(9)
    0.2%




Notes:

|*   | Includes options and restricted stock units exercisable within
60 days of April 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|**  | Assume Common Shares, no par value (Class) = 39,527,560.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(1) | In the case of Mr. Lobsinger, this comprises
    550,700 common shares held directly or beneficially by Mr. Lobsinger,
    3,575,400 common shares held by Quarry Bay Investments Inc., a private
    Alberta corporation wholly-owned by Mr. Lobsinger, and 1,550,000 share
    options and 378,571 RSU's. The share options include: 600,000 options
    granted October 17, 1994 at a grant price of $2.20 and were extended to
    expire October 17, 2004 at the annual and special general meeting held on
    June 16, 1999; 200,000 options granted December 28, 2000 at a grant price of
    $10.05 and expire December 28, 2005; 50,000 options granted January 1, 2001
    at a grant price of $9.20 and expire January 1, 2006; 50,000 options granted
    December 3, 2001 at a grant price of $7.96 and expire December 3, 2006;
    50,000 options granted January 1, 2003 at a grant price of $4.40 and expire
    January 1, 2006; 100,000 options granted April 17, 2003 at a grant price of
    $2.56 and expire on April 17, 2008; and 28,571 restricted stock units at a
    grant price of US$1.75 and expire on April 17, 2008; 100,000 options granted
    on June 11, 2003 at a grant price of $3.43 and expire on June 11, 2008;
    100,000 RSU's on June 11, 2003 at a grant price of nil and expire on June
    11, 2008; 400,000 options granted March 25, 2004 at a grant price of $3.60
    and expire March 25, 2009; 250,000 RSU's at a grant price of nil and expire
    on March 25, 2009.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | In the case of Mr. Armstrong, this comprises
    260,000 common shares held directly or beneficially by Mr. Armstrong and
    55,000 share options. This does not include 10,000 common shares held
    pursuant to a spousal RRSP. The share options include: 25,000 options
    granted October 17, 1994 at a grant price of $2.20 and were extended to
    expire October 17, 2004 at the annual and special general meeting held on
    June 16, 1999; 30,000 options granted June 11, 2003 at a grant price of
    $3.43 and expire on June 11, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) | In the case of Mr. Balloch, this comprises 350 common
    shares held directly or beneficially by Mr. Balloch and 225,000 share
    options granted August 4, 2001 at a grant price of $11.66 and expire
    July 31, 2006; 50,000 options granted June 11, 2003 at a grant price of
    $3.43 and expire on June 11, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4) | In the case of Mr. Hyde, this comprises 50,000 share options
    granted June 11, 2003, at a grant price of $3.43 and expire on June 11,
    2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5) | In the case of Mr. Love, this comprises 275,000 share options,
    which include: 225,000 options granted June 8, 2001 at a grant price of
    $12.23 and expire June 8, 2006; 50,000 options granted June 11, 2003 at a
    grant price of $3.43 and expire on June 11, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6) | In the case of Mr. MacDonald, this comprises 80,000 share options
    which include: 50,000 options granted October 17, 1994 at a grant price of
    $2.20 and were extended to October 17, 2004 at the annual and special
    general meeting held on June 16, 1999; 30,000 options granted June 11, 2003
    at a grant price of $3.43 and expire on June 11, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7) | In the case of Mr. Mackenzie, this comprises 200,000 common
    shares held directly or beneficially by Mr. Mackenzie and 275,000 share
    options. The share options include: 100,000 options granted July 26, 2000 at
    a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

64

|    | grant price of $13.50 and expire July 26, 2005; 125,000 options
    granted June 8, 2001 at a grant price of $12.23 and expire June 8, 2006;
    50,000 options granted June 11, 2003 at a grant price of $3.43 and expire on
    June 11, 2008.                                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(8) | In the case of Mr. Mendel, this comprises 107,500 share options,
    which include: 60,000 options granted June 1, 2001 at a grant price of
    $11.20 and expire June 1, 2006; 10,000 options granted February 1, 2002 at a
    grant price of $9.56 and expire February 1, 2005; 12,500 options granted
    April 17, 2003 at a grant price of $2.56 and expire on April 17, 2008;
    25,000 options granted June 11, 2003 at a grant price of $3.43 and expire
    June 11, 2008.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(9) | In the case of Mr. Donnell, this comprises 83,333 share options
    granted July 24, 2003 at a grant price of $4.94 and expire July 24, 2008.                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

(b)     Option Plans

In 1993, the Company adopted the 1993 Plan for the directors,
officers, employees and consultants of the Company, reserving 2,625,000 common
shares for issuance pursuant to stock options. On the subsequent adoption of the
1995 Plan (see description below), the Company ceased granting any stock options
pursuant to the 1993 Plan. As at April 22, 2004, 675,000 stock options remain
granted and outstanding under the 1993 Plan. No further stock options amounts
are available for granting under this Plan.

On May 17, 1995, the directors of the Company adopted the
1995 Plan, for the directors, officers, employees and consultants of the
Company, reserving 1,430,000 common shares for issuance pursuant to stock
options. The 1995 Plan was subsequently approved and adopted by the shareholders
of the Company on June 23, 1995. As at April 22, 2004, 362,000 stock options
remain granted and outstanding. No further stock option amounts are available
under the 1995 Plan.

On May 14, 1996, the directors of the Company adopted the
1996 Plan, for directors, officers, employees and consultants of the Company,
reserving 2,600,000 common shares for issuance pursuant to stock options. The
1996 Plan was subsequently approved and adopted by the shareholders of the
Company on June 20, 1996. As at April 22, 2004, 571,350 stock options remain
granted and outstanding. No further stock option amounts are available under the
1996 Plan.

On April 3, 1998, the directors of the Company adopted the
1998 Plan, for directors, officers and employees and consultants of the Company,
reserving 1,300,000 common shares for issuance pursuant to stock options. The
1998 Plan was subsequently approved and adopted by the shareholders of the
Company on June 2, 1998. As at April 22, 2004, 259,150 stock options remain
granted and outstanding and 165,850 remain ungranted under the 1998 Plan.

On April 14, 1999, the directors of the Company adopted the
1999 Plan, for directors, officers and employees and consultants of the Company,
reserving 660,000 common shares for issuance pursuant to stock options. The 1999
Plan was subsequently approved and adopted by the shareholders of the Company on
June 16, 1999. On June 1, 2000, shareholders approved an amendment to the 1999
Plan to increase the number of shares reserved for issuance by 3,000,000 common
shares. On June 5, 2002, shareholders approved an amendment to the 1999 Plan to
increase the number of shares reserved for issuance by 1,300,000 common shares
(500,000 of which are restricted stock units) for a total of 4,960,000 common
shares. As at April 22, 2004, 4,362,904 stock options remain granted and
outstanding and 369,136 remain ungranted under the 1999 Plan. (References to the
"1999 Plan" in this section refer collectively to the 1999 Plan originally
approved by shareholders on June 16, 1999 and the amendment approved by
shareholders on June 1, 2000 and June 5, 2002.)

See Item 6(B) - Compensation for a summary of stock
option activity from 2001 to 2003.

65

The Company's stock option plans have been established to
advance the interests of the Company, or any of its subsidiaries or affiliates,
by encouraging the directors, officers, employees and consultants of the
Company, or any of its subsidiaries or affiliates, to acquire shares in the
Company, thereby increasing their proprietary interest in the Company and
encouraging them to remain associated with the Company, or any of its
subsidiaries or affiliates, and furnishing them with additional incentive in
their efforts on behalf of the Company, or any of its subsidiaries or
affiliates, in the conduct of their affairs.

The Board recommended that the 1999 Plan be further amended
(such further amended plan being referred to in this section as the "Amended
1999 Plan") to permit the granting of restricted stock units to directors,
officers, employees and consultants in accordance with the Amended 1999 Plan. A
restricted stock unit ("RSU") entitles the holder upon satisfaction of the terms
and conditions of the Amended 1999 Plan, to receive from treasury common shares
of the Company.

To ensure that a sufficient number of common shares are
available for issuance pursuant to stock options and RSU's, the Board
recommended that the number of shares reserved for issuance be increased by
1,300,000 common shares, of which 800,000 will be available for stock option
grants and 500,000 will be available for the RSU grants. In accordance with the
requirements of The Toronto Stock Exchange, the Company sought and received
shareholder approval at the Annual General Meeting of the Company held on
June 5, 2002 for the 1999 Amended Plan, increasing the maximum number of shares
reserved for issuance pursuant to the 1999 Plan from 3,660,000 common shares to
a maximum of 4,960,000 common shares. Shareholder approval of this resolution
raised the number of common shares currently reserved for issuance pursuant to
stock options and RSU's together with shares reserved for issuance under the
1993, 1995, 1996, 1998 and 1999 plans to approximately 20% of the currently
issued and outstanding common shares. As at April 30, 2004, 378,571 restricted
stock units remain granted and outstanding and 87,468 restricted stock units
remain ungranted under the 1999 Amended 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
April 30, 2004.



Name and municipality
    Beneficial number
    of shares held
    Percentage of total
    voting rightsMarty Steinberg, Receiver(1)Miami, Florida
    19,407,364
    49.1%Michael E. Lobsinger
    Calgary, Alberta
    4,126,100(2)
    10.4%




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 pending before United States courts. Marty Steinberg is a
    lawyer with and represented by the law firm Hunton & Williams LLP of Miami,
    Florida. The information provided herein is based solely on a Schedule 13D
    (the "Schedule 13D") filed on December 11, 2003 with the U.S. Securities and
    Exchange Commission by Marty Steinberg, Esq., as Receiver (the "Receiver")
    of
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

66

|    | 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 Corporation believes that a substantial portion of the common
    shares acquired by the Receivership Entities was acquired in violation of
    applicable securities laws and nothing herein should be taken as an
    admission that such shares may be voted on any matter submitted to the
    shareholders of the Corporation.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(2) | Of which 550,700 common shares are held directly or
    beneficially by Mr. Lobsinger and 3,575,400 are held by Quarry Bay
    Investments Inc., a private Alberta corporation wholly-owned by Mr. Lobsinger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



The Company's major shareholders hold common shares, which
shares do not carry different voting rights than any other shares.

Based on a report from CIBC Mellon Trust Company, as at
December 31, 2003, there were 200registered
shareholders in the United States that held 25,296,950 common shares or 64.19
percent of the common shares outstanding.

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

B.     Related Party Transactions

Except as set forth below and other than employment
agreements with executive officers, stock option grants described elsewhere in
this report or as otherwise disclosed in this report, the Company is not aware
of any related party transactions occurring or being made, or any loans made by
the Company or any of its subsidiaries to related parties, from January 1, 2003
to May 12, 2004, other than the following:

January 1, 2004 to May 12, 2004

Fees for legal services provided by a law firm in which
Derrick Armstrong, a director of the Company, is a partner:

$49,385

Management fees paid by the Company to a consulting firm
owned by Howard Balloch, a director of the Company:

$33,344

January 1, 2003 to December 31, 2003

Management fees paid to a consulting firm owned by Howard
Balloch, a director of the Company:

$166,773

Fees for legal services provided by a law firm of which one
of the directors of the Company, Derrick Armstrong, was a partner

$154,569

Quarry Bay, a privately held Alberta corporation, wholly
owned by Michael Lobsinger, Chief Executive Officer of the Company pledged
3,000,000 common shares held by Quarry Bay in the capital stock of the Company
and provided a Limited Recourse Guarantee in favour of Quest Investment
Corporation as partial security for a loan financing by the Company in the
amount of US$3,300,000.The loan was repaid and security released on June
20, 2003.

67

C.     Interests of Experts and
    Counsel

Not applicable.

Item 8 - Financial Information

A.     Consolidated Statements and
    Other Financial Information

See Item 18 - Financial Statements.

Legal Proceedings

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

Certain of our customers have been subject to a patent
infringement claim in the People's Republic of China as described below.
While we have not been made party to the claims, these customers have executed
licenses with the Company for the use of eZiText on their products, which
licenses contain third party intellectual property infringement indemnities. As
a result, these claims may have significant consequences for the Company to the
extent that such claims may relate to the implementation and use of eZiText on
products sold in the People's Republic of China and to the extent that our
indemnity under our license agreement may be applicable.

|(i)  | Dalian Hanpu Applied Technology Co., Ltd., Hu
    Xianhua & Hu Bin v. Ericsson (China) Co., Ltd. and Beijing Ericsson Mobile
    Telecommunication Co., Ltd., (the "First Dalian Ericsson Action").The
    First Dalian Ericsson Action is in the Higher People's Court (the "High
    Court") in Beijing, China. The Court served Beijing Ericsson Mobile
    Telecommunication Co., Ltd. on August 16, 2000, and Ericsson (China) Co.,
    Ltd. with the plaintiffs' complaint on August 17, 2000. The complaint
    alleges that Ericsson (China) Co. Ltd. and Beijing Ericsson Mobile
    Telecommunication Co., Ltd. infringed the plaintiffs' intellectual property
    rights, namely Chinese patent ZL96120693.4, "Keyboard Assignment of Stroke
    Input and its Screen Prompt." On August 18, 2000, Ericsson sent Zi
    Corporation a request for indemnification pursuant to the license agreement
    between Ericsson Mobile Communications AB and Zi Corporation of Canada, Inc.
    The Company and its affiliates have not been named as a party in the First
    Dalian Ericsson Action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(ii) | Dalian Hanpu Applied Technology Co., Ltd., Hu
    Xianhua & Hu Bin v. Ericsson (China) Co., Ltd. and Nanjing Ericsson Panda
    Mobile Terminals Co., Ltd., (the "Second Dalian Ericsson (Panda) Action").The Second Dalian Ericsson (Panda) Action is in the Second Intermediate
    People's Court (the "Lower Court") in Beijing, China. This is a lower court
    than the Higher People's Court in which the First Dalian Ericsson Action is
    being tried. The plaintiffs' complaint was filed with the Court on
    February 22, 2001. This complaint alleges that Ericsson (China) Co., Ltd.
    and Nanjing Ericsson Panda Mobile Terminals Co., Ltd. infringed the
    plaintiffs' intellectual property rights, namely Chinese patent
    ZL96120693.4, "Keyboard Assignment of Stroke Input and its Screen Prompt"
    (the same patent under suit in the First Dalian Ericsson Action). On
    February 22, 2001, Ericsson sent Zi Corporation a request for
    indemnification pursuant to the Ericsson Chinese License Agreement (defined
    below). The Company and its affiliates have not been named as a party in the
    Second Dalian Ericsson (Panda) Action. A ruling in Ericsson's favour was
    issued by the Lower Court on this matter on May 23, 2002. The Lower Court
    rejected the plaintiff's claims of infringement finding that: (1) there was
    no literal infringement of the plaintiff's patent by Zi's input technology
    on the Ericsson phone models in dispute; and (2) the doctrine of equivalence
    argued by the plaintiff

68

|      | could not be accepted as it would broaden the original scope
    of the plaintiff's patent claims. The plaintiff was charged with paying a
    nominal amount of RMB1000 to cover case handling fees. The plaintiff has
    filed a notice of appeal to the High Court in order to appeal this Lower
    Court ruling. Ericsson is actively defending this appeal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      | Both claims described in (i) and (ii) above will be
    collectively referred to as the "Ericsson/HuBin Claims" and the Ericsson
    parties named in the Ericsson/HuBin Claims shall be referred to as
    "Ericsson". Under the respective notices sent to us, Ericsson asserted its
    rights to indemnification granted by us to Ericsson under our Chinese
    eZiText license agreement with Ericsson signed February 17, 1998 (the
    "Ericsson Chinese License Agreement"). Pending determination of the actual
    scope of the alleged infringement and whether the scope of indemnity
    provided under the Ericsson Chinese License Agreement applies, we have taken
    a course of action where we pay for Ericsson's legal fees and where we
    exercise sole control of the conduct of Ericsson's defense against the
    Ericsson/HuBin Claims. Ericsson is actively cooperating and participating
    with Zi to defend against the Ericsson/HuBin Claims. We believe that the
    allegations are unfounded and without merit and Zi and Ericsson are
    vigorously defending against the Hu Bin claims.                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      | To date, the two cases remain in the hands of the Beijing
    High People's Court. Ericsson has requested a schedule from the Beijing High
    People's Court. The Company is not aware of any response from Beijing High
    People's Court to Ericsson's request for a timetable or any other actions
    taken by any of the parties involved in this matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      | Furthermore, Ericsson made a separate application to the
    PRC Patent Office seeking invalidation of the HuBin Patent. An invalidation
    hearing was held with the PRC Patent Re-examination Board on May 27, 2002.
    In March 2004, a ruling from the PRC Patent Re-examination Board was
    rendered in favour of the patent. This decision will be appealed by Ericsson
    within the requisite time period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(iii) | Dalian Hanpu Applied Technology Co., Ltd., Hu
    Xianhua & Hu Bin v. Alcatel Suzhou communication Co., Ltd and Another (the "Dalian
    Alcatel Action").The Dalian Alcatel Action is also in the Lower Court.
    On April 5, 2001, the Company received a notice from Alcatel Suzhou
    Communication Co., Ltd. that Alcatel Suzhou Communication Co., Ltd, and
    Yanshaqiro Trading Branch of Beijing Yingcong Science and Trade Center have
    been made parties to a patent infringement claim in the PRC (the "Alcatel/Hu
    Bin Claims") filed in the Lower Court for infringement of Chinese patent
    ZL96120693.4 (the same patent in both of the First Dalian Ericsson Action
    and the Second Dalian Ericsson (Panda) Action). On April 19, 2001 Alcatel
    sent Zi Corporation of Canada, Inc. a request for indemnification pursuant
    to the license agreement between Alcatel Business Systems and Zi Corporation
    of Canada, Inc. Zi responded denying the applicability of the indemnity and
    we have not received any answering response from Alcatel. The Company and
    its affiliates have not been named as a party in the Dalian Alcatel Action.
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      | A ruling in Alcatel's favour on this matter was also
    issued by the Lower Court on May 23, 2002. The rulings by the Lower Court in
    this Dalian Alcatel Action are substantially similar to those given in the
    Second Dalian Ericsson (Panda) Action. The plaintiff has filed a notice of
    appeal to the High Court in order to appeal this Lower Court ruling. Alcatel
    is actively defending this appeal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

69

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | We have disputed the applicability of the indemnity
    provided by us to Alcatel under the license agreement dated October 20, 1999
    (the "Alcatel License Agreement") in respect of the Alcatel/HuBin Claims. To
    date, we are not providing any indemnification to Alcatel in respect of
    Alcatel's defense of the Alcatel/Hu Bin claim; however, we have been
    actively providing Alcatel technical support for their defense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(iv) | Zi Corporation, an Alberta, Canada corporation,
    and Zi Corporation of America, Inc., a Nevada corporation v. Morrison &
    Foerster LLP, a limited liability partnership, and Does 1-100,
    inclusive (the" MoFo" Malpractice Action). An action against Morrison &
    Foerster LLP was commenced on behalf of the Company by its litigation
    counsel, Foley Bezek, LLP ("F&B"), in the Superior Court of the State of
    California, County of San Francisco claiming (i) professional negligence
    based on MoFo's failure to exercise reasonable care, skill and diligence in
    representing the Company in the defence of Asian Communication Pty Ltd and
    Tegic Communications Inc. v. Zi Corporation and Zi Corporation of America,
    Inc. (the Tegic California patent infringement lawsuit described more fully
    at Item 3 - Risk Factors - Tegic Lawsuit Settlement and (ii)
    reimbursement of the payments made to MoFo in connection with the defense of
    Tegic v. Zi Corporation, which payments are alleged to exceed the
    reasonable value of MoFo's services and costs advanced. MoFo has filed, as
    part of its defence to the Company's action, a cross complaint against Zi
    Corporation for payment of legal fees incurred and reimbursement of
    out-of-pocket costs advanced in the defence of Tegic v. Zi Corporation
    (in addition to legal fees and costs already paid by the Company to MoFo in
    the amount of US$1,061,616.81). The likelihood of net gain or loss on the
    complaint by Zi Corporation against MoFo and the cross-complaint by MoFo
    against the Company is not determinable at this time.

Dividend Policy

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

B.     Significant Changes

Not applicable

Item 9 - The Offer and Listing

A.     Offer and Listing Details -
    Stock Price History

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

70

Toronto Stock Exchange (in CDN$):



Period
    High
    LowApril, 2004
    $ 3.85
    $ 3.00March, 2004
    $ 4.03
    $ 3.32February, 2004
    $ 3.66
    $ 3.20January, 2004
    $ 3.82
    $ 3.17December, 2003
    $ 3.55
    $ 2.95November, 2003
    $ 3.79
    $ 3.03Quarter ended
    March 31, 2004
    $ 5.48
    $ 2.75Quarter ended
    December 31, 2003
    $ 4.20
    $ 2.95Quarter ended
    September 30, 2003
    $ 5.60
    $ 2.88Quarter ended
    June 30, 2003
    $ 5.09
    $ 2.39Quarter ended
    March 31, 2003
    $ 5.48
    $ 2.75Quarter ended
    December 31, 2002
    $ 6.60
    $ 2.35Quarter ended
    September 30, 2002
    $ 8.12
    $ 3.65Quarter ended
    June 30, 2002
    $ 8.30
    $ 6.11Quarter ended
    March 31, 2002
    $11.29
    $ 7.90Year ended
    December 31, 2003
    $5.60
    $ 2.39Year ended
    December 31, 2002
    $11.29
    $ 2.35Year ended
    December 31, 2001
    $14.50
    $ 7.36Year ended
    December 31, 2000
    $59.25
    $ 4.75Year ended
    December 31, 1999
    $37.00
    $ 1.23






NASDAQ (in US$):



Period
    High
    LowApril, 2004
    $ 2.89
    $ 2.20March, 2004
    $ 3.05
    $2.54February, 2004
    $ 2.67
    $2.42January, 2004
    $ 2.93
    $2.48December, 2003
    $ 2.70
    $2.30November, 2003
    $ 2.87
    $2.32Quarter ended
    March 31, 2004
    $ 3.05
    $ 2.42Quarter ended
    December 31, 2003
    $ 3.11
    $2.25Quarter ended
    September 30, 2003
    $ 4.08
    $2.11Quarter ended
    June 30, 2003
    $ 3.82
    $1.62Quarter ended
    March 31, 2003
    $ 3.47
    $1.82Quarter ended
    December 31, 2002
    $ 2.85
    $2.27Quarter ended
    September 30, 2002
    $ 5.14
    $2.28Quarter ended
    June 30, 2002
    $ 5.33
    $4.05Quarter ended
    March 31, 2002
    $ 7.04
    $4.95 71 Year ended
    December 31, 2003
    $ 4.08
    $1.62Year ended
    December 31, 2002
    $ 7.04
    $2.27Year ended
    December 31, 2001
    $9.44
    $4.00Year ended
    December 31, 2000
    $40.875
    $3.125Year ended
    December 31, 1999
    $25.25
    $0.8125






B.     Plan of Distribution

Not applicable.

C.     Markets

Our common shares are listed on the Toronto Stock Exchange
and Nasdaq National Market Exchange. At December 31, 2003, the Company had
39,406,560 common shares outstanding, with no par value.

D.     Selling Shareholders

Not applicable.

E.     Dilution

Not applicable.

F.     Expenses of the Issue

Not applicable.

Item 10 - Additional Information

A.     Share Capital

Not applicable.

B.     Memorandum and Articles of
    Association

The Company's Certificate of Incorporation, together with all
amendments, which we refer to as our articles of incorporation, are on file with
the Alberta Registrar of Corporations under Alberta Corporate Access Number
203761614. Our articles of incorporation do not include a stated purpose and
contain no restrictions on the nature of business to be carried on. Under the
Alberta Business Corporations Act, in the absence of any such
restrictions, a corporation has the capacity, rights, powers and privileges of a
natural person, and has the capacity to carry on business, conduct its affairs
and exercise its power in any jurisdiction outside Alberta to the extent that
the laws of that jurisdiction permit. For additional information regarding our
incorporation, see Item 4 - Information on the Company - History and
Development of the Company.

72

Directors

A director of our Company need not be a shareholder. In
accordance with the Alberta Business Corporations Act, at least half of
our directors must be residents of Canada. The Alberta Business Corporations
Act requires that a person must be at least 18 years of age, be of sound
mind and not be bankrupt or a dependent adult or formal patient under the Dependent Adults Act or Mental Health Act, or the subject of an order
under The Mentally Incapacitated Persons Act in order to serve as a
director. Neither our articles of incorporation or by-laws, nor the Alberta Business Corporations Act, impose any mandatory retirement requirements for
directors.

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

A director who is a party to, or who is a director or officer
of or has a material interest in any person who is a party to, a material
contract or transaction or proposed material contract or transaction with our
Company shall disclose to the Company the nature and extent of his interest at
the time and in the manner provided by the Alberta Business Corporations Act.
The Alberta Business Corporations Act prohibits such a director from
voting on any resolution to approve the contract or transaction unless the
contract or transaction:

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



Our board of directors may, on behalf of the Company and
without authorization of our shareholders:

- borrow money upon the credit of the company;
- issue, reissue, sell or pledge bonds, debentures, notes or
  other evidences or indebtedness or guarantees of our company, either secured
  or unsecured;
- subject to certain disclosure requirements of the Alberta
  Business Corporations Act, give a guarantee on behalf of our Company to
  secure performance of an obligation of any person;
- mortgage, hypothecate, pledge or otherwise create a
  security interest in all or any property of the Company owned or subsequently
  acquired to secure any obligation of the Company; and
- issue common shares or other securities of the Company.



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

Common Shares

Our articles of incorporation authorize the issuance of an
unlimited number of common shares. The holders of the common shares of the
Company are entitled to receive notice of and to attend all meetings of the
shareholders of our Company and have one vote for each common share held at all

73

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 received
dividends if and when declared by our board of directors.

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

Preferred Shares

Our articles of incorporation authorize the issuance of an
unlimited number of preferred shares, in one or more series. The Alberta Business Corporations Act does not impose restrictions upon our board of
directors issuing preferred shares of the type authorized by our articles of
incorporation. Our board of directors may fix, before issuing, the number of
preferred shares of each series, the designation, rights, privileges,
restrictions and conditions attaching to the preferred shares of each series,
including the rate or amount of dividends or the method of calculating
dividends, the dates of payment of dividends, the redemption purchase and/or
conversion price and terms and conditions of redemption, purchase and/or
conversion and any sinking fund or other provisions, the whole to be subject to
the sending of articles of amendment in prescribed form and the issuance of a
certificate of amendment.

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

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

The holders of preferred shares will not be entitled to
receive notice of or vote at any shareholders' meetings, except as specifically
provided by the Alberta Business Corporations Act. No preferred shares
are currently outstanding. There is no present intention to issue any preferred
chares.

Changing Rights of Shareholders

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

Shareholder Meetings

An annual meeting of shareholders is held each year, not
later than 15 months after the last preceding annual meeting, for the purpose of
considering the financial statements and reports, electing directors,

74

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.

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

The only persons entitled to be present at a meeting of
shareholders are those entitled to vote, the directors of the company and the
auditor of the company. Any other person may be admitted only on the invitation
of the chairman of the meeting or with the consent of the meeting. If a
corporation is winding-up, the Alberta Business Corporations Act permits
a liquidator appointed by the shareholders, during the continuance of a
voluntary winding-up, to call and attend meetings of the shareholders. In
circumstances where a court orders a meeting of shareholders, the court may
direct how the meeting may be held, including the parties entitled, or required,
to attend the meeting.

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

Limitations on Right to Own Securities

There is no limitation imposed by Canadian law or by our
articles or other charter documents on the right of a non-resident to hold or
vote common shares or preference shares with voting rights (the "Voting
Shares"), other than as provided in the Investment Canada Act (the "ICA").
The ICA requires a non-Canadian making an investment which would result in the
acquisition of control of a Canadian business (i.e. the gross value of the
assets of which exceed a certain monetary threshold) to identify, notify, or
file an application for review with the Investment Review Division of Industry
Canada ("IRD").

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

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.

75

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

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

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

1.     An investment to establish a new Canadian business;
    and

2.     An investment to acquire control of a Canadian
    business that is not reviewable pursuant to the Act.

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

|1. | An investment is reviewable if there is an acquisition
    of a Canadian business and the asset value of the Canadian business being
    acquired equals or exceeds the following thresholds:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                              
|   | (a)                                                                                                                                                                                          
|   |                                                                                                                                                                                              
|   | (b)                                                                                                                                                                                          
|   |                                                                                                                                                                                              
|   | (c)                                                                                                                                                                                          
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              
|   |                                                                                                                                                                                              

76

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|2. | Notwithstanding the above, any investment which is
    usually only notifiable, including the establishment of a new Canadian
    business, and which falls within a specific business activity, including the
    publication and distribution of books, magazines, newspapers, film or video
    recordings, audio or video music recordings, or music in print or
    machine-readable form may be reviewed if an Order-in-Council directing a
    review is made and a notice is sent to the Investor within 21 days following
    the receipt of a certified complete notification.

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

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

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

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

Change of Control

Our articles of incorporation and by-laws do not contain any
specific provision that has the effect of delaying, deferring or preventing a
change of control of our company.

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

77

Disclosure of Ownership

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

C. Material Contracts

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

|1.  | Agreement to acquire the Magic Lantern group of
    companies - See Item 4 - Information on the Company - Dispositions and
    Discontinued Operations - the Magic Lantern Group of Companies and
    Exhibit 4.12.                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                 
|2.  | Agreement to dispose of the Magic Lantern group of
    companies - See Item 4 -Information on the Company - Dispositions and
    Discontinued Operations and Exhibit 4.21. Incorporated herein by
    reference to Magic Lantern Group, Inc.'s Form 8-K filed with the Securities
    and Exchange Commission on August 8, 2002 and on October 11, 2002.        
|    |                                                                                                                                                                                                                                                                                                                                                                 
|3.  | Agreement to dispose of substantially all of the Zi
    Services business assets - See Item 4 - Information on the Company -
    Dispositions and Discontinued Operations - Telecom Technology Centre Limited.
    Letter agreement dated November 20, 2002 between Telecom Technology
    Corporation Limited and Wong's Electronic (Holdings) Company Limited.
|    |                                                                                                                                                                                                                                                                                                                                                                 
|4.  | Settlement Agreement with AOL - See Item 3 - Risk
    Factors - Risks Related to Settlement of the Tegic Lawsuit and
    Exhibit 4.17. Settlement Agreement made December 6, 2002 between America
    Online, Inc., Zi Corporation and Zi Corporation of America, Inc.                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                 
|5.  | Consent Judgement Order and Permanent Injunction dated
    December 20, 2002 made by The Honourable Maxine M. Chesney, United States
    District Court Judge in the United States District Court for the Northern
    District of California San Francisco Division.                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                 
|6.  | Loan Agreement dated December 5, 2002 between Quest
    Investment Corporation and Zi Corporation.                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                 
|7.  | Loan Amendment Agreement dated March 19, 2003 between
    Quest Investment Corporation and Zi Corporation.                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                 
|8.  | Second Loan Amendment Agreement dated April 30, 2003
    between Quest Investment Corporation and Zi Corporation.                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                 
|9.  | Loan Agreement dated May 7, 2003 between Quest
    Investment Corporation and Zi Corporation.                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                 
|10. | Employment Agreement dated July 23, 2003, between Zi
    Corporation and Mike Donnell.                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                 
|11. | Form of Subscription Agreement pursuant to a U.S.
    $2,000,000private placement of 1,000,000 units at US$2.00 per unit,
    each unit consisting of one common share and one-half                                                                                                                                                                             

78

|    | of one common share purchase warrant. Each full warrant
    entitles the holder to acquire one additional common share until May 31,
    2006 upon payment of US$2.25. The private placement was completed on June
    19, 2003 (1,000,000 units).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. | Amending Agreement dated March 31, 2004, (re
    Employment Agreement dated December 31, 1999, between Zi Corporation and
    Michael Lobsinger).                                                                                                 
|    |                                                                                                                                                                                                                                                   
|13. | Margin Account Agreement dated December 8, 2003
    between Jones, Gable & Company Limited and Zi Corporation.                                                                                                                                    

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

D.     Exchange Controls

The Company is aware of no governmental laws, decrees or
regulations, including foreign exchange controls, in Canada which restrict the
export or import of capital or that affect the remittance of dividends, interest
or other payments to non-resident holders of the Company's securities. Any such
remittances to United States residents, however, are subject to a withholding
tax pursuant to The Canada - US Income Tax Convention (1980), as amended.

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

Except as provided in the ICA, the Company knows of no
limitations under the laws of Canada, the Province of Alberta, or in the charter
or any other constituent documents of the Company imposed on the right of
foreigners to hold or vote the shares of the Company. See Item 10 -
Additional Information - Limitations on Rights to Own Securities.

E. Taxation

Material Canadian Income Tax Consequences

Generally, cash dividends paid by
Canadian corporations to non-resident shareholders are subject to a withholding
tax of 25 percent. However, the Canada - US Income Tax Convention (1980),
as amended ("the Convention"), provides for a 15 percent withholding tax on
dividends paid to all individuals and corporate residents of the United States
qualifying for treaty benefits. Dividends paid to any non-resident company that
beneficially owns at least 10 percent of the voting stock of the payer company
are subject to withholding tax at 5 percent.

A non-resident shareholder who holds
shares of the Company as capital property will not be subject to tax on capital
gains realized on the disposition of such shares unless such shares are "taxable
Canadian property" within the meaning of the Income Tax Act (Canada) and
no relief is afforded under any applicable tax treaty. The shares of the Company
would be taxable Canadian property of a non-resident shareholder if the
non-resident shareholder used the shares in carrying on a business in Canada.
The shares of the Company would also be taxable Canadian property of a
non-resident shareholder if at any time during the five year period immediately
preceding the disposition, not less than 25 percent of the issued shares of any
class of the Company belonged to the particular shareholder or persons with whom
the shareholder did not deal at arms length.

79

Material United States Federal Income
Tax Consequences

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

The following discussion is based upon
the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), existing and proposed Treasury Regulations, published Internal Revenue
Service ("IRS") rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. This
discussion does not consider the potential effects, both adverse and beneficial,
of any recently proposed legislation which, if enacted, could be applied,
possibly on a retroactive basis, at any time.

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

US Holders

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

80

Distributions on Common Shares

US Holders receiving dividend
distributions with respect to the Company's common shares
are required to include in gross income for United States federal income tax
purposes the gross amount of such distributions (including any
Canadian tax withheld)equal to the US dollar value of each dividend on
the date of receipt (based on the exchange rate on such date) to the extent that
the Company has current or accumulated earnings and profits, without reduction
for any Canadian income tax withheld from such distributions. It should be noted
that as used in this discussion of US Federal Income Tax Consequences, the term
"earnings and profits" refers to the Company's earnings and profits as
determined under the Codeand the term "dividend" refers to
corporate distributions taxable as dividends for US federal income tax purposes.
Such Canadian tax withheld may be credited, subject to certain limitations,
against the US Holder's United States federal income tax liability or,
alternatively, may be deducted in computing the US Holder's United States
federal taxable income by those who itemize deductions. (See more detailed
discussion at "Foreign Tax Credit" below.) To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the US Holder's adjusted
basis in the common shares and thereafter as gain from the sale or exchange of
the common shares. Preferential tax rates for long-term capital gains are
applicable to a US Holder which is an individual, estate or trust. There are
currently no preferential tax rates for long-term capital gains for a US Holder
which is a corporation. Dividends paid on
the Company's common sharesgenerally will not
be eligible for the dividends received deduction provided to corporations
receiving dividends from certain United States corporations.

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

Foreign Tax Credit

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

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

81

income," "shipping income," and certain other classifications
of income. Dividends distributed by the Company will generally constitute
"passive income" or, in the case of certain US Holders, "financial services
income" for these purposes.

Disposition of Common Shares

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

Other Considerations

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

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

Foreign Personal Holding Company

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

Foreign Investment Company

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

82

Passive Foreign Investment Company

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

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

Controlled Foreign Corporation

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

F.     
    Dividends and Paying Agents

Not applicable.

83

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.edgar.com.

The Company is subject to the
information requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, to the extent required of Canadian companies,
files periodic reports and other information with the Securities and Exchange
Commission. All such reports and information may be read and copied at the
public reference facilities listed below. The Company intends to give its
shareholders annual reports containing audited financial statements and a report
thereon from its independent chartered accountants and quarterly reports for the
first three quarters of each fiscal year containing unaudited interim financial
information.

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

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

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

I.     Subsidiary Information

Not applicable.

Item 11 - Quantitative and Qualitative
Disclosure About Market Risk

A. Financial Instruments

Accounts receivable, accounts payable, accrued liabilities,
note payable and capital lease obligation constitute financial instruments. The
carrying value of these financial instruments approximate their fair value given
the relatively short periods to maturity. The note receivable constitutes a
financial instrument with a fair value that is not determined due, in part, to
the unrecognized contingent portion of the note.

84

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.

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, 2003, the fair value of the portfolio would decline by an
immaterial amount. The Company generally has the ability to hold its fixed
income investments until maturity and therefore it would not expect its
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on its investment portfolio.

B. Foreign Currency

Foreign Exchange Rate Risk

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

Substantially all of the Company's product revenues are
denominated in U.S. dollars while expenses are denominated in Canadian dollars,
Hong Kong dollars, U.S. dollars and Chinese renminbi. Based on the 2002
distribution of revenues and cash flows, a one percent change in the Canadian
dollar relative to the U.S. dollar is estimated to affect revenues by $136,000
and expenses by $37,000 based upon the exchange rate on December 31, 2003 of
CDN$1.2965 to the US$1.00.

Item 12 - Description of Securities
Other than Equity Securities

Not applicable.

Part II

Item 13 - Defaults, Dividend
Arrearages and Delinquencies

None.

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

Not applicable.

Item 15 - Controls and Procedures

As of December 31, 2003, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures are effective to ensure that
information required to be included in our periodic reports

85

to the Securities and Exchange Commission is recorded,
processed, summarized and reported in a timely manner.

In addition, there have been no significant changes in our
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.

Item 16 - [Reserved]

Item 16A - Audit committee financial
expert

As an Alberta corporation with
operations principally outside of the United States, it is considered a "foreign
private issuer" for the purposes of filings with the SEC and with the NASDAQ
National Market, on which the Company's common shares trade in the United
States. Under applicable SEC regulations, an issuer must disclose if it has an
"audit committee financial expert" on its audit committee if it is required to
have such an expert by the listing rules applicable to it. The NASDAQ has
adopted rules which will implement the audit committee financial expert
requirement applicable to foreign private issuers such as the Company, which
will be effective on July 15, 2005. Accordingly, the Company is not presently
subject to the audit committee financial expert requirement.



The Board of Directors of the Company has appointed Mr. H.
Donald Hyde to the audit committee. Mr. Hyde is a chartered accountant and has
had his own practice since 1991. Prior to setting up his own practice, Mr. Hyde
was the vice president of finance and administration for an international oil
and gas drilling and service company. The Board of Directors has determined that
Mr. Donald Hyde possesses the necessary attributes for designation as the
Company's audit committee financial expert and has designated Mr. Hyde as its
audit committee financial expert to the extent that this requirement currently
applies to the Company. As noted previously, the Company has recently converted
its reporting from Canadian GAAP to US GAAP. Mr. Hyde is qualified as an expert
in Canadian GAAP and has an understanding of US GAAP. Management of the Company
believes that Mr. Hyde and the other members of the Audit Committee have the
skills, experience and education that qualify them to carry out their duties as
members of the Audit Committee.

Item 16B - Code of Ethics

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



Item 16C - Principal Accountant Fees
and Services

Audit Fees

Deloitte & Touche LLP were the Company's auditors for both 2002
and 2003. Audit fees paid were $169,302 for 2002 and $117,431 for 2003.Audit fees relate to the audit of the yearend financial statements and
reviews of interim financial statements.

86

Audit Related Fees

Audit related fees paid were $nil for 2002 and $40,823 for
2003. Audit related fees paid in 2003 were related to consultations concerning
financial accounting and reporting standards and assistance with accounting for
acquisitions and dispositions carried out by the Company.

Tax Fees

In 2002, we paid Deloitte & Touche LLP $6,000 for tax related
services. In 2003, we paid Deloitte & Touche LLP $15,093 for tax related services.

All Other Fees

We did not purchase any other services from Deloitte & Touche
LLP
in 2002 or 2003.

Our Audit Committee has adopted a policy and procedures for
the approval of audit and non-audit services rendered by our independent
auditors, Deloitte & Touche LLP. The policy generally requires the Audit Committee's
approval of the scope of the engagement of our independent auditors on an
individual basis. The policy prohibits retention of the independent auditors 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 public auditors.
Our Audit Committee approved all of the audit fees, audit-related fees and tax
fees from May 2003.

Item 16D - Exemption from the Listing
Standards for Audit Committees

Not applicable

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

Not applicable



Part III

Item 17 - Financial Statements

Not applicable

Item 18 - Financial Statements

See attached

87

Management's Report

The consolidated financial statements and all information in
the Annual Report have been prepared by management and approved by the Board of
Directors. These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, where appropriate, reflect management's best estimates and
judgements. Management is responsible for the accuracy, integrity and
objectivity of these consolidated financial statements within reasonable limits
of materiality and for the consistency of financial data included in the text of
the Annual Report with that in these consolidated financial statements.

To assist management in the discharge of these
responsibilities, the Company maintains a system of internal controls 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
auditors' report. 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 external auditors have direct access
to the Audit Committee of the Board of Directors.

Deloitte & Touche LLP has audited these consolidated
financial statements independently on behalf of the shareholders, in accordance
with auditing standards generally accepted in the United States of America.
Their report outlines the nature of their audit and expresses their opinion on
these consolidated financial statements.



|(signed)
    Mike Donnell
    President & Chief Executive Officer
    February 27, 2004 |  | (signed)
    Dale Kearns
    Chief Financial Officer
|--------------------------------------------------------------------------------------- |  | ----------------------------------------------------



88

Independent Auditors' Report

To the Shareholders of Zi Corporation

We have audited the consolidated balance sheets of Zi
Corporation as at December 31, 2003 and 2002 and the consolidated statements of
loss, shareholders' equity and cash flows for each of the years in the three
year period ended December 31, 2003. 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 auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform an
audit to obtain reasonable assurance about 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, 2003 and 2002 and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 2003 in accordance with accounting principles generally accepted in the
United States of America.

(signed) "Deloitte & Touche LLP"

|Chartered Accountants
    Calgary, Alberta, Canada
    February 27, 2004 |  | 
|------------------------------------------------------------------------ |  | 

89

Comments By Auditors on Canada-

United States of America Reporting Differences

In the United States of America, 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 financial statements. Although we conducted our audits in
accordance with both Canadian generally accepted auditing standards and auditing
standards generally accepted in the United States of America, our report 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.

In the United States of America, reporting standards for
auditors require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company's financial statements, such as the
change described in note 3, to the financial statements. Our report is expressed
in accordance with Canadian auditing standards which do not require a reference
to such changes in accounting principles in the auditor's report when the change
is properly accounted for and adequately disclosed in the financial statements.

(signed) "Deloitte & Touche LLP"

|Chartered Accountants
    Calgary, Alberta, Canada
    February 27, 2004 |  | 
|------------------------------------------------------------------------ |  | 

90



ZI CORPORATION
CONSOLIDATED BALANCE SHEETS



As at December 31
      
      2003
      
      2002(All amounts in Canadian
      dollars except share amounts)AssetsCurrent assetsCash and cash
      equivalents
      $
      3,065,605
      $
      5,342,771Accounts receivable, net of allowance of
      $658,156 (2002 - $389,765)
      
      5,250,995
      
      4,480,800Work-in-progress
      
      -
      
      153,975Prepayments and deposits
      
      517,547
      
      1,110,492Total current assets
      
      8,834,147
      
      11,088,038Notes receivable (note 4)
      
      2,593,000
      
      3,155,200Capital assets - net
      (note 6)
      
      1,455,074
      
      2,033,738Intangible assets - net
      (note 7)
      
      761,836
      
      1,986,937Investment in
      significantly influenced company (note 4 and 11)
      
      -
      
      -$
      13,644,057
      $
      18,263,913Liabilities and
      shareholders' equityCurrent liabilitiesAccounts payable and accrued liabilities (note
      18)
      $
      5,311,458
      $
      6,706,687Deferred revenue
      
      1,426,771
      
      798,268Notes payable (note 8)
      
      1,296,500
      
      5,206,080Current portion of capital lease obligations
      (note 9)
      
      28,647
      
      158,952Total current
      liabilities
      
      8,063,376
      
      12,869,987Capital lease obligations (note 9)
      
      4,330
      
      32,9778,067,706
      
      12,902,964Contingent liabilities,
      going concern and commitments (notes 13, 2 & 15)Shareholders' equityShare capital (note 10)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, 39,371,560 (2002 - 37,914,250)
      issued and outstanding
      
      134,976,726
      
      130,144,769Accumulated
      deficit
      
      (131,816,518)
      
      (127,424,236)Accumulated other comprehensive income
      
      2,416,143
      
      2,640,4165,576,351
      
      5,360,949$
      13,644,057
      $
      18,263,913






See accompanying notes to consolidated financial statements.

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

91

ZI CORPORATION
CONSOLIDATED STATEMENTS OF LOSS



Years ended
      December 31
      
      2003
      
      2002
      
      2001(All amounts in Canadian dollars except share
      amounts)RevenueLicense and implementation fees
      $
      13,557,330
      $
      10,166,562
      $
      5,130,553Other product revenue
      
      934,058
      
      3,037,035
      
      248,35114,491,388
      
      13,203,597
      
      5,378,904Cost of
      salesLicense and implementation fees
      
      485,581
      
      394,749
      
      1,412,123Other
      
      117,310
      
      1,233,312
      
      227,287602,891
      
      1,628,061
      
      1,639,410Gross margin
      
      13,888,497
      
      11,575,536
      
      3,739,494Operating
      expensesSelling
      general and administrative
      
      (11,395,883)
      
      (17,849,562)
      
      (10,226,620)Litigation
      and legal (note 13)
      
      (1,206,421)
      
      (11,794,981)
      
      (3,052,701)Product
      research and development
      
      (2,940,322)
      
      (4,365,803)
      
      (1,000,614)Depreciation and amortization (note 6 & 7)
      
      (1,865,648)
      
      (3,833,991)
      
      (3,045,997)Impairment
      of goodwill (note 7)
      
      -
      
      (1,976,908)
      
      -Impairment
      of intangible assets (note 7)
      
      -
      
      (2,287,949)
      
      -Operating
      loss before undernoted
      
      (3,519,777)
      
      (30,533,658)
      
      (13,586,438)Interest on capital lease obligation
      
      (13,922)
      
      (139,046)
      
      (50,744)Other interest
      
      (892,268)
      
      (439,765)
      
      (6,676)Interest income and other income
      
      33,685
      
      286,429
      
      1,553,973Equity interest in loss of significantly
      influenced company (note 11)
      
      -
      
      (343,402)
      
      -Loss from
      continuing operationsbefore income taxes
      
      (4,392,282)
      
      (31,169,442)
      
      (12,089,885)Income taxes
      
      -
      
      -
      
      (174,286)Loss from
      continuing operations
      
      (4,392,282)
      
      (31,169,442)
      
      (12,264,171)Discontinued operations (note 5)Loss from discontinued operations
      
      -
      
      (9,077,079)
      
      (7,957,967)Net loss
      $
      (4,392,282)
      $
      (40,246,521)
      $
      (20,222,138)Basic and
      diluted loss from continuing operationsper share (note 10)
      $
      (0.11)
      $
      (0.83)
      $
      (0.33)Loss from discontinued operations per share
      
      -
      
      (0.24)
      
      (0.21)Basic and diluted loss per share (note 10)
      $
      (0.11)
      $
      (1.07)
      $
      (0.54)Weighted
      average common shares
      
      38,719,786
      
      37,767,000
      
      37,190,905Common shares outstanding, end of period
      
      39,371,560
      
      37,914,250
      
      37,544,650






See accompanying notes to consolidated financial statements.

92

ZI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



Common shares issued(All amounts in Canadian dollars except per
      share amounts)
      Accumulated other comprehensive income (loss)
      Shares
      Amount
      Additional paid-in capital
      Accumulated deficitBalance -
      December 31, 2000
      $
      996,755
      36,990,967
      $ 125,325,278
      $ 52,292
      $ (66,955,577)Issued on exercise of stock options
      -
      528,683
      2,645,680
      -
      -Issued for patents acquired
      -
      25,000
      250,000
      -
      -Loss from continuing operations
      -
      -
      -
      -
      (12,264,171)Loss from discontinued operations
      -
      -
      -
      -
      (7,957,967)Other comprehensive income from foreign
      currency translation adjustment
      1,601,573
      -
      -
      -
      -Balance -
      December 31, 2001
      $
      2,598,328
      37,544,650
      $ 128,220,958
      $ 52,292
      $ (87,177,715)Issued on exercise of stock options
      -
      304,600
      1,117,446
      -
      -Issued pursuant to acquisition of Magic Lantern
      less shares held in escrow
      -
      65,000
      513,500
      -
      -Issued share purchase warrants
      -
      -
      -
      240,573
      -Loss from continuing operations
      -
      -
      -
      -
      (31,169,442)Loss from discontinued operations
      -
      -
      -
      -
      (9,077,079)Other comprehensive income from foreign
      currency translation adjustment
      42,088
      -
      -
      -
      -Balance -
      December 31, 2002
      $ 2,640,416
      37,914,250
      $ 129,851,904
      $ 292,865
      $ (127,424,236)Issued on exercise of stock options
      -
      301,666
      982,655
      -
      -Issued under a private placement
      -
      1,000,000
      2,639,219
      -
      -Issued restricted stock units
      -
      -
      -
      713,005
      -Exercise of restricted stock units
      -
      33,961
      -
      -
      -Issued shares on settlement of debt
      -
      21,683
      60,929
      -
      -Issued share purchase warrants
      -
      -
      -
      74,149
      -Issued on exercise of share purchase warrants
      -
      100,000
      362,000
      -
      -Loss from continuing operations
      -
      -
      -
      -
      (4,392,282)Other comprehensive loss from foreign currency
      translation adjustment
      (224,273)
      -
      -
      -
      -Balance - December 31, 2003
      $ 2,416,143
      39,371,560
      $ 133,896,707
      $ 1,080,019
      $ (131,816,518)




























See accompanying notes to consolidated financial statements.

93

ZI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS



Years ended December 31
      
      2003
      
      2002
      
      2001(All amounts in
      Canadian dollars)Net cash
      flow used in operating activities:Net loss from
      continuing operations
      $
      (4,392,282)
      $
      (31,169,442)
      $
      (12,264,171)Items not
      affecting cash:Loss (gain) on
      dispositions of capital assets
      
      3,384
      
      330,194
      
      (20,983)Depreciation
      and amortization
      
      1,865,648
      
      3,833,991
      
      3,045,997Impairment of
      goodwill
      
      -
      
      1,976,908
      
      -Impairment of
      intangible assets
      
      -
      
      2,287,949Interest
      expense
      
      135,079
      
      240,573
      
      -Compensation
      expense
      
      713,005
      
      -
      
      -Equity in net
      loss of significantly influenced company
      
      -
      
      343,402
      
      -Decrease (increase) in non-cash
      working capital (note 18)
      
      (790,001)
      
      1,896,595
      
      1,410,072Cash flow used in operating
      activities
      
      (2,465,167)
      
      (20,259,830)
      
      (7,829,085)Cash flow
      from (used in) financing activities:Proceeds from issuance of common shares, net of
      issuance costs
      
      3,983,873
      
      1,117,446
      
      2,645,680Settlement of note payable
      
      (5,206,080)
      
      -
      
      -Issuance of note payable
      
      1,296,500
      
      5,127,910
      
      -Payment of capital lease obligations
      
      (158,952)
      
      (143,080)
      
      (139,700)Cash flow from (used in) financing activities
      
      (84,659)
      
      6,102,276
      
      2,505,980Cash flow
      from (used in) investing activities:Short-term investments
      
      -
      
      8,577,503
      
      (8,577,503)Purchase of capital assets
      
      (1,410)
      
      (1,060,012)
      
      (642,137)Proceeds from capital dispositions
      
      3,594
      
      50,964
      
      118,321Software development costs
      
      (67,451)
      
      (978,161)
      
      (4,318,840)Other deferred costs
      
      -
      
      (60,000)
      
      (142,636)Acquisition of subsidiaries net of bank
      indebtedness
      
      -
      
      (1,884,433)
      
      -Sale of subsidiary net of cash given up
      
      562,200
      
      (548,461)
      
      -Cash flow from (used in) investing activities
      
      496,933
      
      4,097,400
      
      (13,562,795)Cash flow
      used by discontinued operations
      
      -
      
      (3,730,127)
      
      (10,516,575)Effect of foreign exchange rate changes on
      cash and cash equivalents
      
      (224,273)
      
      42,088
      
      1,601,573Net cash
      outflow
      
      (2,277,166)
      
      (13,748,193)
      
      (27,800,902)Cash and cash equivalents, beginning of year
      
      5,342,771
      
      19,090,964
      
      46,891,866Cash and cash equivalents, end of year
      $
      3,065,605
      $
      5,342,771
      $
      19,090,964Non cash
      financing activityEquipment acquired under capital lease
      $
      -
      $
      34,200
      $
      83,695Patent acquired through share issuance
      $
      -
      $
      -
      $
      250,000Acquisition of subsidiary
      $
      -
      $
      513,500
      $
      -Components
      of cash and cash equivalentsCash
      $
      3,065,605
      $
      5,342,771
      $
      4,971,376Cash equivalents
      $
      -
      $
      -
      $
      14,119,588Supplemental cash flow informationCash paid for interest
      $
      771,111
      $
      136,888
      $
      57,420Cash paid for income taxes
      $
      -
      $
      -
      $
      174,286






See accompanying notes to consolidated financial statements.

94

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. Through its
e-Learning business segment which includes Oztime, English Practice and an
equity interest in Magic Lantern Group, Inc., the Company is also involved in
e-Learning technology, content and customer service as well as educational
content and distribution channels to offer learning management systems,
interactive online courses and network education solutions to meet diverse
client requirements.

2.         Going
Concern Basis Of Presentation

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. The Company has incurred operating
losses on a recurring basis. On December 19, 2003, the Company borrowed US$1.0
million through the issuance of a demand note payable on terms described in
note 8. At present, Zi has not arranged replacement financing to repay the note
and there can be no assurance that Zi will be successful in its efforts to
complete such refinancing. On December 6, 2002 the Company settled a judgement
in favour of Tegic Communications Inc. ("Tegic"), a division of AOL Time Warner
("AOL") as discussed in note 13. Under the terms of the settlement agreement,
the Company, among other things, is obliged as at December 31, 2003 to pay a
final instalment of US$750,000 on January 2, 2004, which was paid (note 19).

Continuing operations are dependent on the Company achieving
profitable operations in the coming year, being able to refinance its
borrowings, pay the remaining scheduled installment payment due under the
settlement agreement with AOL (note 19) and increase revenue and achieve
profitability. These financial statements do not include any adjustments to the
amounts and classifications of assets and liabilities that may be necessary
should the Company be unable to raise additional capital to meet the repayment
of the note payable, increase revenue and continue as a going concern.

3.        
Significant Accounting Policies

The accompanying consolidated financial statements are
prepared by management in conformity with accounting principles generally
accepted in the United States of America ("US GAAP"), which conforms in all
material respects with Canadian generally accepted accounting principles
("Canadian GAAP"), except as disclosed in note 17. Historically, the primary
consolidated financial statements of the Company were prepared in accordance
with Canadian GAAP with annual reconciliation of the Company's financial
position and results of operations to US GAAP. Management has elected to report
in accordance with US GAAP as of December 31, 2003 to provide information on a
more comparable basis with Zi's industry peers and to better assist with the
understanding of the financial statements to the majority of their users, who
are primarily in the United States of America.

As part of the preparation of US GAAP consolidated financial
statements, certain additional disclosures, as compared to the previously issued
Canadian GAAP consolidated financial statements, were required. As part of the
additional disclosures, the Company re-established the previously reduced
December 31, 1997 stated capital. The stated capital was reduced by the December
31, 1996

95

deficit, as allowed under Canadian GAAP but not under US GAAP.
The result has no effect on shareholders' equity as at December 31, 2003, 2002
and 2001. In addition, costs of start-up activities and organizational costs are
expensed as incurred under US GAAP. Previously capitalized start-up costs
recorded in 1999, related to the start-up of Beijing Oz Education Network Ltd.,
and the related amortization expense recognized in subsequent years, have been
excluded and these costs were expensed in the year they were incurred.

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

Note 17 includes explanations of material differences to
Canadian GAAP, a reconciliation of net loss under US GAAP to net loss using
Canadian GAAP for all periods presented, relevant Canadian GAAP disclosure not
already reflected in these financial statements and the consolidated balances
sheets, statements of operations and cash flows as previously presented under
Canadian GAAP for the years ended December 31, 2002 and 2001.

Principles of consolidation

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

Foreign currency translation

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

Use of estimates

The preparation of these consolidated financial statements
and related disclosures in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
these financial statements, and revenue and expenses during the period reported.
Estimates include allowance for doubtful accounts; estimated useful life of
intangible assets, deferred costs and capital assets; provisions for contingent
liabilities; valuation allowance for future tax assets; and revenue for
licensing and engineering consulting services using the percentage of completion
method, and reflect

96

management's best estimates. By their nature, these estimates
are subject to uncertainty and the effect on the financial statements of changes
in estimates in future periods could be significant. Estimates and assumptions
are reviewed periodically and the effects of revisions are reflected in the
period that they are determined to be necessary. The allowance for doubtful
accounts reflects estimates of doubtful amounts in accounts receivable. The
allowance is based on specifically identified accounts, historical experience
and other current information.

Cash and cash equivalents

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

Capital assets

The Company records capital assets at cost and provides for
amortization over the life of the asset using the declining-balance method at a
rate of 30 percent for computer and office equipment. Leasehold improvements are
recorded at cost and amortized using the straight-line method over the remaining
term of the lease.

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

Intangible assets

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

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

The Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets" in 2002. The Company records intangible assets, excluding
goodwill and intangible assets with indefinite lives at cost and provides for
amortization over their expected useful lives using the straight-line method
over the following periods:

Acquired software licenses                            
        3 years
        Patents acquired                                            
        11 years
        Software development costs                          
        3 years

97

Goodwill and other intangible assets with indefinite lives
are not amortized, but are tested for impairment at least annually, or more
frequently, if events or changes in circumstances indicate that the asset might
be impaired in accordance with SFAS No. 142. The Company evaluated its goodwill
and intangible assets for impairment at September 30, 2002 and determined that
an impairment charge was necessary (note 7).

The following table outlines the impact of the change in
accounting policy, as if this change had been applied retroactively effective
January 1, 2001.



Years ended December 31,
      
      2001Net loss
      $
      (20,222,138)Add: Goodwill amortization
      
      1,083,407Pro forma net loss
      $
      (19,138,731)Basic net loss
      per share, as previously reported
      $
      (0.54)Add: Goodwill amortization
      
      0.03Pro forma basic net loss per share
      $
      (0.51)






Impairment of long-lived assets

In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144. SFAS No. 144 established a single model for the impairment
of long-lived assets and broadens the presentation of discontinued operations to
include a component of the entity. SFAS No. 144 is effective for years beginning
after December 15, 2001.The Company adopted SFAS No. 144 in 2002. The Company
annually reviews the carrying value of its long-lived assets, including
intangible assets, on September 30 of each year and periodically reviews the
carrying value of its intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. To the
extent the estimated future net cash inflows from such assets is less than the
carrying amount, an impairment loss is recognized. The Company considers factors
such as significant changes in the business climate and projected discounted
cash flows from the respective assets. The Company evaluated its remaining
intangible assets at September 30, 2003 and determined that no impairment had
occurred.

Revenue recognition

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

Under software licensing arrangements, the Company recognizes
revenues - provided that: a non-cancellable license agreement has been signed;
the software and related documentation have been delivered; there are no
uncertainties regarding customer acceptance; collection of the resulting
receivable is deemed probable; the fees are fixed and determinable; and no other
significant vendor obligations exist. Any revenue associated with contracts
having multiple elements is deferred and recognized ratably over the period of
the contract unless clear evidence exists with respect to the fair

98

value of each separate element of the contract. In addition,
contracts involving significant modifications or customization of the software
sold are accounted for under the guidelines of contract accounting.

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

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

Income taxes

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

Leases

Leases are classified as capital or operating leases. A lease
that transfers to the lessee substantially all the benefits and risks incidental
to ownership is classified as a capital lease. At inception, a capital lease is
recorded as if it were an acquisition of an asset and the incurrence of an
obligation. Assets recorded as capital leases are amortized on a basis
consistent with that of accounting for capital assets. Operating lease costs are
expensed as incurred.

Share issue costs

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

Loss per share

Loss per share is computed based on the weighted average
basic number of shares outstanding for the period. Diluted loss per share has
been calculated using the treasury stock method, whereby diluted loss per share
is calculated as if options and common share purchase warrants were exercised at
the beginning of the year and funds received were used to purchase the Company's
own stock. Diluted loss per share in 2003, 2002 and 2001 was anti-dilutive.
Common shares held in escrow that are subject to future performance level
criteria are excluded in the calculation of loss per share (35,000 in 2003,
75,000 in 2002; 40,000 in 2001).

Comprehensive Loss

SFAS No. 130, "Reporting Comprehensive Income", establishes
standards for the reporting and display of comprehensive income and its
components in general-purpose financial statements.

99

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

Financial instruments

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

The Company maintains substantially all cash and cash
equivalents and short-term investments 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.

Stock-based compensation plan

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

The Company has a stock-based compensation plan, which is
described in note 10. Any consideration paid by employees on exercise of stock
options or purchase of stock is credited to share capital. If stock or stock
options are repurchased from employees, the excess of the consideration paid
over the carrying amount of the stock or stock option cancelled is charged to
retained earnings.

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

100

stock option plan been determined by this method, Zi's net
loss and loss per share would have been as follows:



Years ended December 31
      2003
      2002
      2001Net
      loss from continuing operations:As reported
      $
      (4,392,282)
      $(31,169,443)
      $
      (12,264,171)Stock compensation expense
      (4,886,563)
      (9,541,581)
      
      (9,169,135)Pro forma
      (9,278,845)
      (40,711,024)
      
      (21,433,306)Loss from
      discontinued operations:
      -
      (9,077,079)
      
      (7,957,967)Pro forma net loss:
      $ (9,278,845)
      $(49,788,103)
      $
      (29,391,273)Net loss per
      common share from continuing operations:As reported, basic and diluted
      $ (0.11)
      $ (0.83)
      $
      (0.33)Stock compensation expense, basic and diluted
      (0.13)
      (0.25)
      
      (0.25)Pro forma, basic and dilutive
      $ (0.24)
      $ (1.08)
      $
      (0.58)Loss per share
      from discontinued operations:
      -
      (0.24)
      
      (0.21)Net loss per common share:
      $ (0.24)
      $ (1.32)
      $
      (0.79)Stock options issued during period
      2,342,532
      306,666
      
      1,893,498Weighted average exercise price
      $ 3.24
      $ 8.84
      $
      10.85Weighted average fair value of options granted
      during the period
      $ 1.84
      $ 4.32
      $
      5.35






The foregoing information is calculated in accordance with
the Black-Scholes model, using the following data and assumptions:



Years ended December 31
      2003
      2002
      2001Risk free
      interest rate
      3.82%
      3.94%
      4.63%Expected life in
      years
      4.4
      3.0
      3.0Expected dividend
      yield
      0%
      0%
      0%Volatility
      65%
      70%
      70%






Recent accounting pronouncements

On January 1, 2003, the Company adopted SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 applies to the legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
Adoption of SFAS No. 143 in 2003 has not had a material impact on the Company's
financial statements.

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on
the disclosures the Company must make about its obligations under certain
guarantees that Zi has issued. It also requires the Company to recognize, at the
inception of a guarantee, a liability for the fair value of the obligations Zi
has undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions are to be applied only to guarantees issued

101

or modified after December 31, 2002. Adoption of these
provisions has not had a material impact on the Company's financial statements.



In December 2003, the FASB issued Interpretation ("FIN") No.
46 (revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") No. 51, (FIN 46R). FIN
46R requires consolidation of entities in which the Corporation is the primary
beneficiary, despite not having voting control. Management has evaluated FIN 46R
and does not believe the adoption will have a material effect on the Company's
financial statements.

In January 2003, the FASB issued Statement No. 148. SFAS
No. 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 has no material
impact on Zi, as the Company does not plan to adopt the fair value method of
accounting for stock options at the current time. Zi has included the required
disclosures.



The Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-21, addressing how to account for arrangements that involve the
delivery or performance of multiple products, services, and/or rights to use
assets. Revenue arrangements with multiple deliverables are divided into
separate units of accounting if the deliverables in the arrangement meet the
following criteria: (a) the delivered item has value to the customer on a stand
alone basis; (b) there is objective and reliable evidence of the fair value of
undelivered items; and (c) delivery of any undelivered item is probable.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, with the amount allocated to the
delivered item being limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance conditions.
The

final consensus is applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early adoption permitted.
Management has evaluated EITF Issue 00-21 and does not believe the adoption will
have a material effect on the Company's financial statements.

4.        
Acquisitions And Dispositions

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

Acquisition - Magic Lantern Communications Ltd. ("Magic
Lantern")

Effective March 18, 2002, the Company indirectly acquired all
of the issued and outstanding shares of Magic Lantern. Magic Lantern is a
Canadian education content provider with two subsidiaries: Tutorbuddy Inc.,
which is wholly owned; and Sonoptic Technologies Inc. ("STI"), which is 75
percent owned. The remaining 25 percent of STI is held by Provincial Holdings
Ltd. ("PHL") and is subject to a redemption agreement.

Magic Lantern was acquired for cash consideration of
$1,850,000, and 100,000 common shares of Zi with a value of $790,000 based on
the Company's closing share price on the date of the agreement. Of the Zi common
shares issued, 35,000 shares were placed in escrow subject to future performance

102

obligations. In addition, there were acquisition costs
amounting to $161,649 to effect the business combination.

At December 31, 2002, it was determined that the performance
obligations attached to the 35,000 shares placed in escrow would most likely not
be met. These escrowed shares were originally included in the determination of
the purchase price at the purchase date. As a result, the purchase price was
adjusted by $276,500 to reflect the exclusion of the escrowed shares and the
resulting adjustment was allocated to the assets purchased. The purchase price
was allocated as follows:



Net assets
      acquired:Bank indebtedness
      $
      (34,433)Non-cash working capital
      
      52,765Notes payable
      
      (875,303)Capital assets
      
      1,623,718Software development costs
      
      458,402Distribution agreements
      
      1,300,000$
      2,525,149






Disposition - Magic Lantern Communications Ltd.

On November 7, 2002, the Company completed the sale of the
Magic Lantern to JKC Group Inc. ("JKC"), a related party (note 14) and an
American Stock Exchange listed company incorporated in the state of New York.
Magic Lantern operations comprise the most significant portion of JKC's
operations subsequent to the sale. Following the closing of the transaction on
November 7, 2002, JKC was renamed to Magic Lantern Group, Inc. ("MLG").

Under the agreement, Zi received a 45 percent equity interest
in MLG, consisting of 29,750,000 shares, and a three-year promissory note of MLG
in the amount of US$3,000,000. The note consideration is subject to adjustment
based on the MLG's performance for the first year after the sale. Zi may receive
additional consideration of up to US$2,930,000, payable in cash and stock, if
the MLG's consolidated revenues for that period exceed US$12,222,500. The
purchase price will also be subject to reduction if MLG revenues for that period
are less than US$5,000,000. In that event, the shortfall, up to US$1,000,000,
will be offset against the principal amount of the MLG promissory note.

The Company accounted for the sale at the date of closing by
recognizing its interest in the net assets of MLG acquired and 55 percent of the
promissory note received, excluding the note's contingent portion of
US$1,000,000. The Company's $3,498,602 book value for Magic Lantern at
November 7, 2002, consisting of patents, distribution agreements, capital and
current net assets, upon closing of the transaction resulted in a note
receivable and an investment in shares, in the amount of $3,155,200 and $343,402
respectively, with no gain recognized. A nominal value has been ascribed to the
MLG stock consideration received.

103



Net assets
      disposed:Cash
      $
      548,461Non-cash working capital
      
      54,350Capital assets
      
      1,606,326Deferred development costs
      
      865,084Distribution agreements & other
      
      1,221,514Notes payable
      
      (797,133)$
      3,498,602






5.        
Discontinued Operations

Through the Company's discontinued Zi Services business
segment, Zi provided specialized product development and customized solutions in
BluetoothTM, VoIP and man-machine interface design to the
telecommunications industry.

On June 30, 2002, the Board of Directors of the Company
approved the adoption of a plan to dispose of its Zi Services business segment,
the telecom engineering division of the Company operated by Telecom Technology
Company Ltd. Accordingly, the results of operations of these businesses were
accounted for on a discontinued basis as at June 30, 2002. On July 1, 2002, the
Company announced that it had signed a letter of intent to sell Zi Services. On
October 31, 2002 the letter of intent expired and the sale was not executed.
Management determined that the carrying value of Zi Services, consisting of
deferred software development costs of $3,289,922, goodwill of $753,140, capital
assets of $54,734 and net current assets of $335,727 were no longer recoverable.
As a result, the Company recognized a charge of $4,433,523 in 2002. As at
December 31, 2002, the Company has sold the remaining assets of this business
segment and no longer carries on any related business activities.



Year ended December 31
      
      2002
      
      2001Revenue
      $
      239,308
      $
      852,864Operating Loss
      $
      (9,077,079)
      $
      (7,957,967)






6.         Capital
Assets



Cost
      Accumulated amortization
      Net book
      value2003Computer and
      office equipment
      
      $3,606,462
      $
      2,336,622
      $
      1,269,840Leasehold improvements
      
      757,094
      
      571,860
      
      185,234$4,363,556
      $
      2,908,482
      $
      1,455,0742002Computer and
      office equipment
      
      $3,860,840
      $
      2,108,722
      $
      1,752,118Leasehold improvements
      
      806,338
      
      524,718
      
      281,620$4,667,178
      $
      2,633,440
      $
      2,033,738






Included in computer and office equipment are assets under
capital lease totalling $555,536 (2002 -$555,536) and related accumulated
amortization of $334,049 (2002 - $255,198).

104

7.         Intangible
Assets

|                               | Cost | Accumulated amortization | Net book
    value
|------------------------------ | ---- | ------------------------ | ------------------
|2003                           |      |                          |                   
|Patent                         | $    | 800,666                  | $                 
|Software
    development costs |      | 16,350,130               |                   
|Acquired software licenses     |      | 75,645                   |                   
|                               |      | $17,226,441              | $                 
|2002                           |      |                          |                   
|Patent                         | $    | 835,109                  | $                 
|Software
    development costs |      | 16,411,513               |                   
|Human Capital                  |      | 705,517                  |                   
|Goodwill                       |      | 4,088,439                |                   
|Acquired software licenses     |      | 75,645                   |                   
|                               | $    | 22,116,223               | $                 

During 2003, $67,451 (2002- $1,756,126) of software
development costs were deferred and are being amortized using the straight-line
method over a three-year economic life. Amortization in 2003 includes $1,208,775
of amortization of software development costs (2002 - $2,587,364).

In accordance with SFAS No.142, the Company tested for
impairment of goodwill at September 30, 2002, using projected discounted cash
flows, and recorded an impairment charge of $1,976,908 in the year. This charge
was in respect to remaining goodwill associated with the purchase of the Chinese
e-Learning business, in light of limitations for funding e-Learning businesses
future development and growth.



GoodwillNet book value - December 31, 2001
      $
      1,976,908Impairment - September 30, 2002
      
      (1,976,908)Net book value - December 31, 2002
      $
      -






The Company evaluated its remaining other intangible assets
at September 30, 2003 and determined that no impairment had occurred. The
Company reviewed the carrying value of its other intangible assets and
determined that the deferred software development costs related to the Company's
China based e-Learning business at September 30, 2002, using a projected
discounted cash flow model, were not recoverable in light of limitations for
funding its future development and growth and recorded a charge of $2,287,949.

105

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



2004
      $
      378,5232005
      
      117,2722006
      
      78,2962007
      
      61,2102008
      
      61,210Total
      $
      696,511






8.         Notes
Payable

On December 19, 2003, the Company borrowed US$1.0 million
through the issuance of a demand loan payable. The note payable bears interest
at the prime rate (4.5 percent at December 31, 2003) plus one percent, payable
monthly. The loan is secured by a first security interest in 5,000,000 shares of
MLG, held by the Company.

On December 5, 2002, the Company borrowed US$3,300,000
(before deduction for fees and expenses) through the issuance of a note payable.
The note payable, with interest at 12 percent per annum, was due March 5, 2003,
extended to April 30, 2003 and subsequently to May 7, 2003, at which time it was
settled in full. The lender was issued 100,000 share purchase warrants upon
funding, which were exercisable at one common share to one share purchase
warrant for a price of $3.62 per share (note 10). A commitment fee of US$300,000
was paid upon funding. The first extension terms included a four percent
extension fee of US$130,800 paid upon funding. The note was secured through a
general security agreement, a limited recourse guarantee by a private company
owned by an officer who is also a director of the Company and a share pledge
agreement by the Company which pledged and granted a first security interest in
29,750,000 shares of MLG, held by the Company.

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

9.         Capital
Lease Obligations

The Company has entered into leases for computer and office
equipment with payment terms over three years with interest at rates varying
between 8.86 percent and 19.22 percent. Obligations as at December 31, 2003 were
$32,977 (2002 - $191,929). The current portion at December 31, 2003 was $28,647
(2002 - $158,952).

106

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

|2004                                   | $ | 30,979
|-------------------------------------- | - | ------
|2005                                   |   | 4,444 
|Total minimum
    lease payments       |   | 35,423
|Amount
    representing interest       |   | 2,446 
|Amount included in current liabilities |   | 28,647
|                                       | $ | 4,330 

10.         Share
Capital

Common share warrants

At December 31, 2003, the Company had 500,000 share purchase
warrants outstanding. On June 19, 2003, the Company completed a private
placement of 1.0 million units priced at US$2.

00 per unit for net proceeds of US$1,968,610. Each unit
consists of one share of the Company's stock and one-half of a stock purchase
warrant. Each whole stock purchase warrant is exercisable into one share of the
Company's stock on or before May 31, 2006 at an exercise price of US$2.25 per
share. Under the terms of the private placement, the units sold in the private
placement are subject to statutory restrictions on resale, including hold
periods.

On December 5, 2002, the Company issued 100,000 share
purchase warrants to acquire 100,000 common shares of the Company at a price of
$3.62 per share, which were to expire two years from the date of issue (note 8).
In June 2003, the Company issued 100,000 shares through the exercise of these
100,000 share purchase warrants. In 2002, the Company recorded, as part of the
other interest expense, a charge of $240,573 calculated by using the Black-Scholes
option pricing model.

At December 31, 2001, the Company had 1,482,233 share
purchase warrants outstanding to acquire 1,482,233 common shares of the Company.
These warrants were initially issued in connection with private placements in
1999 and 2000. On December 10, 2001, the Company amended the terms of the
warrants to extend their expiry date to December 29, 2002 and to amend the
exercise price to US$7.00. The Company did not assign any value to these
warrants. These warrants expired December 29, 2002.

Stock options and restricted stock units

At December 31, 2003, the Company maintained a Stock Option
Plan for all directors, officers, employees and consultants of the Company.

Under the terms of the Stock Option Plan, options and
restricted stock units ("RSU's") may be granted at the discretion of the Board
of Directors. The option price equals the closing price of the Company's shares
on the day preceding the date of grant. The options and RSU's are not
assignable, vest at the discretion of the Board of Directors, and expire, at
maximum, after the tenth anniversary of the date of grant. In 2003, 162,532
RSU's were granted and issued without performance criteria attached and at no
cost to the grantee.

Since inception of the Stock Option Plan in 1993,
shareholders have approved resolutions reserving a total of 11,615,000 common
shares for issuance under the plan of which 500,000 are issuable as

107

RSU's. At December 31, 2003, the Company had 1,411,486 shares
(337,468 of which are reserved for RSU's) remaining reserved for possible future
allocation under the plan.

Stock option activity and related information for the three
years ended December 31, 2003 is as follows:



2003
      2002
      2001Shares
      under options
      and RSU's
      Weighted average exercise price
      Shares
      under options
      Weighted average exercise price
      Shares
      under options
      Weighted average exercise priceOutstanding, beginning of year
      5,135,700
      $ 8.92
      5,874,852
      $
      9.43
      5,486,151
      $
      9.09Granted
      2,342,532
      3.24
      306,666
      8.84
      1,893,498
      10.85Exercised
      (335,627)
      (2.93)
      (304,600)
      (3.67)
      (528,683)
      (5.00)Forfeited or expired
      (1,667,701)
      (9.36)
      (741,218)
      (15.10)
      (976,114)
      (12.68)Outstanding, end of year
      5,474,904
      $ 6.72
      5,135,700
      $ 8.92
      5,874,852
      $ 9.43Exercisable, end of year
      4,683,732
      $ 7.19
      4,671,129
      $ 8.74
      4,382,515
      $ 8.57Weighted-average fair value of options granted during
      the year
      
      $ 1.84
      
      $ 4.32
      
      $ 5.35






The following table summarizes the exercise price ranges of
outstanding and exercisable options as of December 31, 2003:



Total options outstanding
      Options exercisableRange of exercise prices
      Number outstanding December 31, 2003
      Weighted
      average remaining contractual life
      Weighted average
      exercise price
      Number exercisable December 31, 2003
      Weighted average exercise price$ 2.10 - $ 5.05
      2,978,738
      4.1 years
      $ 2.96
      2,209,067
      $ 2.71$ 7.00 - $ 10.71
      1,376,166
      2.8 years
      9.20
      1,367,165
      9.21$ 11.00 - $ 16.60
      1,081,000
      3.1 years
      12.50
      1,068,500
      12.48$ 22.95 - $ 31.00
      3,000
      2.0 years
      31.00
      3,000
      31.00$ 45.40 - $ 47.30
      36,000
      2.2 years
      47.30
      36,000
      47.30$ 2.10 - $ 47.30
      5,474,904
      3.6 years
      $ 6.72
      4,683,732
      $ 7.19






Escrowed shares

Pursuant to the acquisition of English Practice Inc. ("EPI")
on June 15, 2000 and to the terms of an amended purchase agreement, the Company
had placed in escrow 40,000 common shares subject to release based upon
performance obligations. The performance obligations were not met under the
terms of the amended purchase agreement and were subsequently cancelled in 2003.
Pursuant to the acquisition of Magic Lantern (note 4), the Company had placed in
escrow 35,000 common shares that were subject to release based upon performance
obligations. The performance obligations were not met under the terms of the
purchase agreement and the escrowed shares are to be cancelled.

11.         Equity
Interest In Significantly Influenced Company

The Company holds a 45 percent interest in MLG received upon
the disposition of Magic Lantern on November 7, 2002 (note 4). The Company's
proportionate share of the loss from MLG operations for the year ended
December 31, 2003 has not been recognized as the carrying value of the
investment in

108

MLG is nil and the Company has no commitment to fund this
loss. The Company's unrecorded share of the loss from MLG's operations between
November 8, 2002 and September 30, 2003 is $552,043 and will offset the
Company's proportionate share of MLG's future income upon MLG profitability.

12.         Income
Taxes

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



2003
      2002
      2001Combined basic Canadian federal and provincial
      income tax rate
      39%
      39%
      42%Expected
      combined Canadian federal and provincial tax recovery based on above rates
      $(1,805,997)
      $(15,750,970)
      $ (7,773,362)Enacted tax
      rate adjustment differences
      223,710
      1,057,477Differences in
      foreign statutory tax rates
      (421,256)
      3,265,605
      1,791,526Permanent
      differences
      438,320
      76,767
      1,098,170Canadian large
      corporations tax
      -
      -
      174,286Loss on sale
      of Zi Services assets
      -
      (1,375,514)
      -Gain on sale
      of Magic Lantern
      -
      7,204,181
      -Equity loss in
      significantly influenced company
      -
      134,339
      -Unrecognized
      recoveries on losses
      (1,637,783)
      (3,769,181)
      (21,328)Non-deductible
      goodwill
      -
      1,215,354
      780,670Other
      (253,995)
      (48,470)
      (64,538)Valuation allowance
      3,457,001
      7,990,412
      4,188,862Consolidated income tax
      $ -
      $ -
      $ 174,286






The components of future income taxes are as follows:

|December 31                 |   | 2003         |   | 2002         |   | 2001        
|--------------------------- | - | ------------ | - | ------------ | - | ------------
|Capital assets              | $ | 66,937       | $ | 319,680      | $ | 186,159     
|Software development costs  |   | (125,300)    |   | 154,962      |   | 154,370     
|Patents                     |   | 32,205       |   | 63,342       |   | 49,682      
|Share issue costs           |   | 217,083      |   | 464,164      |   | 742,236     
|Other                       |   | 11,410       |   | 55,815       |   | -           
|Loss carryforwards          |   | 18,609,788   |   | 21,629,875   |   | 15,068,655  
|Valuation allowance         |   | (18,812,123) |   | (22,687,838) |   | (16,201,102)
|Net future income tax asset | $ | -            | $ | -            | $ | -           

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

109

At December 31, 2003, the Company and its subsidiaries ("the
Group") have non-capital losses of $29,692,725 which are available to reduce
Canadian taxable income in future years. If not utilized, these losses will
expire as follows:



2004
      $
      583,1982005
      $
      524,4872006
      $
      159,1102007
      $
      1,587,4122008
      $
      1,985,3552009
      $
      4,742,4552010
      $
      13,862,8892011
      $
      6,249,383






The Group has non-capital losses for Chinese tax purposes of
$7,692,419. If the losses are not utilized, these losses will begin to expire in
2004.

The Group also has non-capital losses for Hong Kong tax
purposes of $22,019,691. These losses may be carried forward indefinitely.

The Group has carryforward net operating losses for US
federal and state income tax purposes of approximately $4,854,219. Federal net
operating loss carryforwards will expire if not utilized in 2017. For state
purposes, the net operating losses, if not utilized, will expire in 2005
($3,475,075) and 2006 ($1,353,214).

13.        
Contingent Liabilities

The US$9 million damages judgement awarded to Tegic was
settled pursuant to a written settlement agreement with AOL dated December 6,
2002 and a consent judgement (the "Consent Judgement") dated December 20, 2002.
Settlement costs were included as part of legal and litigation costs in 2002 and
as at December 31, 2003 US$0.75 million (the "Outstanding Balance") was owed to
AOL and paid on January 2, 2004 (note 19).

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 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.

110

14.         Related
Party Transactions

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



2003
      2002
      2001Legal services
      provided by two law firms
  in which a director is and was a partner
      $154,569
      $228,593
      $101,276Consulting
      fees paid to a firm owned by a director
      $166,773
      $188,422
      $ 78,505Consulting fees paid to a firm owned by an
      officer
      $ -
      $ 7,128
      $ 68,267






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 to related parties are as
follows:



2003
      2002
      2001Due to law firm
      in which a director is a partner
      $ 533
      $24,058
      $ 5,721Due to companies owned by a director or
      officer
      $14,488
      $15,591
      $23,156






In 2002, a private company owned by an officer, who is also a
director of the Company, guaranteed the note payable by the Company through a
limited recourse guarantee and share pledge agreement (note 8).

On November 7, 2002, the Company completed the sale of Magic
Lantern to JKC Group Inc., a related party (note 4). The companies are related
through a common significant shareholder.

15.        
Commitments And Guarantees

The Company rents premises and equipment under operating
leases, which expire at various dates up to June 2007. The Company recorded rent
expense for 2003 of $1,160,329 (2002 - $2,287,665; 2001 - $3,063,612).

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



2004
      $
      630,8532005
      
      390,2102006
      
      363,3172007
      
      181,6582008
      
      -Total
      $
      1,566,038




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

111

exposure to the above risks and obtains insurance coverage to
satisfy potential or future claims as necessary.



16.         Segmented
Information

Zi Corporation develops software designed to enhance the
usability of mobile and consumer electronic devices through its Zi Technology
business segment. Zi Technology's core technology product, eZiText, is a
predictive text input solution that predicts words and/or phrases for use in
messaging and other text applications in 41 unique language databases. By
offering word candidates as text is being entered, eZiText increases the ease,
speed and accuracy of text input on any electronic device for applications such
as short messaging, e-mail, e-commerce and Web browsing.

Through its e-Learning business segment which includes Oztime,
English Practice and an equity interest in Magic Lantern Group, Inc., the
Company is also involved in e-Learning technology, content



and customer service as well as educational content and
distribution channels to offer learning management systems, interactive online
courses and network education solutions to meet diverse client requirements.

Other includes unallocated segment expenses such as legal
fees, public company costs, 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 three reportable geographic segments through three
reportable business segments:



Revenue
      Operating profit (loss)License and
      implementation fees
      Software
      and other
      Total
      before interest and
      other income2003
      Zi Technology
      $
      13,557,330
      $
      -
      $
      13,557,330
      $
      2,339,807e-Learning
      
      -
      
      934,058
      
      934,058
      
      (1,129,855)Other
      
      -
      
      -
      
      -
      
      (4,729,729)Total
      $
      13,557,330
      $
      934,058
      $
      14,491,388
      $
      (3,519,777)2002
      Zi Technology
      $
      10,166,562
      $
      -
      $
      10,166,562
      $
      (1,592,608)e-Learning
      
      -
      
      3,037,035
      
      3,037,035
      
      (10,627,422)Other
      
      -
      
      -
      
      -
      
      (18,657,030)Total
      $
      10,166,562
      $
      3,037,035
      $
      13,203,597
      $
      (30,877,060)2001
      Zi Technology
      $
      5,130,553
      $
      -
      $
      5,130,553
      $
      (285,428)e-Learning
      
      -
      
      248,351
      
      248,351
      
      (1,783,521)Other
      
      -
      
      -
      
      -
      
      (11,517,489)Total
      $
      5,130,553
      $
      248,351
      $
      5,378,904
      $
      (13,586,438)








Identifiable assets
      2003
      2002Zi Technology
      $
      6,043,338
      $
      8,597,467e-Learning
      
      1,932,699
      
      3,989,957Other
      
      5,668,020
      
      5,676,489Total
      $
      13,644,057
      $
      18,263,913






112

The investment in significantly influenced subsidiary and its
associated 2002 loss of $343,402 have been included as part of the e-Learning
business segment and as part of the Canadian geographic segment (note 11).



Revenue
      Operating profit (loss)License and
      implementation fees
      Software
      and other
      Total
      before interest and other income
      Identifiable assets2003
      Canada
      $
      5,034,099
      $
      19,709
      $
      5,053,808
      $
      (4,248,186)
      $
      10,836,288China
      
      4,616,417
      
      914,349
      
      5,530,766
      
      (86,256)
      
      1,618,342USA
      
      3,906,814
      
      -
      
      3,906,814
      
      1,045,494
      
      991,352Other
      
      -
      
      -
      
      -
      
      (230,829)
      
      198,075Total
      $
      13,557,330
      $
      934,058
      $
      14,491,388
      $
      (3,519,777)
      $
      13,644,0572002
      Canada
      $
      3,634,538
      $
      2,573,660
      $
      6,208,198
      $
      (20,312,686)
      $
      13,491,016China
      
      2,146,176
      
      463,375
      
      2,609,551
      
      (9,987,175)
      
      2,059,054USA
      
      4,385,848
      
      -
      
      4,385,848
      
      290,298
      
      2,449,365Other
      
      -
      
      -
      
      -
      
      (867,497)
      
      264,478Total
      $
      10,166,562
      $
      3,037,035
      $
      13,203,597
      $
      (30,877,060)
      $
      18,263,9132001
      Canada
      $
      2,777,720
      $
      41,443
      $
      2,819,163
      $
      (7,450,808)
      $
      30,650,257China
      
      1,303,993
      
      206,908
      
      1,510,901
      
      (1,155,851)
      
      15,820,841USA
      
      1,022,436
      
      -
      
      1,022,436
      
      (2,662,962)
      
      624,304Other
      
      26,404
      
      -
      
      26,404
      
      (2,316,817)
      
      804,277Total
      $
      5,130,553
      $
      248,351
      $
      5,378,904
      $
      (13,586,438)
      $
      47,899,679






In 2003, two Zi Technology customers accounted for 26 percent
(2002 - 23 percent; 44 percent - 2001) of the Company's total revenue.

17.         Canadian
Generally Accepted Accounting Principles

The consolidated financial statements, prepared in accordance
with US GAAP, conform to those generally accepted in Canada ("Canadian GAAP"),
in all material respects, except:

Start-up costs

Pursuant to Canadian GAAP Emerging Issues Committee ("EIC")
Abstract 27, "Revenues and Expenditures During the Pre-Operating Period",
certain costs of start-up activities and organizational costs are capitalized as
incurred as long as the expenditure is directly related to placing the new
business into service, is incremental in nature and recoverable through future
operations. Start-up costs include those one-time activities related to
organizing a new entity. Consequently, start-up costs associated with the 1999
acquisition of Beijing Oz Education Network Ltd. ("Oztime") of $306,143 have
been capitalized. Related amortization charges recorded pursuant to Canadian
GAAP are included in income under Canadian GAAP.

Share capital

Under Canadian GAAP, the December 31, 1997 stated capital of
the Company was reduced by its December 31, 1996 deficit of $33,349,455. US GAAP
does not allow for such restatement. This reclassification has no effect on net
shareholders' equity as at December 31, 2001, 2002 and 2003.

113



Foreign currency translation

Under Canadian GAAP, the Company, on a consolidated basis, is
required, for the years ended December 31, 2001, 2002 and 2003, to translate the
accounts of its subsidiaries to Canadian dollars using the temporal method. The
accounts of the Company's integrated operations in foreign subsidiaries are
translated into Canadian dollars using the temporal method whereby monetary
items are translated at the rate of exchange in effect at the balance sheet date
and non-monetary items are translated at applicable historical rates. The
resulting foreign exchange gain or loss on translation is included as part of
the calculation of the net loss as compared to inclusion as part of other
comprehensive income disclosed on the statement of shareholders equity under US
GAAP.

Consolidated statement of loss

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



2003
      2002
      2001Net loss from continuing operations 
      as reported in accordance with US GAAP
      $ (4,392,282)
      $ (31,169,442)
      $ (12,264,171)Adjustments:Start-up costs
      adjustment
      -
      -
      793Start-up costs
      amortization
      -
      (182,667)
      (62,518)Fair value of stock
      options issued
      (3,140,591)
      -
      -Foreign exchange
      gain
      (224,273)
      42,088
      1,601,573Total adjustments
      (3,364,864)
      (140,579)
      1,539,848Net loss from continuing operations under
      Canadian GAAP
      $ (7,757,146)
      $ (31,310,021)
      $ (10,724,323)Loss from discontinued operations
      -
      (9,077,079)
      (7,957,967)Net loss under Canadian GAAP
      $ (7,757,146)
      $ (40,387,100)
      $ (18,682,290)Loss from continuing operations per share
      under Canadian GAAP
      $ (0.20)
      $ (0.83)
      $ (0.29)Loss from discontinued operations per share
      under Canadian GAAP
      -
      (0.24)
      (0.21)Loss per share under Canadian GAAP
      $ (0.20)
      $ (1.07)
      $ (0.50)






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



2003
      2002
      2001Weighted average number of shares
      38,719,786
      37,767,000
      37,190,905






Stock-based compensation

Effective January 1, 2002, under Canadian GAAP, the Company
is required to adopted Section 3870, "Stock-based Compensation and Other
Stock-based Payments", which recommends that awards to employees be valued using
the fair value method of accounting. These rules also require that companies
account for stock appreciation rights ("SARs") and similar awards to be settled
in cash or other assets, by measuring compensation expense on an ongoing basis,
as the amount by which the quoted market price exceeds the exercise price at
each measurement date.

The Company has a stock-based compensation plan, which is
described in note 10. Under Canadian GAAP, the Company has elected to account
for stock options by measuring compensation expense as the excess, if any, of
the quoted market value of the stock at the date of grant over the exercise
price. Any consideration paid by employees on exercise of stock options or
purchase of stock is credited to

114

share capital. If stock or stock options are repurchased from
employees, the excess of the consideration paid over the carrying amount of the
stock or stock option cancelled is charged to retained earnings.

Under CICA 3870, companies that elect a method other than the
fair value method of accounting are required to disclose pro forma net income
and earnings per share information, using a pricing model such as the Black-Scholes
model, as if the fair value method of accounting had been used. These new rules
do not apply to pre-existing awards except for those awards that call for
settlement in cash or other assets.

In September 2003, the CICA issued an amendment to CICA
Handbook Section 3870 "Stock-based Compensation and Other Stock-based Payments".
The amendment provides two alternative methods of transition to the fair-value
method of accounting for stock-based employee compensation - prospective and
retroactive methods. In January 2003, FASB issued Statement No. 148 "Accounting
for Stock-based Compensation -Transition and Disclosure, an Amendment of FASB
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-based Compensation", to provide alternative methods of
transition for a voluntary change to the fair-value method of accounting for
stock-based employee compensation. Both the Canadian and US amendments only
apply to voluntary transitions before January 1, 2004. The Company adopted the
fair-value method of accounting for stock options in the fourth quarter of 2003.
The Company has adopted the fair-value based method prospectively, whereby
compensation cost is recognized for all options granted on or after January 1,
2003. All stock options granted prior to January 1, 2003 will continue to be
accounted for under APB No. 25 "Accounting for Stock Issued to Employees" unless
these stock options are modified or settled subsequent to adoption.



Under the fair value method, the pro forma effect on the
Company's net loss and net loss per share in 2002, is as follows:



Compensation Costs
      Year ended December 31, 2002Net loss under Canadian GAAP
      
      $
      (40,387,100)Add: Stock option expense
      
      
      (604,477)Net loss under Canadian GAAP, pro forma
      
      $
      (40,991,577)Basic net loss per share
      
      $
      (1.07)Add: Stock option expense
      
      
      (0.02)Basic net loss per share, pro forma
      
      $
      (1.09)






115

Consolidated balance sheets

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



Shareholders' Equity
      2003
      2002
      2001Shareholders' equity under Canadian GAAP, beginning of year
      $ 5,360,949
      $ 43,876,530
      $ 59,663,140Share
      capital issued and contributed surplus
      4,831,957
      1,871,519
      2,895,680Net loss from continuing operations under US
      GAAP
      (4,392,282)
      (31,169,442)
      (12,264,171)Net
      loss from discontinued operations under US GAAP
      -
      (9,077,079)
      (7,957,967)Adjustments to net loss for the year under
      Canadian GAAP
      (3,364,864)
      (140,579)
      1,539,848Shareholders' equity under Canadian GAAP, end
      of year
      $ 2,435,760
      $ 5,360,949
      $ 43,876,530






Intangible assets

In accordance with the CICA Handbook sections 1581 and 3062,
"Business Combinations" and "Goodwill and Other Intangible Assets",
respectively, are to be applied to any acquisition subsequent to June 30, 2001.
Under the new accounting standards, goodwill and other intangible assets with
indefinite lives are no longer amortized, but are tested for impairment at least
annually. In accordance with Section 3062, the Company evaluated its goodwill
and intangible assets for impairment at September 30, 2003 and determined that
an impairment charge was not necessary. At September 30, 2002, it was determined
that an impairment charge was necessary (note 7).

The following table outlines the impact of the change in
accounting policy, as if this change had been applied retroactively effective
January 1, 2001.



Year ended December 31
      2001Net loss under
      Canadian GAAP
      $
      (18,682,290)Add: Goodwill
      amortization
      
      1,083,407Net loss under Canadian GAAP, pro forma
      $
      (17,598,883)Basic net loss
      per share, as previously reported
      $
      (0.50)Add: Goodwill amortization
      
      0.03Basic net loss per share, pro forma
      $
      (0.47)




New accounting standards

The following guidelines issued by the CICA are not expected to impact the
Company:

- In November 2003, the CICA
  approved an amendment to Section 3860, "Financial Instruments - Disclosure and
  Presentation,"effective for fiscal years beginning on or after
  November 1, 2004.
- Accounting Guideline 15, "Consolidation of Variable
  Interest Entities" is effective for annual and interim periods beginning on or
  after January 1, 2004.

- Section 1100, "General Accounting
  Principles" iseffective for years beginning on or after October 31,
  2003.

116

- Section 1400, "General Standards of Financial Statement
  Presentation" iseffective for years beginning on or after October 31,
  2003.

Canadian GAAP Financial Statements for The Years Ended
December 31, 2002 and 2001

The following financial statements for the years ended December 31, 2002 and
2001 are as previously disclosed in accordance with Canadian GAAP.

Consolidated Balance Sheets



As at December 31
      
      2002
      
      2001AssetsCurrent assetsCash and cash equivalents
      $
      5,342,771
      $
      19,090,964Short-term investments
      
      -
      
      8,577,503Accounts receivable
      
      4,480,800
      
      2,752,262Work-in-progress and inventory
      
      153,975
      
      509,298Prepayments and deposits
      
      1,110,492
      
      909,38811,088,038
      
      31,839,415Notes receivable
      
      3,155,200
      
      -Capital assets -
      net
      
      2,033,738
      
      3,160,008Intangible
      assets - net
      
      1,986,937
      
      13,082,923Investment in significantly influenced company
      
      -
      
      -$
      18,263,913
      $
      48,082,346Liabilities
      and shareholders' equityCurrent
      liabilitiesAccounts payable and accrued liabilities
      $
      6,706,687
      $
      3,097,692Deferred revenue
      
      798,268
      
      773,115Note payable
      
      5,206,080
      
      -Current portion of capital lease obligations
      
      158,952
      
      175,99612,869,987
      
      4,046,803Capital lease obligations
      
      32,977
      
      159,01312,902,964
      
      4,205,816Contingent
      liability and going concernShareholders'
      equityShare capital
      
      96,502,449
      
      94,871,503Contributed
      surplus
      
      240,573
      
      -Deficit
      
      (91,382,073)
      
      (50,994,973)5,360,949
      
      43,876,530$
      18,263,913
      $
      48,082,346






117

Consolidated Statements Of Loss And Deficit



Years ended December 31
      
      2002
      
      2001RevenueLicense and implementation fees
      $
      10,166,562
      $
      5,130,553Other product revenue
      
      3,037,035
      
      248,35113,203,597
      
      5,378,904Cost of
      salesLicense and implementation fees
      
      394,749
      
      1,412,123Other
      
      1,233,312
      
      227,2871,628,061
      
      1,639,410Gross margin
      
      11,575,536
      
      3,739,494Operating
      expensesSelling
      general and administrative
      
      (17,849,562)
      
      (10,226,620)Litigation
      and legal
      
      (11,794,981)
      
      (3,052,701)Product
      research and development
      
      (4,365,803)
      
      (1,000,614)Depreciation and amortization
      
      (3,879,913)
      
      (3,107,722)Impairment
      of goodwill
      
      (1,976,908)
      
      -Impairment
      of intangible assets
      
      (2,424,694)
      
      -Foreign exchange gain
      
      42,088
      
      1,601,573Operating
      loss before undernoted
      
      (30,674,237)
      
      (12,046,590)Interest on long term debt
      
      (139,046)
      
      (50,744)Other interest
      
      (439,765)
      
      (6,676)Interest income and other income
      
      286,429
      
      1,553,973Equity interest in loss of significantly
      influenced company
      
      (343,402)
      
      -Loss from
      continuing operations before income taxes
      
      (31,310,021)
      
      (10,550,037)Income taxes
      
      -
      
      (174,286)Loss from
      continuing operations
      
      (31,310,021)
      
      (10,724,323)Discontinued OperationsLoss from discontinued operations
      
      (9,077,079)
      
      (7,957,967)Net loss
      
      (40,387,100)
      
      (18,682,290)Deficit, beginning of year
      
      (50,994,973)
      
      (32,312,683)Deficit, end of year
      $
      (91,382,073)
      $
      (50,994,973)Basic and
      diluted loss from continuing operations per share
      $
      (0.83)
      $
      (0.29)Loss from discontinued operations per share
      
      (0.24)
      
      (0.21)Basic and diluted loss per share
      $
      (1.07)
      $
      (0.50)Weighted
      average common shares
      
      37,767,000
      
      37,230,905Common
      shares outstanding, end of period
      
      37,914,250
      
      37,544,650






118

Consolidated Statements Of Cash Flows



Years ended
      December 31
      
      2002
      
      2001Operating
      activities:Net loss
      $
      (31,310,021)
      $
      (10,724,323)Items not affecting cash:Loss (gain) on dispositions of capital assets
      
      330,194
      
      (20,983)Depreciation and amortization
      
      3,879,913
      
      3,107,722Impairment of goodwill
      
      1,976,908
      
      -Impairment of intangible assets
      
      2,424,694Interest expense
      
      240,573
      
      -Equity in net loss of significantly influenced
      company
      
      343,402
      
      -Funds applied to operations
      
      (22,114,337)
      
      (7,637,584)Decrease in non-cash working capital
      
      1,896,595
      
      1,410,072Cash flow applied to operations
      
      (20,217,742)
      
      (6,227,512)Financing
      activities:Proceeds from issuance of common shares
      
      1,117,446
      
      2,645,680Issuance of note payable
      
      5,127,910
      
      -Payment of capital lease obligations
      
      (143,080)
      
      (139,700)6,102,276
      
      2,505,980Investing
      activities:Short-term investments
      
      8,577,503
      
      (8,577,503)Purchase of capital assets
      
      (1,060,012)
      
      (642,137)Proceeds from capital dispositions
      
      50,964
      
      118,321Software development costs
      
      (978,161)
      
      (4,318,840)Other deferred costs
      
      (60,000)
      
      (142,636)Acquisition of subsidiaries net of bank
      indebtedness
      
      (1,884,433)
      
      -Sale of subsidiary net of cash given up
      
      (548,461)
      
      -4,097,400
      
      (13,562,795)Discontinued operations
      
      (3,730,127)
      
      (10,516,575)Net cash
      (outflow) inflow
      
      (13,748,193)
      
      (27,800,902)Cash and cash equivalents, beginning of year
      
      19,090,964
      
      46,891,866Cash and cash equivalents, end of year
      $
      5,342,771
      $
      19,090,964Non cash
      financing activityEquipment acquired under capital lease
      $
      34,200
      $
      83,695Patent acquired through share issuance
      $
      -
      $
      250,000Acquisition of subsidiary
      $
      513,500
      $
      -Components
      of cash and cash equivalentsCash
      $
      5,342,771
      $
      4,971,376Cash equivalents
      $
      -
      $
      14,119,588Supplemental cash flow informationCash paid for interest
      $
      136,888
      $
      57,420Cash paid for income taxes
      $
      -
      $
      174,286






119

18.        
Supplemental Financial Information

Accounts payable and accrued liabilities

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



Accounts payable and accrued liabilities
      2003
      2002Trade accounts
      payable
      $
      557,147
      $
      979,246Litigation and
      legal
      
      2,628,034
      
      3,961,939Compensation
      
      1,450,225
      
      884,021Other accrued
      liabilities
      
      676,052
      
      881,481Total
      $
      5,311,458
      $
      6,706,687






Non-cash working capital

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



Non-cash working capital
      2003
      2002
      2001Accounts
      receivable
      $ (770,195)
      $
      (1,745,637)
      $
      513,039Work-in-progress
      and inventory
      153,975
      242,856
      (509,298)Prepayments and
      deposits
      592,945
      (190,471)
      334,721Accounts payable
      and accrued liabilities
      (1,395,229)
      3,564,694
      439,470Deferred revenue
      628,503
      25,153
      632,140(Decrease) increase in non-cash working
      capital
      $ (790,001)
      $ 1,896,595
      $ 1,410,072






Loss per share

In 2003, anti-dilutive stock options, warrants and
performance based escrowed shares of 6,014,904 have been excluded in the
calculation of diluted loss per share (2002 - 5,310,700; 2001 - 7,397,085).

19.        
Subsequent Events

On January 2, 2004, the Company paid the final
settlement cost instalment of US$0.75 million included as part of legal and
litigation costs as at December 31, 2002 of US$0.75 million (note 2 and 13). The
security provided under this agreement has been discharged.

The Company has entered into a Financial Advisory Services
Agreement effective January 9, 2004 with an unrelated third party. The agreement
stipulates that the third party shall provide to the Company management and
consulting services for a period of one year from the date of the agreement. As
consideration for these services, the Company has granted 400,000 stock options
with each option exercisable through the purchase of one common share at a price
of $3.25. The options vest immediately and expire, if unexercised five years
from the date of grant. The Company will account for these options in accordance
with SFAS No. 123, whereby the fair value method is used and the related expense
is recognized over the vesting period.

120

Item 19 -
Exhibits

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





SIGNATURE

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

| | ZI CORPORATION
| | --------------
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| | Per:          
| |               
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| | Date:         
| |               
| | Per:          
| |               
| |               
| | Date:         
| |               



121

CERTIFICATION

I, Dale Kearns, Chief Financial Officer, certify that:

|1. | I have reviewed this annual report on Form 20-F of Zi
    Corporation;                                                                                                                                                                                                                                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                         
|2. | Based on my knowledge, this annual report does not
    contain any untrue statement of a material fact or omit to state a material
    fact necessary to make the statements made, in light of the circumstances
    under which such statements were made, not misleading with respect to the
    period covered by this annual report;
|   |                                                                                                                                                                                                                                                                                                                                         
|3. | Based on my knowledge, the financial statements, and
    other financial information included in this annual report, fairly present
    in all material respects the financial condition, results of operations and
    cash flows of the registrant as of, and for, the periods presented in this
    annual report;                   
|   |                                                                                                                                                                                                                                                                                                                                         
|4. | The registrant's other certifying officers and I are
    responsible for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
    the registrant and we have:                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                         
|   | a.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|   | b.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|   | c.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|5. | The registrant's other certifying officers and I have
    disclosed, based on our most recent evaluation of internal control over
    financial reporting, to the registrant's auditors and the audit committee of
    registrant's board of directors (or persons performing the equivalent
    function):                             
|   |                                                                                                                                                                                                                                                                                                                                         
|   | a.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|   | b.                                                                                                                                                                                                                                                                                                                                      



|Date: May 14, 2004. |                                        
|------------------- | ---------------------------------------
|                    | "Dale Kearns"                          
|                    | Dale Kearns
    Chief Financial Officer

122

CERTIFICATION



I, Michael D. Donnell, Chief Executive Officer, certify that:

|1. | I have reviewed this annual report on Form 20-F of Zi
    Corporation;                                                                                                                                                                                                                                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                         
|2. | Based on my knowledge, this annual report does not
    contain any untrue statement of a material fact or omit to state a material
    fact necessary to make the statements made, in light of the circumstances
    under which such statements were made, not misleading with respect to the
    period covered by this annual report;
|   |                                                                                                                                                                                                                                                                                                                                         
|3. | Based on my knowledge, the financial statements, and
    other financial information included in this annual report, fairly present
    in all material respects the financial condition, results of operations and
    cash flows of the registrant as of, and for, the periods presented in this
    annual report;                   
|   |                                                                                                                                                                                                                                                                                                                                         
|4. | The registrant's other certifying officers and I are
    responsible for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
    the registrant and we have:                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                         
|   | a.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|   | b.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|   | c.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|5. | The registrant's other certifying officers and I have
    disclosed, based on our most recent evaluation of internal control over
    financial reporting, to the registrant's auditors and the audit committee of
    registrant's board of directors (or persons performing the equivalent
    function):                             
|   |                                                                                                                                                                                                                                                                                                                                         
|   | a.                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                         
|   | b.                                                                                                                                                                                                                                                                                                                                      



|Date: May 14, 2004. |                                               
|------------------- | ----------------------------------------------
|                    | "Michael D.
    Donnell"                      
|                    | Michael D. Donnell
    Chief Executive Officer

123







CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report, of Zi Corporation (the
"Company") on Form 20-F for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof, I, Dale Kearns, Chief
Financial Officer of the Company, certify pursuant to 18 U.S.C. ss.1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements
        of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in this Report fairly
        presents, in all material respects, the financial condition and results
        of operations of the Company.



|Date: May 14, 2004. |                                        
|------------------- | ---------------------------------------
|                    | "Dale Kearns"                          
|                    | Dale Kearns
    Chief Financial Officer

124

CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report, of Zi Corporation (the
"Company") on Form 20-F for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof, I Michael D. Donnell,
Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements
        of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in this Report fairly
        presents, in all material respects, the financial condition and results
        of operations of the Company.

|Date: May 14, 2004. |                                               
|------------------- | ----------------------------------------------
|                    | "Michael D.
    Donnell"                      
|                    | Michael D. Donnell
    Chief Executive Officer



125

ANNUAL REPORT ON FORM 20-F
for the year ended
December 31, 2003
EXHIBIT INDEX



|Exhibit No. Item | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Sequential Page #
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------
|1.1**            | Certificate of Incorporation, together with all
    amendments. (Previously filed as Exhibit 1.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                  
|1.2**            | Bylaws. (Previously filed as Exhibit 1.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                  
|4.1*             | Form of Subscription Agreement pursuant to a
    US$23.5 million private placement of 1,250,000 units at US$20 per unit, each
    unit consisting of one common share and three-quarters of one common share
    purchase warrant. Each full warrant entitles the holder to acquire one
    additional common share for a period of 24 months from the closing date upon
    payment of US$22.75 for period up to 12 months from the closing date and
    upon payment of US$24.50 for the period from 12 months to 24 months from the
    closing date. The private placement was completed on February 2, 2000
    (650,000 units), February 8, 2000 (75,000 units) and February 9, 2000
    (525,000 units). (Previously filed as Exhibit 2.8) |                  
|4.2*             | Engagement letter between Zi Corporation and Lehman
    Brothers dated January 4, 2000. (Previously filed as Exhibit 2.9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                  
|4.3+             | Novation Agreement dated July 21, 2000 among the
    government of the Special Administrative Region of Hong Kong, Telecom
    Technology Centre Company Ltd. and Zi (Bermuda) Corporation Ltd. (Previously
    filed as Exhibit 3.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                  
|4.4+             | Share Purchase Agreement dated June 15, 2000 among
    certain shareholders, Zi Corporation and EnglishPractice.com Inc.
    (Previously filed as Exhibit 3.3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                  
|4.5+             | Employment Agreement dated December 31, 1999, as amended,
    between Zi Corporation and Michael Lobsinger. (Previously filed as
    Exhibit 3.4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                  
|4.6+             | Employment Agreement dated January 21, 2000, as amended,
    between Zi Corporation and Gary Kovacs. (Previously filed as Exhibit 3.5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                  
|4.7+             | Employment Agreement dated February 5, 2001 between Zi
    Corporation of America, Inc. and Roland Williams. (Previously filed as
    Exhibit 3.6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                  

126

|4.8+   | Employment Agreement dated February 9, 2000, as amended,
    between Zi Corporation and George C. Tai. (Previously filed as Exhibit 3.7)                                                                                                                                                                                                                | 
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|4.9**  | Employment Agreement dated March 22, 2001 between Zi
    Corporation (H.K.) Limited and David Yang. (Previously filed as Exhibit 4.9)                                                                                                                                                                                                                   | 
|4.10+  | Agreement of Frontpage and Photoshop training between
    Ericsson (China) Co., Ltd. and Beijing Education Network System Co., Ltd.,
    dated March 5, 2001. (Previously filed as Exhibit 3.8)                                                                                                                                                         | 
|4.11+  | Software Agency Agreement between IVT International
    Validation and Testing Corporation and Telecom Technology Centre Company
    Ltd., dated August 1, 2000. (Previously filed as Exhibit 3.9)                                                                                                                                                      | 
|4.12** | Share and Loan Purchase Agreement dated March 18, 2002
    among MagicVision Media Inc., All of the Shareholders of MagicVision Media
    Inc. and named Key Employees. (Previously filed as Exhibit 4.12)                                                                                                                                              | 
|4.13** | 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)                                                                                                                                                                                        | 
|4.14 # | Zi Corporation 1996, 1998 and 1999 Stock Option Plans as
    amended (previously filed on Form S-8)                                                                                                                                                                                                                                                     | 
|4.15** | Consulting Agreement, dated September 26, 2001, between
    The Balloch Group Ltd. And Zi Corporation (H.K.) Ltd. (Previously filed as
    Exhibit 4.15)                                                                                                                                                                                                | 
|4.16 # | Letter agreement dated November 20, 2002 between Telecom
    Technology Corporation Limited and Wong's Electronic (Holdings) Company
    Limited. (previously filed as Exhibit 4.16)                                                                                                                                                                    | 
|4.17 # | Settlement Agreement made December 6, 2002 between
    America Online, Inc., Zi Corporation and Zi Corporation of America, Inc.
    (Portions of this exhibit have been redacted, omitted and filed separately
    with the Securities and Exchange Commission pursuant to a request for
    confidential treatment) (previously filed as Exhibit 4.17) | 

127

|4.18 # | Consent Judgement Order and Permanent Injunction dated
    December 20, 2002 made by The Honourable Maxine M. Chesney, United States
    District Court Judge in the United States District Court for the Northern
    District of California San Francisco Division. (previously filed as Exhibit
    4.18)                                                                                                                            | 
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|4.19 # | Loan Agreement dated December 5, 2002 between Quest
    Investment Corporation and Zi Corporation. (previously filed as Exhibit
    4.19)                                                                                                                                                                                                                                                                                               | 
|4.20 # | Loan Amendment Agreement dated March 19, 2003 between
    Quest Investment Corporation and Zi Corporation. (previously filed as
    Exhibit 4.20)                                                                                                                                                                                                                                                                                       | 
|4.21#  | Stock Purchase Agreement dated August 2, 2002 among JKC
    Group Inc., JKC Alberta Ltd. and Zi Corporation; Amendment No. 1 to Stock
    Purchase Agreement dated October 11, 2002 among JKC Group Inc., JKC Alberta
    Ltd. and Zi Corporation (incorporated herein by reference to Magic Lantern
    Group, Inc.'s Form 8-K filed with the Securities and Exchange Commission on
    August 8, 2002 and on October 11, 2002).       | 
|4.22 # | Second Loan Amendment Agreement dated April 30, 2003
    between Quest Investment Corporation and Zi Corporation. (previously filed
    as Exhibit 4.22)                                                                                                                                                                                                                                                                                | 
|4.23 # | Loan Agreement dated May 7, 2003 between Quest Investment
    Corporation and Zi Corporation. (previously filed as Exhibit 4.23)                                                                                                                                                                                                                                                                                                        | 
|4.24   | Employment Agreement dated July 23, 2003, between Zi
    Corporation and Mike Donnell                                                                                                                                                                                                                                                                                                                                                   | 
|4.25   | Form of Subscription Agreements pursuant to a
    U.S. $2,000,000private placement of 1,000,000 units at US$2.00 per
    unit, each unit consisting of one common share and one-half of one common
    share purchase warrant. Each full warrant entitles the holder to acquire one
    additional common share until May 31, 2006 upon payment of US$2.25. The
    private placement was completed on June 19, 2003 (1,000,000 units). | 
|4.26   | Amending Agreement dated March 31, 2004, (re Employment
    Agreement dated December 31, 1999, between Zi Corporation and Michael
    Lobsinger).                                                                                                                                                                                                                                                                                       | 
|4.27   | Margin Account Agreement dated December 8, 2003 between
    Jones, Gable & Company Limited and Zi Corporation                                                                                                                                                                                                                                                                                                                           | 
|8.1    | List of Subsidiaries (included in Item 4)                                                                                                                                                                                                                                                                                                                                                                                               | 

128

|10.1 | Management Information Circular dated April 15, 2004.
    (Previously filed on Form 6-K)      | 
|---- | --------------------------------------------------------------------------------------------- | 
|10.2 | 2003 Annual Report. (Previously filed on Form 6-K)                                            | 
|10.3 | Officers Certification pursuant to
            Section 302 of the Sarbanes Oxley Act, 2002.   | 
|10.4 | Officers Certification pursuant to Section 302
    of the Sarbanes Oxley Act, 2002.           | 
|10.5 | Section 906 Certification by Dale Kearns, Chief Financial
    Officer dated May 14, 2004.     | 
|10.6 | Section 906 Certification by Michael Donnell, Chief
    Executive Officer dated May 14, 2004. | 
|14   | Independent Auditors' Consent                                                                 | 



* 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, 2002



129



INDEPENDENT AUDITORS' REPORT



To the Shareholders of Zi Corporation



We have audited the consolidated financial statements of Zi
Corporation as of December 31, 2003 and 2002, and for each of the three years in
the period ended December 31, 2003, and have issued our reports thereon dated
February 27, 2004; such financial statements and reports are included in the
2003 Annual Report on Form 20-F. Our audits also included the financial
statement schedule of Zi Corporation.  This financial statement schedule is
the responsibility of the Company's management.  Our responsibility is to
express an opinion on this financial statement schedule based on our audits. 
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.



/s/ Deloitte & Touche LLP

|Chartered Accountants
    Calgary, Alberta, Canada
    February 27, 2004 |  | 
|------------------------------------------------------------------------ |  | 



130



Schedule II - Valuation and Qualifying Accounts





Allowance for doubtful accounts
      Balance at 
      beginning of year
      Charged to 
      costs and 
      expenses
      Deductions
      Balance at 
      end of 
      yearYear ended December 31, 2003
      $389,765
      $268,391
      -
      $658,156Year ended December 31, 2002
      -
      $389,765
      -
      $389,765Year ended December 31, 2001
      -
      -
      -
      -








131