UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

AMENDMENT NO. 1
TOFORM 10-K

Q
      ANNUAL REPORT UNDER SECTION 13 OR
      15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December
      31, 2008£
      TRANSITION REPORT UNDER SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACTFor the transition period from
      _________ to ________Commission file number  000-24018


ZI CORPORATION(Name of small business
issuer in its charter)

|Alberta, Canada                                                    |  | Not Applicable                               
|------------------------------------------------------------------ |  | ---------------------------------------------
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer Identification No.)         
|                                                                   |  |                                              
|2100, 840-7th Avenue, S.W.                                        
|Calgary, Alberta, Canada T2P 3G2                                  
|(Address of principal executive
    offices)                      
|                                                                   |  |                                              
|Issuer's telephone number: (403)
    231-0721                     
|                                                                   |  |                                              
|Securities registered under Section
    12(b) of the Exchange Act:
|                                                                   |  |                                              
|Common Shares, no par value                                        |  | The NASDAQ Capital Market                    
|Title of each class                                                |  | Name of each exchange on which
    registered
|                                                                   |  |                                              
|Securities registered under Section
    12(g) of the Exchange Act:

NONE(Title of class)

Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities  Act.     
Yes £                 No
Q

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the 
Act.      Yes £                 No 
Q

-1-

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Indicate by check mark whether the
registrant has (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.      Yes
Q             No
£

Indicate by check mark if disclosure
of delinquent filers in response to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of "large accelerated
filer", "accelerated filer" and "smaller reporting Company" in Rule 12b-2 of the
Exchange Act (check one):

|Large Accelerated filer                           | £ | Accelerated filer         | £
|------------------------------------------------- | - | ------------------------- | -
|Non-Accelerated filer                             | £ | Smaller Reporting Company | Q
|(Do not
    check if a smaller reporting company) |   |                           |  

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes £                 No  Q

The aggregate market value of voting and non-voting
common stock held by non-affiliates of the registrant as of June 30, 2008 was
$12,405,416.

There were 50,667,957 shares of common stock
outstanding as of March 23, 2009.

-2-

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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K (the Amendment) hereby
amends the Form 10-K of Zi Corporation (the Company) for the fiscal year ended
December 31, 2008, as originally filed with the Securities and Exchange
Commission on March 30, 2009 (the Original Filing). The Amendment is being
filed solely as a result of a change in the report of Ernst & Young LLP,
independent auditors to the Company, which was included in the Original Filing.
No other material changes have been made.

- 3 -

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

Managements Report

Managements responsibility for financial reporting

The consolidated financial statements and all information in
the Annual Report are the responsibility of management and have been 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. Financial statements are not precise since they
include certain amounts based on estimates and judgments. Management has
determined such amounts on a reasonable basis in order to ensure that the
financial statements present fairly, in all material respects. Management has
prepared the financial information presented elsewhere in the annual report and
has ensured that it is consistent with the financial statements.

Management has a system of internal controls designed to
provide reasonable assurance that the financial statements are accurate and
complete in all material respects. The internal control system includes an
internal audit function by external advisors and an established business conduct
policy that applies to all employees. Management believes that the systems
provide reasonable assurance that transactions are properly authorized and
recorded, financial information is relevant, reliable and accurate and that the
Companys assets are appropriately accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring management
fulfils its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board
carries out this responsibility through its Audit Committee.

The audit committee is appointed by the Board and the majority
of its directors are unrelated and independent. The Committee meets periodically
with management, as well as external auditors, to discuss internal controls over
the financial reporting process, auditing matters and financial reporting
issues; to satisfy itself that each party is properly discharging its
responsibilities; and, to review the annual report, the financial statements and
the external auditors report. The Audit Committee reports its findings to the
Board for consideration when approving the financial statements for issuance to
shareholders. The Committee also considers, for review by the Board and approval
by the shareholders, the engagement or re-appointment of the external auditors.

The financial statements have been audited by Ernst & Young
LLP, the external auditors, in accordance with Canadian generally accepted
auditing standards on behalf of the shareholders. Ernst & Young has full and
free access to the Audit Committee.

Managements report on internal control

Management is responsible for the establishing and maintaining
an adequate system of internal control over financial reporting. Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the financial statements for external purposes in accordance with generally
accepted accounting standards.

Due to its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements on a timely basis.
Also, projections of any of the effectiveness of internal control are subject to
the risk that the controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies and procedures may
deteriorate. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to the financial statement
preparation and presentation.

Management conducted an evaluation of the effectiveness of the
system of internal control over financial reporting. Based on this evaluation,
management conduced that the Companys system of internal control over financial
reporting was effective as at December 31, 2008.

|[signed]                              | [signed]               
|------------------------------------- | -----------------------
|Milos Djokovic                        | Blair Mullin           
|President and Chief Executive Officer | Chief Financial Officer
|March 25, 2009                        |                        

-4-

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Report of Independent Auditors

To the Shareholders of

Zi Corporation

We have audited the consolidated balance sheets of Zi
Corporation as at December 31, 2008 and 2007, and the consolidated statement
of loss, shareholders equity and cash flows for the years then ended. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company as at
December 31, 2008 and 2007, and the results of its operations and its cash flows
for the years then ended in accordance with United States generally accepted
accounting principles.

The financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring losses from
operations. These matters raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regards to these matters are
discussed in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

[signed] "Ernst & Young LLP"

Independent Registered Chartered Accountants Calgary,
Canada March 25, 2009

- 5 -

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Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of Zi Corporation

We have audited Zi Corporations consolidated statements of
loss, shareholders equity and cash flows for the year ended December 31, 2006.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis for
our opinion.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the results of Zi Corporations operations and
its cash flows for the year ended December 31, 2006 in accordance with
accounting principles generally accepted in the United States of America.

The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion.

[Signed] Deloitte & Touche LLP

Independent Registered Chartered Accountants Calgary,
Canada

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

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

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

[Signed] Deloitte & Touche LLP

Independent Registered Chartered Accountants Calgary,
Canada

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

- 6 -

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Consolidated Balance Sheets

|As at December 31,                                                                    |   | 2008         |   |   | 2007         |  
|------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | -
|(All amounts in United States of America
      dollars except share amounts)          |   |              |   |   |              |  
|Assets                                                                                |   |              |   |   |              |  
|Current assets                                                                        |   |              |   |   |              |  
|Cash and
      cash equivalents                                                       | $ | 3,187,733    |   | $ | 4,979,193    |  
|Restricted cash (note 4)                                                              |   |             |   |   | 2,740,702    |  
|Accounts
      receivable, net of allowance of $14,202 (December 31, 2007  $454,070) |   | 2,266,307    |   |   | 2,644,413    |  
|Prepayments and deposits                                                              |   | 515,419      |   |   | 677,262      |  
|Future income tax assets (note 10)                                                    |   | 29,366       |   |   |             |  
|Total current assets                                                                  |   | 5,998,825    |   |   | 11,041,570   |  
|Capital assets  net (note 6)                                                         |   | 821,314      |   |   | 931,921      |  
|Intangible assets  net (note 7)                                                      |   | 1,507,411    |   |   | 3,721,623    |  
|                                                                                      | $ | 8,327,550    |   | $ | 15,695,114   |  
|Liabilities and shareholders equity                                                  |   |              |   |   |              |  
|Current liabilities                                                                   |   |              |   |   |              |  
|Accounts payable and accrued liabilities (note 16)                                    | $ | 4,610,306    |   | $ | 4,677,007    |  
|Deferred
      revenue                                                                |   | 4,127,952    |   |   | 4,500,044    |  
|Future
      income tax liabilities (note 10)                                         |   |             |   |   | 14,636       |  
|Total current
      liabilities                                                       |   | 8,738,258    |   |   | 9,191,687    |  
|Contingent liabilities (note 12)                                                      |   |              |   |   |              |  
|Going concern uncertainty (note 2)                                                    |   |              |   |   |              |  
|Shareholders equity                                                                  |   |              |   |   |              |  
|Share capital (note 9)                                                                |   |              |   |   |              |  
|Unlimited number of Class A, 9%
      convertible, preferred shares authorized and    |   |              |   |   |              |  
|no shares
      issued or outstanding                                                 |   |             |   |   |             |  
|Unlimited number of common shares, no par
      value, authorized,                    |   |              |   |   |              |  
|50,667,957
      (December 31, 2007  50,557,957) issued and outstanding              |   | 115,024,228  |   |   | 114,991,895  |  
|Additional paid-in capital                                                            |   | 4,727,787    |   |   | 3,860,022    |  
|Warrants                                                                              |   | 1,403,160    |   |   | 1,403,160    |  
|Accumulated deficit                                                                   |   | (121,078,664 | ) |   | (113,702,097 | )
|Accumulated other
      comprehensive loss                                            |   | (487,219     | ) |   | (49,553      | )
|                                                                                      |   | (410,708     | ) |   | 6,503,427    |  
|                                                                                      | $ | 8,327,550    |   | $ | 15,695,114   |  

See accompanying notes to audited consolidated financial
statements.

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

- 7 -

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Consolidated Statements of Loss

|Years ended
      December 31,                                                 |   | 2008        |   |   | 2007        |   |   | 2006        |  
|------------------------------------------------------------------------------ | - | ----------- | - | - | ----------- | - | - | ----------- | -
|(All amounts in United States of America dollars except
      share amounts)   |   |             |   |   |             |   |   |             |  
|Revenue                                                                        | $ | 13,323,492  |   | $ | 13,111,002  |   | $ | 11,836,217  |  
|Cost of sales                                                                  |   | (258,545    | ) |   | (263,922    | ) |   | (406,463    | )
|Gross margin                                                                   |   | 13,064,947  |   |   | 12,847,080  |   |   | 11,429,754  |  
|Operating expenses                                                             |   |             |   |   |             |   |   |             |  
|Selling general and administrative                                             |   | (11,259,582 | ) |   | (10,531,299 | ) |   | (10,728,671 | )
|Business taxes                                                                 |   | (939,276    | ) |   | (1,257,662  | ) |   | (925,192    | )
|Litigation and legal (note 12)                                                 |   | (2,130,412  | ) |   | (1,941,660  | ) |   | (3,352,763  | )
|Product research and development                                               |   | (2,891,945  | ) |   | (2,450,771  | ) |   | (3,700,242  | )
|Depreciation and amortization (note 7)                                         |   | (1,581,628  | ) |   | (1,670,037  | ) |   | (1,667,534  | )
|Impairment of
      software development costs (note 7)                        |   | (1,429,670  | ) |   |            |   |   |            |  
|Operating loss before undernoted                                               |   | (7,167,566  | ) |   | (5,004,349  | ) |   | (8,944,648  | )
|Interest on capital lease
      obligation                                     |   |            |   |   | (43         | ) |   | (795        | )
|Other
      interest expense                                                   |   | (23,111     | ) |   | (35,570     | ) |   | (17,211     | )
|Interest and other income                                                      |   | 40,836      |   |   | 189,290     |   |   | 227,562     |  
|Loss before undernoted                                                         |   | (7,149,841  | ) |   | (4,850,672  | ) |   | (8,735,092  | )
|Recovery/(impairment)
      note receivable (note 11)                          |   |            |   |   | 130,931     |   |   | (129,417    | )
|Income tax expense (note
      10)                                             |   | (226,726    | ) |   | (1,039,458  | ) |   | (885,084    | )
|Net loss from continuing operations                                            | $ | (7,376,567  | ) | $ | (5,759,199  | ) | $ | (9,749,593  | )
|Gain/(loss) on
      discontinued operations (note 18)                         |   |            |   |   | 632,601     |   |   | (1,245,291  | )
|Net loss                                                                       | $ | (7,376,567  | ) | $ | (5,126,598  | ) | $ | (10,994,884 | )
|Basic and diluted loss per share from
      continuing operations (note 16)    | $ | (0.15       | ) | $ | (0.11       | ) | $ | (0.21       | )
|Basic and diluted income/(loss) per share from discontinued
      operations   |   |             |   |   |             |   |   |             |  
|(note 18)                                                                      | $ |            |   | $ | 0.01        |   | $ | (0.03       | )
|Basic and diluted
      net loss per share                                     | $ | (0.15       | ) | $ | (0.10       | ) | $ | (0.24       | )
|Weighted average number of common shares
      outstanding  basic and diluted |   | 50,611,864  |   |   | 49,640,891  |   |   | 46,502,728  |  
|Common shares
      outstanding, end of year                                   |   | 50,667,957  |   |   | 50,557,957  |   |   | 46,688,624  |  

See accompanying notes to audited consolidated financial
statements.

- 8 -

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Consolidated Statements of Shareholders Equity

|                                                                             |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |   | Accumulated   |   |   |               |  
|---------------------------------------------------------------------------- |  | -------------------- |  | - | ----------- | - | - | --------------- | - | - | ----------- |  | - | ------------- | - | - | ------------- | - | - | ------------- | -
|                                                                             |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |   | other         |   |   | Total         |  
|                                                                             |  | Common shares issued |  |   | Additional  |   |   |                 |   |   | Accumulated |  |   | comprehensive |   |   | comprehensive |  
|                                                                             |  | shares               |  |   | amount      |   |   | paid-in capital |   |   | Warrants    |  |   | deficit       |   |   | income (loss) |   |   | income (loss) |  
|(All amounts in United States of America dollars except share
      amounts) |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |  
|Balance  December 31, 2005                                                  |  | 46,272,568           |  | $ | 109,365,824 |   | $ | 2,114,190       |   | $ |            |  | $ | (97,580,615   | ) | $ | (577,745      | ) | $ | (5,431,531    | )
|Issued on exercise of restricted stock units                                 |  | 416,056              |  |   | 1,269,261   |   |   | (1,269,261      | ) |   |            |  |   |              |   |   |              |   |   |              |  
|Issued restricted stock units                                                |  |                     |  |   |            |   |   | 156,663         |   |   |            |  |   |              |   |   |              |   |   |              |  
|Employee stock-based compensation costs                                      |  |                     |  |   |            |   |   | 1,340,706       |   |   |            |  |   |              |   |   |              |   |   |              |  
|Archer dilution                                                              |  |                     |  |   |            |   |   | 758,903         |   |   |            |  |   |              |   |   |              |   |   |              |  
|Net loss                                                                     |  |                     |  |   |            |   |   |                |   |   |            |  |   | (10,994,884   | ) |   |              |   |   | (10,994,884   | )
|Other comprehensive income from
      foreign                                |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |   |               |   |   |               |  
|currency translation adjustment                                              |  |                     |  |   |            |   |   |                |   |   |            |  |   |              |   |   | 235,113       |   |   | 235,113       |  
|Balance  December 31, 2006                                                  |  | 46,688,624           |  | $ | 110,635,085 |   | $ | 3,101,201       |   | $ |            |  | $ | (108,575,499  | ) | $ | (342,632      | ) | $ | (10,759,771   | )
|Issued on exercise of stock options                                          |  | 55,000               |  |   | 159,184     |   |   | (65,101         | ) |   |            |  |   |              |   |   |              |   |   |              |  
|Issued on exercise of restricted stock units                                 |  | 37,485               |  |   | 67,142      |   |   | (67,142         | ) |   |            |  |   |              |   |   |              |   |   |              |  
|Issued under private placement                                               |  | 3,776,848            |  |   | 5,533,644   |   |   |                |   |   |            |  |   |              |   |   |              |   |   |              |  
|Private placement warrants                                                   |  |                     |  |   | (1,403,160  | ) |   |                |   |   | 1,403,160   |  |   |              |   |   |              |   |   |              |  
|Employee stock-based compensation costs                                      |  |                     |  |   |            |   |   | 891,064         |   |   |            |  |   |              |   |   |              |   |   |              |  
|Net loss                                                                     |  |                     |  |   |            |   |   |                |   |   |            |  |   | (5,126,598    | ) |   |              |   |   | (5,126,598    | )
|Other comprehensive income from
      foreign                                |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |   |               |   |   |               |  
|currency translation adjustment                                              |  |                     |  |   |            |   |   |                |   |   |            |  |   |              |   |   | 293,079       |   |   | 293,079       |  
|Balance  December 31, 2007                                                  |  | 50,557,957           |  | $ | 114,991,895 |   | $ | 3,860,022       |   | $ | 1,403,160   |  | $ | (113,702,097  | ) | $ | (49,553       | ) | $ | (4,833,519    | )
|Issued restricted stock awards                                               |  | 110,000              |  |   | 32,333      |   |   |                |   |   |            |  |   |              |   |   |              |   |   |              |  
|Issued restricted stock units                                                |  |                     |  |   |            |   |   | 29,856          |   |   |            |  |   |              |   |   |              |   |   |              |  
|Employee stock-based compensation costs                                      |  |                     |  |   |            |   |   | 837,909         |   |   |            |  |   |              |   |   |              |   |   |              |  
|Net loss                                                                     |  |                     |  |   |            |   |   |                |   |   |            |  |   | (7,376,567    | ) |   |              |   |   | (7,376,567    | )
|Other comprehensive loss from
      foreign                                  |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |   |               |   |   |               |  
|currency translation adjustment                                              |  |                     |  |   |            |   |   |                |   |   |            |  |   |              |   |   | (437,666      | ) |   | (437,666      | )
|Balance  December 31, 2008                                                  |  | 50,667,957           |  | $ | 115,024,228 |   | $ | 4,727,787       |   | $ | 1,403,160   |  | $ | (121,078,664  | ) | $ | (487,219      | ) | $ | (7,814,233    | )
|See accompanying notes to audited
      consolidated financial statements.   |  |                      |  |   |             |   |   |                 |   |   |             |  |   |               |   |  

- 9 -

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Consolidated Statements of Cash Flow

|Years ended
      December 31,                                                    |   | 2008       |   |   | 2007       |   |   | 2006       |  
|--------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|(All amounts in United States of America dollars)                                 |   |            |   |   |            |   |   |            |  
|Cash flow from (used in) operating
      activities:                              |   |            |   |   |            |   |   |            |  
|Net loss from continuing operations                                               | $ | (7,376,567 | ) | $ | (5,759,199 | ) | $ | (9,749,593 | )
|Items not affecting cash:                                                         |   |            |   |   |            |   |   |            |  
|Depreciation and
      amortization                                               |   | 1,611,070  |   |   | 1,707,552  |   |   | 1,707,212  |  
|Stock-based compensation expense                                                  |   | 900,098    |   |   | 891,064    |   |   | 1,544,755  |  
|Impairment of
      software development costs                                    |   | 1,429,670  |   |   |           |   |   |           |  
|Impairment (recovery) of note receivable                                          |   |           |   |   | (130,931   | ) |   | 129,417    |  
|Loss on disposal of
      capital assets                                          |   | 16,185     |   |   | 65,462     |   |   | 24,212     |  
|Decrease (increase) in non-cash working capital:                                  |   |            |   |   |            |   |   |            |  
|Accounts receivable                                                               |   | 378,106    |   |   | 3,141,541  |   |   | (2,206,562 | )
|Prepayments and deposits                                                          |   | 174,399    |   |   | (77,299    | ) |   | (59,607    | )
|Accounts payable
      and accrued liabilities                                    |   | 51,841     |   |   | 630,985    |   |   | 536,725    |  
|Deferred revenue                                                                  |   | (372,092   | ) |   | 22,018     |   |   | 671,215    |  
|Future income taxes                                                               |   | (44,002    | ) |   | (159,764   | ) |   | 174,400    |  
|Cash flow from (used in) operating activities                                     |   | (3,231,292 | ) |   | 331,429    |   |   | (7,227,826 | )
|Cash flow from (used in) financing activities:                                    |   |            |   |   |            |   |   |            |  
|Proceeds
      from issuance of common shares and warrants, net of issuance costs |   |           |   |   | 5,533,644  |   |   |           |  
|Proceeds from exercise of stock options                                           |   |           |   |   | 94,083     |   |   |           |  
|Proceeds from bank indebtedness (note 8)                                          |   | 1,250,000  |   |   | 2,000,000  |   |   | 1,000,000  |  
|Payment of bank indebtedness                                                      |   | (1,250,000 | ) |   | (3,000,000 | ) |   |           |  
|Payment of capital lease obligations                                              |   |           |   |   | (1,833     | ) |   | (7,545     | )
|Cash flow from financing
      activities                                         |   |           |   |   | 4,625,894  |   |   | 992,455    |  
|Cash flow from (used in) investing
      activities:                              |   |            |   |   |            |   |   |            |  
|Purchase of capital assets                                                        |   | (347,966   | ) |   | (407,792   | ) |   | (304,457   | )
|Software development costs                                                        |   | (1,231,363 | ) |   | (1,638,389 | ) |   | (1,407,204 | )
|Other deferred costs                                                              |   |           |   |   | (28,634    | ) |   | (57,445    | )
|Recovery of impaired note receivable                                              |   |           |   |   | 130,931    |   |   |           |  
|Changes in restricted cash
      (note 4)                                         |   | 2,740,702  |   |   | (580,207   | ) |   | (1,512,376 | )
|Cash flow from (used in) investing activities                                     |   | 1,161,373  |   |   | (2,524,091 | ) |   | (3,281,482 | )
|Cash flow from (used in) discontinued operations (note 18):                       |   |            |   |   |            |   |   |            |  
|Operating activities                                                              |   |           |   |   |           |   |   | (139,328   | )
|Financing activities                                                              |   |           |   |   |           |   |   | (106,650   | )
|Investing activities                                                              |   |           |   |   | 632,601    |   |   | (181,199   | )
|Cash flow from (used in)
      discontinued operations                            |   |           |   |   | 632,601    |   |   | (427,177   | )
|Effect of foreign exchange rate changes on cash and cash
      equivalents        |   | 278,459    |   |   | 240,513    |   |   | 107,556    |  
|Net cash inflow (outflow)                                                         |   | (1,791,460 | ) |   | 3,306,346  |   |   | (9,836,474 | )
|Cash and cash equivalents, beginning of year                                      |   | 4,979,193  |   |   | 1,672,847  |   |   | 11,509,321 |  
|Cash and cash
      equivalents, end of year                                      | $ | 3,187,733  |   | $ | 4,979,193  |   | $ | 1,672,847  |  
|                                                                                  |   |            |   |   |            |   |   |            |  
|Components of cash and cash equivalents                                           |   |            |   |   |            |   |   |            |  
|Cash                                                                              | $ | 3,187,733  |   | $ | 4,979,193  |   | $ | 1,294,185  |  
|Cash equivalents                                                                  |   |           |   |   |           |   |   | 378,662    |  
|Total cash and cash equivalents                                                   | $ | 3,187,733  |   | $ | 4,979,193  |   | $ | 1,672,847  |  
|Supplemental cash flow information                                                |   |            |   |   |            |   |   |            |  
|Cash paid for interest                                                            | $ | 23,111     |   | $ | 35,613     |   | $ | 18,006     |  
|Cash paid for income taxes                                                        | $ | 71,186     |   | $ | 940,495    |   | $ | 772,260    |  

See accompanying notes to audited consolidated financial
statements.

- 10 -

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Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

1. Nature of Operations

Zi Corporation (the Company or Zi") is incorporated under
the Business Corporations Act of Alberta. Zi develops software designed to
provide discovery and usability solutions for mobile search, input and
advertising. Products include Qix, a search and discovery engine, Decuma for
natural handwriting which now includes prediction technology, eZiText for
one-touch predictive text entry, and eZiType predictive keyboard entry with
auto-correction. Zi markets these products directly to original equipment
manufacturers, original design manufacturers and network operators.

2. Going Concern Uncertainty

As at December 31, 2008, the Company had an accumulated deficit
of $121,078,664 and, for the year then ended, incurred a net loss of $7,376,567
from continuing operations and used cash in operating activities of $3,231,292.
Continuing operations are dependent on the Company achieving profitable
operations and being able to raise additional capital, if and when necessary, to
meet the Companys obligations and repay liabilities arising from the normal
course of operations when they come due.

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

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

3.Significant Accounting Policies

Basis of presentation

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

Use of estimates

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

Principles of consolidation

These consolidated financial statements include the accounts of
Zi and its subsidiaries. All inter-company transactions and balances have been
eliminated.

The Company consolidates an entitys financial statements when
the Company either will absorb a majority of the entitys expected losses or
residual returns, in the case of a variable interest entity (VIE), which there
were none at December 31, 2008 and 2007, or has the ability to exert control
over a subsidiary. Control is normally established when ownership interests
exceed 50 percent in an entity. However, when the Company does not exercise
control over a majority-owned entity as a result of other investors having
rights over the management and operations of the entity, the Company accounts
for the entity under the equity method. As at December 31, 2008 and 2007, there
were no greater-than-50 percent-owned affiliates whose financial statements were
not consolidated.

- 11 -

---

Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

Foreign currency translation

The Companys functional currency is the U.S. dollar. For the
United States, Swedish, Chinese, Hong Kong and other Canadian subsidiaries, the
functional currencies are the U.S. dollar, Swedish krona, Chinese renminbi
(RMB), Hong Kong dollar and Canadian dollar (CDN), respectively. The balance
sheet accounts of the Companys foreign operations for which the local currency
is the functional currency are translated into U.S. dollars at year-end exchange
rates, while revenues, expenses and cash flows are translated at average
exchange rates prevailing for the year. Translation gains or losses related to
net assets of such operations are shown as a component of accumulated other
comprehensive income/(loss) in shareholders equity. Gains and losses resulting
from foreign currency transactions, which are transactions denominated in a
currency other than the entitys functional currency, are included in the
consolidated statements of loss.

Cash and cash equivalents

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

Capital assets

The Company records capital assets at cost and provides for
amortization over the useful lives of the assets using the declining-balance
method at a rate of 30 percent for computer and office equipment, and furniture
and fixtures. Leasehold improvements are recorded at cost and amortized using
the straight-line method over the shorter of the estimated useful lives or the
remaining term of the lease. The amortization periods for leasehold improvements
range from one to five years.

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

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

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

|Customer agreements        | 4.5 years
|-------------------------- | ---------
|Patents and trademarks     | 11 years 
|Software development costs | 3 years  

Goodwill and other intangible assets with indefinite lives are
not amortized, but are tested for impairment at least annually, or more
frequently, if events or changes in circumstances indicate that the asset might
be impaired, such as, the loss of a patent litigation or a significant decline
in the Companys revenue.

Impairment of long-lived assets

The Company reviewed the carrying value of its long-lived
assets, including intangible assets, on September 30th. Due to the current
economic environment, management performed an additional impairment review on
December 31, 2008. To the extent that estimated undiscounted future net cash
inflows from such assets are less than the carrying amount, an impairment loss
is recognized. The Company considers factors such as significant changes in the
business climate and projected discounted cash flows from the respective assets
in determining the fair value of the asset. The Company evaluated its remaining
long-lived assets as at December 31, 2008 and determined that Qix was impaired.
Accordingly, an impairment provision of $1.4 million was recorded.

- 12 -

---

Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

Revenue recognition

Revenues from software licensing royalties related to the sale
of the product in which the Companys technologies have been embedded are
recognized in accordance with Statement of Position 97-2 (SOP), 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 obligations exist. Any revenue associated with contracts
having multiple elements is deferred and recognized once 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.

The guidance in SOP 97-2 requires that in multi-deliverable
contracts the fee should be allocated to the various elements based on vendor
specific objective evidence (VSOE) of fair value, regardless of any separate
prices stated within the contract for each element. If sufficient VSOE does not
exist for the allocation of revenue to the various elements of the arrangement,
all revenue from the arrangement should be deferred until the earlier of the
point at which (i) such sufficient vendor-specific objective evidence does exist
or (ii) all elements of the arrangement have been delivered. When VSOE of the
fair values of undelivered elements in an arrangement exist but VSOE of fair
value does not exist for one or more of the delivered elements, the revenue is
recognized using the residual method provided that all other applicable revenue
recognition criteria are met.

The Company may agree to deliver unspecified additional
software products in the future as part of a multiple-element software
arrangement. In such situations, there is no basis on which to allocate the
arrangement fee to the unspecified products to be delivered because VSOE of fair
value for unspecified products does not exist. Accordingly, the revenue is
accounted for under subscription accounting, and is recognized ratably over the
estimated economic life of the products covered by the arrangement.

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

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

The Company reports revenue on a gross basis in the Peoples
Republic of China (PRC). The amount of taxes collected from customers and
remitted to the governmental authorities were $621,100, $787,632 and $595,157
for the three years ended December 31, 2008, 2007 and 2006, respectively.

Allowance for doubtful accounts

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

Income taxes

The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), an interpretation of FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The interpretation
requires that the Company recognize the impact of a tax position in the
financial statements if that position is more likely than not being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. Should the Company incur any interest and
penalties related to unrecognized tax benefits, these amounts will be recorded
in income tax expense (see note 10).

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.

- 13 -

---

Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

Share issue costs

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

Loss per share

Loss per share is computed based on the weighted average number
of shares outstanding for the year. Diluted loss per share has been calculated
using the treasury stock method, whereby diluted loss per share is calculated as
if options, restricted stock units ("RSUs"), restricted stock awards (RSAs),
and common share purchase warrants were exercised at the beginning of the year
and funds received were used to purchase the Companys own stock. Potentially
diluted shares have not been used in calculating diluted loss per share for the
years ended December 31, 2008, 2007 and 2006 as they were anti-dilutive as
discussed in note 16.

Comprehensive income (loss)

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

Financial instruments

Accounts receivable, cash equivalents, investments in
significantly influenced companies, accounts payable, accrued liabilities, notes
payable, and capital lease obligations constitute financial instruments. The
carrying values of these financial instruments approximate their fair values
given the relatively short periods to maturity. The carrying values for these
financial instruments represent their maximum credit risk.

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

Stock-based compensation

The Company has a stock-based compensation plan, which is
described in note 9. Any consideration paid by employees on exercise of stock
options or purchase of stock is credited to share capital. Compensation expense
related to the exercise of stock options previously credited to additional
paid-in capital is credited to common stock. New common stock is issued upon
exercise of stock options, and RSUs, and the issuance of RSAs.

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

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

Recent accounting pronouncements

In March 2008, FASB issued FAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161) which changes the
disclosure requirements for derivative instruments and hedging activities. FAS
161 is intended to enhance the current disclosure framework in FAS 133,
Accounting for Derivative Instruments and Hedging Activities. FAS 161 is effective for financial statements issued for fiscal 2009. The
Company has not historically entered into derivative instruments and hedging
activities. However, the Company is considering on actively managing its foreign
exchange risks which includes entering into derivative and hedging contracts if
appropriate. Accordingly, the Company will be required to disclose its potential
hedging activities in accordance with FAS 161 for years beginning after November
15, 2008.

- 14 -

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Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

In December 2007, FASB issued FAS No. 160, Non-controlling
Interest in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51, Consolidated Financial Statements (FAS 160). FAS
160 establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income (loss) attributable to the parent and to the non-controlling
interest, changes in a parents ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. FAS 160
also establishes additional reporting requirements that identify and distinguish
between the interest of the parent and the interest of the non-controlling
owners. FAS 160 is effective for fiscal 2009. The adoption of FAS 160 will not
have a material effect on the Companys consolidated financial position, results
of operations or cash flows.

The Company adopted FAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No.115. The statement provides companies with an option to report
selected financial assets and liabilities at fair value. The Company determined
that the adoption of FAS 159 does not have a significant impact on its
consolidated operations and financial condition.

The Company adopted FAS No. 157, Fair Value Measurements. The
statement provides a single definition of fair value, together with a framework
for measuring it, and requires additional disclosure about the use of fair value
to measure assets and liabilities. The Company determined that the adoption of
FAS 157 does not have a significant impact on its consolidated operations and
financial condition.

The Securities and Exchange Commission (SEC) commented that
several registrants should have recorded share purchase warrants that were
issued in a currency other than their functional currency as a derivative
instrument in accordance with FAS 133, Accounting for Derivative Instruments
and Hedging Activities, instead of shareholders equity, and adjusted to market
value each reporting period. The FASB met and concluded that the position taken
by the SEC was correct, but that entities would not be required to adopt it
until the matter had been settled, and then would be able to do so as a change
in accounting policy. In June 2008, the Emerging Issues Task Force (EITF)
issued EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock, effectively settling this issue. The Company
does not have warrants outstanding that meet the definition of a derivative
under FAS 133 in 2008, and accordingly, no adjustment is required.

4. Restricted Cash

Funds held in one of the Companys Chinese subsidiaries had
been restricted for use in funding the day-to-day operations of only those
subsidiaries, and were not fully available to fund the non-Chinese operations of
the Company. In the first quarter of 2008, the Company established an
inter-company royalty program, the effect of which is the Company can
periodically charge a royalty to its Chinese subsidiaries and have that
subsidiary transfer the cash to one of its entities in Canada. Thus, it is no
longer necessary to classify such funds as restricted.

As a result of the royalty program as at December 31, 2008 cash
previously classified as restricted has now been classified as cash and cash
equivalents (as at December 31, 2007, restricted cash was $2,740,702).

5. Dispositions

Disposition of Archer Education Group Inc. (Archer)

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

The Companys proportionate share of the loss from Archers
operations for the period ended March 27, 2007 had not been recognized as the
carrying value of the investment in Archer was nil and the Company had no
commitment to fund this loss. In addition, Archer did not complete any private
placements between January 1, 2007 and March 27, 2007. Therefore, the Company
was not required to recognize any potential dilution gains resulting in an
increase in its net investment in Archer. As a result, the full amount of the
proceeds was recognized as a gain on disposal of discontinued operations in the
first quarter of 2007 (see note 18).

- 15 -

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Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

6. Capital Assets

|                              |   |           |  |   | Accumulated  |  |   |                      | 
|----------------------------- | - | --------- |  | - | ------------ |  | - | -------------------- | 
|2008                          |   | Cost      |  |   | amortization |  |   | Net
      book value | 
|Computer and office equipment | $ | 3,140,768 |  | $ | 2,319,454    |  | $ | 821,314              | 
|Leasehold
      improvements  |   | 456,484   |  |   | 456,484      |  |   |                     | 
|Total                         | $ | 3,597,252 |  | $ | 2,775,938    |  | $ | 821,314              | 
|                              |   |           |  |   |              |  |   |                      | 
|2007                          |   |           |  |   |              |  |   |                      | 
|Computer and office equipment | $ | 3,451,494 |  | $ | 2,524,131    |  | $ | 927,363              | 
|Leasehold improvements        |   | 652,821   |  |   | 648,263      |  |   | 4,558                | 
|Total                         | $ | 4,104,315 |  | $ | 3,172,394    |  | $ | 931,921              | 

7. Intangible Assets

|                                 |   |            |  |   | Accumulated  |  |   |                      | 
|-------------------------------- | - | ---------- |  | - | ------------ |  | - | -------------------- | 
|2008                             |   | Cost       |  |   | amortization |  |   | Net
      book value | 
|Patents                          | $ | 1,583,892  |  | $ | 864,723      |  | $ | 719,169              | 
|Trademarks                       |   | 64,450     |  |   | 23,436       |  |   | 41,014               | 
|Customer agreements              |   | 170,440    |  |   | 148,747      |  |   | 21,693               | 
|Software
      development costs |   | 11,727,306 |  |   | 11,001,771   |  |   | 725,535              | 
|Total                            | $ | 13,546,088 |  | $ | 12,038,677   |  | $ | 1,507,411            | 
|                                 |   |            |  |   |              |  |   |                      | 
|2007                             |   |            |  |   |              |  |   |                      | 
|Patents                          | $ | 1,929,014  |  | $ | 880,893      |  | $ | 1,048,121            | 
|Trademarks                       |   | 78,150     |  |   | 21,314       |  |   | 56,836               | 
|Customer agreements              |   | 206,669    |  |   | 135,275      |  |   | 71,394               | 
|Software development costs       |   | 14,018,585 |  |   | 11,473,313   |  |   | 2,545,272            | 
|Total                            | $ | 16,232,418 |  | $ | 12,510,795   |  | $ | 3,721,623            | 

During 2008, $1,231,363 (2007 - $1,638,389) of software
development costs were deferred and are being amortized using the straight-line
method over a three-year economic life. Amortization for 2008 includes
$1,129,285 of amortization of deferred software development costs and $169,514,
$6,982 and $44,314, respectively, of amortization of patents, trademarks and
customer agreements. Amortization for 2007 includes $1,165,665 of amortization
of deferred software development costs $165,411, $6,737 and $42,760,
respectively, of amortization of patents, trademarks and customer
agreements.

The Company assesses the value of its intangible assets on an
annual basis. In addition the Company continually monitors the value of its
intangible assets for changes in circumstances including but not limited to:
significant underperformance relative to historical or projected results,
significant changes in the Companys business or use of assets, and significant
negative industry or economic trends. Any identified impairments are recorded in
the reporting period identified.

The Company reviewed the carrying value of its long-lived
assets, including intangible assets on September 30, 2008. Due to the current
economic environment, the Company evaluated its other intangible assets on
December 31, 2008. Based on the current economic environment and the Companys
success rate in signing revenue generating Qix deals, the Company recorded a
impairment provision relating to its Qix software of $1.4 million. The Company
will continue to monitor the economic environment and record any additional
provisions in the period identified.

- 16 -

---

Notes to the Consolidated Financial Statements For the
years ended December 31, 2008, 2007 and 2006(All amounts expressed in United
States of America dollars except share amounts)

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

|2009  | $ | 479,619   | 
|----- | - | --------- | 
|2010  |   | 277,136   | 
|2011  |   | 198,923   | 
|2012  |   | 108,598   | 
|2013  |   | 102,277   | 
|Total | $ | 1,166,553 | 

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

8. Bank Indebtedness

On September 8, 2008, the Company secured a $1,250,000 credit
facility agreement from its principal bank, HSBC Bank Canada. The loan was
secured by a single trade receivable which was insured by the Export Development
Canada. The outstanding amount on the loan was due on demand, on the earlier of
the collection of the significant receivable or October 31, 2008. The amount
with interest thereon was repaid on October 16, 2008. The proceeds of the loan
were used to augment the cash balances for operating purposes.

The loan was secured by a first priority interest in all
capital assets of the Company. The loan bore interest at the banks U.S base
rate plus 1.0 percent per annum. The loan agreement contained a number of
restrictive covenants, all of which were in compliance before repayment.

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

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

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

9. Share Capital

Private Placement

On March 29, 2007, the Company completed a brokered private
placement in the United States and a non-brokered private placement in Canada of
a total of 3,776,848 units priced at $1.61 per unit for net proceeds of
$5,533,644. The Company agreed to pay a commission to the placement agent
involved in the private placement in the United States equal to 10 percent of
the gross proceeds of such private placement, with eight percent to be paid in
the form of cash and two percent to be paid in the form of units equal to the
price paid per unit.

Each unit issued in the private placements consisted of
two-fifths of a stock purchase warrant. Each whole stock purchase warrant is
exercisable to purchase one share of the Companys stock after six months from
the date of closing but before March 29, 2012, at an exercise price of $2.14 per
share. An additional eight percent commission was payable to the placement agent
on the gross proceeds of the cash exercise of any share purchase warrants held
by investors during the first twelve months following the closing of the private
placement in the United States and four percent of the gross proceeds of the
cash exercise of any share purchase warrants held by investors during the second
twelve months following the closing of the private placement in the United
States. The placement agent has also been issued warrants to purchase such number of common
shares of the Company equal to eight percent of the units issued in the private
placement in the United States. As at December 31, 2008, there were 1,709,532
stock purchase warrants outstanding (December 31, 2007  1,709,532).

- 17 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

Nasdaq Listing

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

On February 1, 2008 the Company received a Nasdaq Staff
Deficiency Letter dated January 30, 2008 stating that the bid price of Zi's
common shares had closed below $1.00 per share for 30 consecutive days. As a
result, in accordance with Marketplace Rule 4310(c)(8) ("the Rule"), Zi was
granted 180 calendar days, or until July 28, 2008, for the bid price of its
common shares to close at $1.00 or more for a minimum of 10 consecutive business
days.

On August 1, 2008, the Company received a letter from Nasdaq
indicating that the Company had failed to regain compliance with Nasdaqs
minimum bid price requirement of US$1.00 per share for continued listing of the
Companys common shares on the Nasdaq Capital Market as set forth in Marketplace
Rule 4310(c)(4) (the Staff Determination). In accordance with the Marketplace
Rules, the Company had initially been provided with a grace period of 180
calendar days, or until July 28, 2008, to regain compliance with the minimum bid
requirement. The Company was unable to comply with the minimum bid requirement
as of such date and also was unable to satisfy the other initial listing
criteria for the Nasdaq Capital Market that would have provided it with an
additional 180 calendar day grace period to meet the minimum bid price
requirement.

Following procedures set forth in the Nasdaq Marketplace Rule
4800 series, the Company requested a hearing before a Panel to review the Staff
Determination which was held on September 18, 2008. At the hearing, the Company
requested continued listing on the Nasdaq Capital Market, based upon its plan
for demonstrating compliance with the applicable listing requirements. Pursuant
to the Nasdaq Marketplace Rules, the Panel has the authority to grant the
Company up to an additional 180 days to regain compliance with the applicable
listing requirements.

On October 21, 2008, Nasdaq announced that it will not take any
action through January 16, 2009 to delist companies for a bid price or market
value of publicly-held shares deficiency. Nasdaq has subsequently announced the
extension of the date to July 20, 2009. Accordingly, the Panels decision on
Zis appeal will be made after July 20, 2009, unless Zi regains compliance
before that date, in which case, a decision would not be necessary. If Zis bid
price remains deficient at the close of business on July 20, 2009, then Zi must
provide Nasdaq with an updated plan of compliance in order to continue the
appeal process.

In the event that the Panel denies the Companys request for
continued listing on the Nasdaq Capital Market, the Companys common shares
could be eligible for quotation and trading on the Over-the-Counter Bulletin
Board. Additionally, trading of the Companys shares will continue on the
Toronto Stock Exchange.

Stock-based Compensation

At December 31, 2008 and 2007, the Company maintained a
stock-based compensation plan (the Plan). The Plan provides that stock
options, RSAs (in the case of participants subject to taxation in the United
States) and RSUs (in the case of participants subject to taxation in Canada) may
be granted by the Company to officers, directors, employees and service
providers of the Company, or of any affiliate or subsidiary of the Company from
time to time up to a maximum of fifteen (15%) percent of the Companys issued
capital. The number of the common shares which may be reserved specifically for
issuance in respect of RSAs and RSUs shall not exceed 7,583,693 common shares.
Any expiration, cancellation or exercise of stock options pursuant to the
provisions of the Plan will allow the Company to re-grant the options on a
continuous revolving and reloading basis. Any expiration or cancellation of RSAs
and RSUs become available for re-granting by the Company. Any increase in the
issued and outstanding common shares will result in an increase in the maximum
number of common shares reserved for issuance under the Plan. As at December 31,
2008, the Company had 50,667,957 common shares issued and outstanding.
Accordingly, 7,600,193 common shares are reserved for issuance under the Plan as
at that date. The Plan is required to be re-approved by shareholders every three
years; the next such approval is not required until 2010. At December 31, 2008,
the Company has 3,084,659 stock options, RSAs, and RSUs (December 31, 2007 
2,588,619) available for future grants under the Plan.

- 18 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

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

In 2008, nil (2007  55,000) stock options were exercised for
proceeds of nil (2007  $94,083). In 2008, 955,000 (2007  2,361,700) stock
options were granted by the Company. As at December 31, 2008 and 2007, the
Company has a total of 4,440,534 and 4,995,075 outstanding options,
respectively, which expire over a period of one to five years.

In 2008, nil (2007  37,486) RSUs were exercised for nil
proceeds. In 2008, 75,000 (2007  nil) RSUs were granted by the Company. As at
December 31, 2008 and 2007, the Company has a total of 75,000 and nil
outstanding RSUs, respectively, which expire over a period of one to five years.

In 2008, 110,000 (2007  nil) RSAs were issued by the Company.
Accordingly, the Company issued 110,000 common shares which are restricted from
trading and cancellable if certain service criteria are not met. As at December
31, 2008, 12,500 (2007  nil) RSAs remain restricted from trading and
cancellable.

Compensation expense related to stock options, RSAs and RSUs
are based on the fair value of the underlying shares on the date of grant.
Compensation expense related to stock options, RSAs and RSUs granted pursuant to
the Plan was determined based on the estimated fair values using the
Black-Scholes Option Pricing Model. Stock options granted in 2008, 2007 and 2006
were granted with the following assumptions:

|                                  | 2008          | 2007          | 2006         
|--------------------------------- | ------------- | ------------- | -------------
|Risk free interest rate           | 2.98% - 3.29% | 3.58% - 4.65% | 3.90% - 4.20%
|Expected term in years            | 3.0  4.0     | 1.0 - 4.0     | 3.0          
|Expected dividend yield           | 0%            | 0%            | 0%           
|Weighted average
      volatility | 94.65%        | 89%           | 90%          
|Expected volatility               | 89% - 104%    | 86% - 102%    | 55% - 103%   

Stock options, and RSUs activity and related information for
2008, 2007 and 2006 are as follows:

|                                                                                      |  | Shares         |   |   |                  |      |  | Weighted          |  |   |                 | 
|------------------------------------------------------------------------------------- |  | -------------- | - | - | ---------------- | ---- |  | ----------------- |  | - | --------------- | 
|                                                                                      |  | under options, |   |   | Weighted average |      |  | average remaining |  |   | Aggregate       | 
|2008                                                                                  |  | and
      RSUs |   |   | exercise price   |      |  | contractual life  |  |   | intrinsic value | 
|Outstanding, beginning of period                                                      |  | 4,995,075      |   | $ | 2.25             |      |  |                   |  |   |                 | 
|Granted                                                                               |  | 1,030,000      |   |   | 0.40             |      |  |                   |  |   |                 | 
|Exercised                                                                             |  |               |   |   |                 |      |  |                   |  |   |                 | 
|Forfeited                                                                             |  | (161,333       | ) |   | (0.96            | )    |  |                   |  |   |                 | 
|Expired                                                                               |  | (1,348,208     | ) |   | (2.75            | )    |  |                   |  |   |                 | 
|Outstanding, end
      of period                                                      |  | 4,515,534      |   | $ | 1.23             |      |  | 3.27
      years  |  | $ | 31,500          | 
|Exercisable, end of period                                                            |  | 2,459,665      |   | $ | 1.55             |      |  | 2.76 years        |  | $ | 23,625          | 
|Weighted
      average fair value of stock options and RSUs granted during the period |  |                |   |   | $                | 0.29 | 



|                                 |  | Shares         |   |   |                  |   |  | Weighted          |  |  | Aggregate | 
|-------------------------------- |  | -------------- | - | - | ---------------- | - |  | ----------------- |  |  | --------- | 
|                                 |  | under options, |   |   | Weighted average |   |  | average remaining |  |  | intrinsic | 
|2007                             |  | and
      RSUs |   |   | exercise price   |   |  | contractual life  |  |  | value     | 
|Outstanding, beginning of period |  | 3,999,982      |   | $ | 2.49             |   |  |                   |  |  |           | 
|Granted                          |  | 2,361,700      |   |   | 1.37             |   |  |                   |  |  |           | 
|Exercised                        |  | (92,486        | ) |   | (1.11            | ) |  |                   |  |  |           | 
|Forfeited                        |  | (48,832        | ) |   | (1.84            | ) |  |                   |  |  |           | 

|Expired                                                                                |  | (1,225,289 | ) |   | (2.84 | )    |  |                  |  |   |   | 
|-------------------------------------------------------------------------------------- |  | ---------- | - | - | ----- | ---- |  | ---------------- |  | - | - | 
|Outstanding, end
      of period                                                       |  | 4,995,075  |   | $ | 2.25  |      |  | 3.37
      years |  | $ |  | 
|Exercisable, end
      of period                                                       |  | 2,741,405  |   | $ | 2.96  |      |  | 2.35
      years |  | $ |  | 
|Weighted
      average fair value of stock options, and RSUs granted during the period |  |            |   |   | $     | 0.73 | 

- 19 -

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Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)





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

A summary of the status of the Companys unvested stock options
and RSUs as December 31, 2008 and 2007, and changes during the years then ended
is presented below:

|                              |  | 2008              |   |   | 2007                        |  
|----------------------------- |  | ----------------- | - | - | --------------------------- | -
|                              |  | Shares under      |   |   | Weighted average            |  
|                              |  | options, and RSUs |   |   | grant
      date fair value |  
|Unvested, beginning of period |  | 2,253,670         |   | $ | 0.72                        |  
|Granted                       |  | 1,030,000         |   |   | 0.29                        |  
|Vested                        |  | (1,066,513        | ) |   | (0.53                       | )
|Forfeited                     |  | (161,288          | ) |   | (0.49                       | )
|Unvested, end of period       |  | 2,055,869         |   | $ | 0.52                        |  

The following table summarizes the exercise price ranges of
outstanding and exercisable stock options, and RSUs as at December 31, 2008:

Total stock options and RSUs outstanding
    
    
    Total stock options and RSUs exercisableRange of exercise prices
    
    Number outstanding
    
    
    Weighted average remaining
      contractual life
    
    
    Weighted average exercise
      price
    
    
    Number outstanding
    
    
    Weighted average exercise
      price$0.00  $1.64
    
    3,096,034
    
    
    3.85 years
    
    $
    0.79
    
    
    1,306,832
    
    $
    0.85$1.65  $2.46
    
    935,000
    
    
    2.48 years
    
    
    1.86
    
    
    668,333
    
    
    1.80$2.47  $3.28
    
    254,500
    
    
    1.23 years
    
    
    2.85
    
    
    254,500
    
    
    2.85$3.29  $4.11
    
    230,000
    
    
    0.83
      years
    
    
    3.42
    
    
    230,000
    
    
    3.42$0.00  $4.11
    
    4,515,534
    
    
    3.27 years
    
    $
    1.23
    
    
    2,459,665
    
    $
    1.55


The stock-based compensation expense included in the Companys
consolidated statements of loss was as follows:

|                                       |   | 2008    |  |   | 2007    |  |   | 2006      | 
|-------------------------------------- | - | ------- |  | - | ------- |  | - | --------- | 
|Selling general and administrative     | $ | 799,116 |  | $ | 831,848 |  | $ | 1,208,701 | 
|Product research
      and development |   | 100,982 |  |   | 59,216  |  |   | 336,054   | 
|Total stock-based compensation expense | $ | 900,098 |  | $ | 891,064 |  | $ | 1,544,755 | 

- 20 -

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Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

As at December 31, 2008, there was $425,592 (2007  $1,122,368)
of total unrecognized compensation cost related to unvested share-based
compensation arrangements granted under the Companys stock option plans. That
cost is expected to be recognized over a weighted-average period of 1.20 years.
The total fair value of shares vested during the years ended December 31, 2008,
2007 and 2006 was $645,670, $341,669 and $1,402,781, respectively.

10. Income Taxes

The Company adopted the provisions of FIN 48 on January 1,
2007. The implementation of FIN 48 did not result in any adjustment to the
Companys beginning tax positions. The Company continues to recognize its tax
benefits which are offset by a valuation allowance to the extent that it is more
likely than not that the future income tax assets will not be realized. As of
December 31, 2008 and 2007, there were no unrecognized tax benefits as the
Company provided a full valuation allowance against the future income tax assets
based on the Companys evaluation of the likelihood of realization of these
assets. The Company will continue to evaluate and examine the valuation
allowance on a regular basis.

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

|                                                                                          |   | 2008       |   |   | 2007       |   |   | 2006       |  
|----------------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|Combined basic federal and provincial
      income tax rate                               |   | 29.90%     |   |   | 33.40%     |   |   | 33.40%     |  
|Expected combined Canadian federal and provincial tax
      recovery based on above rates | $ | (2,205,594 | ) | $ | (1,576,393 | ) | $ | (3,268,251 | )
|Enacted tax rate adjustment differences                                                   |   | 46,270     |   |   | 54,194     |   |   | 104,426    |  
|Differences in foreign statutory tax rates                                                |   | (514,196   | ) |   | (223,835   | ) |   | 373,247    |  
|Permanent differences                                                                     |   | 783,087    |   |   | 3,645,392  |   |   | 1,440,996  |  
|Impairment of note receivable                                                             |   |           |   |   |           |   |   | 22,648     |  
|Tax exemption                                                                             |   | (323,858   | ) |   | (442,286   | ) |   | 161,635    |  
|Impairment of software development costs                                                  |   | 421,753    |   |   |           |   |   |           |  
|Other                                                                                     |   |           |   |   | 31,842     |   |   | (56,736    | )
|Valuation allowance                                                                       |   | 1,954,866  |   |   | (1,101,734 | ) |   | 2,107,119  |  
|Consolidated income tax before undernoted                                                 |   | 162,328    |   |   | 387,180    |   |   | 885,084    |  
|Provision for cross border transactions                                                   |   | (270,138   | ) |   | 652,278    |   |   |           |  
|Hong Kong Tax assessment                                                                  |   | 334,536    |   |   |           |   |   |           |  
|Total income tax
      expense                                                            | $ | 226,726    |   | $ | 1,039,458  |   | $ | 885,084    |  

The components of future income tax assets (liabilities) are as
follows:

|As at December 31,                          |   | 2008        |   |   | 2007        |   |   | 2006        |  
|------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|Capital assets                              | $ | 244,372     |   | $ | 154,977     |   | $ | 268,247     |  
|Software development costs                  |   | (166,821    | ) |   | (667,964    | ) |   | (680,084    | )
|Deferred revenue                            |   | 103,775     |   |   | 87,026      |   |   | (102,014    | )
|Share issue costs                           |   | 66,725      |   |   | 147,401     |   |   | 84,767      |  
|Other                                       |   | 424,859     |   |   | (295,810    | ) |   | (337,855    | )
|Loss carry-forwards previously unrecognized |   | 273,568     |   |   |            |   |   |            |  
|Loss carry-forwards                         |   | 11,315,264  |   |   | 13,791,295  |   |   | 19,006,279  |  
|Valuation
      allowance                   |   | (12,232,376 | ) |   | (13,231,561 | ) |   | (18,413,740 | )
|Net future income tax asset (liability)     | $ | 29,366      |   | $ | (14,636     | ) | $ | (174,400    | )

Income tax expense is comprised of the expense for the
Companys profitable Chinese operations, a tax provision taken for a
reassessment by the Inland Revenue Department (IRD) in Hong Kong, and a credit
representing the partial reversal of a penalty provision taken in the third
quarter of 2007 related to the review of the Companys international transfer
pricing policies by the Canada Revenue Agency (CRA). The uncertainty relates
to the treatment of the Companys international operations, including the
allocation of income among different jurisdictions, and related penalties and
interest. The Company will monitor and adjust such reserves on receiving
proposed assessments by tax authorities, changes in facts and circumstances,
issuance of new regulations or new case law, previously unavailable information
obtained during the course of an examination, negotiations between tax
authorities of different countries concerning the Companys transfer prices,
resolution with respect to individual audit issues, the resolution of entire
audits, or the expiration of statutes of limitations. Once a final outcome is
determined, the Company will adjust its tax provision accordingly.

- 21 -

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Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

On February 16, 2009, the Company received an official letter
from the IRD re-assessing the Company $248,576 in taxes for a prior year
transaction relating to the transfer of intangible property to a Canadian
subsidiary in consideration for an outstanding intercompany debt. In addition, a
further $85,960 was recorded for the 2003-2004 taxation year due to the loss of
loss carry-forwards which had reduced taxes to nil prior to the re-assessment.
The Company intends to file an objection to the re-assessment but accrued for
the taxes as of December 31, 2008. Should the objection be successful, the
Company will reverse the provision in the period in which it is received.

On July 19, 2008, the Company received an official letter from
the CRA stating that its audit for the 2002 and 2003 tax years was complete and
that no adjustments were required to the Companys previously-filed tax returns.
Accordingly, the Company has reversed the provision that related to the 2002 and
2003 tax years in the second quarter of 2008. Further to this, on January 1,
2009, the 2001 taxation year becomes statute barred and the Company will reverse
an additional CDN $95,900 of the provision.

As at December 31, 2008, the Company recorded a future income
tax asset of $29,366 and a future tax liability of $14,636 as at December 31,
2007. Future income taxes result from differences in tax reporting with the
Companys Chinese operations. The Chinese tax authorities require the Companys
Chinese operations to report earnings under PRC GAAP, which differs from U.S.
GAAP. Accordingly, future income taxes are recorded when the Companys Chinese
operations are adjusted to U.S. GAAP.

In accordance with FIN 48, as at December 31, 2007, the Company
recorded a penalty provision of $652,278 relating to the CRA audit of the
Companys cross border transactions. During the year ended December 31, 2008,
the provision has been reduced to $306,265 due to the successful settlement of
the 2002 and 2003 taxation years, and from 2000 becoming statute barred. The
reduction has been offset with the additional provision of $334,536 relating to
the re-assessment of prior year tax years by the IRD. Accordingly, the Companys
total amount of penalties and income tax outstanding as at December 31, 2008, in
accordance with FIN 48 is $640,801.

At December 31, 2008, the Companys Canadian subsidiaries have
non-capital losses of $19,182,166, which expire between 2009 and 2029 and net
capital losses of $51,667,824, which do not expire and are available to reduce
Canadian taxable capital gains in future years. The Company has foreign
non-capital losses of $27,840,357 of which $21,006,940 does not expire and the
balance of $6,833,417 relates to a U.S. subsidiary and expires between 2011 and
2027.

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

|2009  | $ | 1,710,526 | 
|----- | - | --------- | 
|2010  |   | 996       | 
|2011  |   | 3,826,525 | 
|2012  |   |          | 
|2013  |   |          | 
|Total | $ | 5,538,047 | 

11. Impairment of Note Receivable.

Archer (see note 18) was incorporated in February 2005 for the
purpose of acquiring a number of educational learning institutions in Canada. Zi
acquired 24.9 percent of Archers shares, through share subscription agreements
in 2005. Consequently, Zi is a related party to Archer. The Companys ownership
of Archer increased through the sale of its Oztime and EPI subsidiaries to
Archer. Under the sale agreements, Zi received 6,140,000 shares of Archer,
including contingent consideration of 1,000,000 shares placed in escrow and a
RMB 1,000,000 non-interest bearing note receivable at December 31, 2006, a U.S.
dollar equivalent of $129,417. At December 31, 2006, the Company evaluated the
note receivable for impairment and determined that subject to SFAS No. 114,
Accounting by Creditors for Impairment of Loan, using a projected discounted
cash flow model, the full amount of the note receivable was impaired and hence
provided for. At the time of the impairment, Archer had been unsuccessful in
raising additional capital sufficient enough to repay the note and continued to
post operating losses. Due to these factors it was probable that Archer would
not have the necessary funds available to meet the requirements under the note.
In April 2007, Archer was able to repay the note receivable in full.
Accordingly, the Company recorded $130,931 for the recovery of the note
receivable.

- 22 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

12. Contingent Liabilities

On August 19, 2008, the Company received a motion filed in the
United States District Court, Northern District of California, San Francisco
Division. The motion claims that the Company violated a 2002 consent judgment
which settled a patent litigation with Tegic, a recently acquired subsidiary of
Nuance, involving the Companys eZiText software. On November 7, 2008, the
motion was dismissed by the courts without prejudice, and both parties were
ordered to seek arbitration.

The Company received a second claim on August 27, 2008, filed
in the Federal Court in Toronto, Canada. This claim states that the Company
infringes Tegics intellectual property with its Qix and eZiText products, with
regard to two Canadian patents.

The Company has no reason to believe that it infringes Tegics
patents or violated the 2002 consent judgment. Accordingly, the Company has
vigorously defended itself in both proceedings.

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

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

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

On May 2, 2007, the United States District Court for Western
District of Texas System issued an Order of Non-Infringement of U.S. Patent No.
4,674,112 against the plaintiff, The Board of Regents of the University of
Texas, and in favor of all remaining defendants. The plaintiff subsequently
filed an appeal but the original finding of the District Court was upheld by the
Appeals Court in July 2008. The U of T subsequently filed a petition for a
rehearing on August 8, 2008, which was not allowed by the Court.

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

13. Related Party Transactions

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

The amounts due from (to) related parties as at December 31:

|                                                        |   | 2008     |   |   | 2007     |  
|------------------------------------------------------- | - | -------- | - | - | -------- | -
|Due to law firm in which a director is a
      partner  | $ | (213,590 | ) | $ | (1,938   | )
|Due to a company
      in which an officer is a partner |   |         |   |   | (116,000 | )

- 23 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

The following table outlines the Companys related party
transactions for the years ending December 31:

|                                                                                    |   | 2008    |  |   | 2007    |  |   | 2006    | 
|----------------------------------------------------------------------------------- | - | ------- |  | - | ------- |  | - | ------- | 
|Legal services provided by a law firm in
      which a director is a partner        | $ | 259,556 |  | $ | 26,382  |  | $ | N/A     | 
|Legal services provided by a law firm in which a former
      director is a partner |   | N/A     |  |   | 160,476 |  |   | 158,078 | 
|Consulting fees paid to a firm in which an
      officer is a partner               |   | 42,500  |  |   | 296,328 |  |   | 66,006  | 
|Consulting fees paid to a firm owned by a former officer                            |   | N/A     |  |   | N/A     |  |   | 34,248  | 
|Fees paid on behalf of a significantly influenced company                           |   | N/A     |  |   | N/A     |  |   | 7,247   | 

14. Off-Balance Sheet Arrangements, Commitments and
Contractual Obligations

The Company rents premises and equipment under operating
leases, which expire at various dates up to June 2012. The Company recorded rent
expense for 2008 of $980,705 (2007  $745,812; 2006  $641,113).

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

|2009  | $ | 873,694   | 
|----- | - | --------- | 
|2010  |   | 615,563   | 
|2011  |   | 561,048   | 
|2012  |   | 280,524   | 
|2013  |   |          | 
|Total | $ | 2,330,829 | 

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

15. Segmented Information

The Company develops software designed to provide discovery and
usability solutions for mobile search, input and advertising through its Zi
Technology business segment. The Company has a singular focus: to make mobile
devices smarter and easier to use. The result is richer, more personalized
interaction for quicker, easier communication in over 60 different languages for
predictive text and over 70 languages for Decuma.

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

Segmented financial information is reported under the
contracting Zi subsidiarys country of residence. Other operating expenses
include unallocated segment expenses such as legal fees, public company costs,
interest and other income and head office costs. The accounting policies of each
of the business segments are the same as those described in note 3.

The Companys primary operations are located in North America.
The Company operates two reportable business segments (Zi Technology and
Corporate) in five reportable geographic locations in which those subsidiaries
reside:

- 24 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

Impairment of
    
    
    
    
    
    Operating profitsoftware
    
    
    Other
    
    
    (loss) beforedevelopment
    
    
    operating
    
    
    interest andRevenues
    
    
    Amortization
    
    
    VAT
    
    
    costs
    
    
    expenses
    
    
    other
      income2008Zi Technology
    $
    13,323,492
    
    $
    1,535,182
    
    $
    621,100
    
    $
    1,429,670
    
    $
    13,040,536
    
    $
    (3,302,996
    )Corporate
    
    
    
    
    75,888
    
    
    
    
    
    
    
    
    3,788,682
    
    
    (3,864,570
    )Total
    $
    13,323,492
    
    $
    1,611,070
    
    $
    621,100
    
    $
    1,429,670
    
    $
    16,829,218
    
    $
    (7,167,566
    )Interest expense and interestand other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,725Loss before income
      taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,149,841
    )2007Zi Technology
    $
    13,111,002
    
    $
    1,601,040
    
    $
    787,632
    
    $
    
    
    $
    11,820,707
    
    $
    (1,098,377
    )Corporate
    
    
    
    
    106,512
    
    
    
    
    
    
    
    
    3,799,460
    
    
    (3,905,972
    )Total
    $
    13,111,002
    
    $
    1,707,552
    
    $
    787,632
    
    $
    
    
    $
    15,620,167
    
    $
    (5,004,349
    )Interest expense and interestand other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,677Note receivable
      recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,931Loss before income
      taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,719,741
    )2006Zi Technology
    $
    11,836,217
    
    $
    1,534,027
    
    $
    595,157
    
    $
    
    
    $
    13,453,283
    
    $
    (3,746,250
    )Corporate
    
    
    
    
    173,185
    
    
    
    
    
    
    
    
    5,025,213
    
    
    (5,198,398
    )Total
    $
    11,836,217
    
    $
    1,707,212
    
    $
    595,157
    
    $
    
    
    $
    18,478,496
    
    $
    (8,944,648
    )Interest expense and interestand other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209,556Loss before income
      taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,735,092
    )




2008
    
    
    2007Capital and intangible assets
    
    
    Other assets
    
    
    Identifiable assets
    
    
    Capital and intangible assets
    
    
    Other assets
    
    
    Identifiable assetsZi Technology
    $
    2,139,504
    
    $
    5,226,221
    
    $
    7,365,725
    
    $
    4,364,019
    
    $
    9,155,516
    
    $
    13,519,535Corporate
    
    189,221
    
    
    772,604
    
    
    961,825
    
    
    289,525
    
    
    1,886,054
    
    
    2,175,579Total
    $
    2,328,725
    
    $
    5,998,825
    
    $
    8,327,550
    
    $
    4,653,544
    
    $
    11,041,570
    
    $
    15,695,114


Corporate includes non-cash compensation expense related to
issuance of employee stock options, RSUs and RSAs in 2008 of $799,116 (2007 
$831,848; 2006  $1,208,701), with the remaining portion to Zi Technology. All
additions to software development costs of $1,231,363 in 2008 (2007 
$1,638,390; 2006  $1,407,204) are part of Zi Technologys operations.



- 25 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

|       |   | Revenues  |  |   | Amortization |  |   | VAT     |  |   | Impairment of software
      development costs |  |   | Other operating expenses |  |   | Operating profit (loss) before
      interest and other income |  
|------ | - | --------- |  | - | ------------ |  | - | ------- |  | - | ---------------------------------------------- |  | - | ------------------------ |  | - | -------------------------------------------------------------- | -
|2008   |   |           |  |   |              |  |   |         |  |   |                                                |  |   |                          |  |   |                                                                |  
|Canada | $ | 7,210,595 |  | $ | 1,380,250    |  | $ |        |  | $ | 1,429,670                                      |  | $ | 8,939,624                |  | $ | (4,538,949                                                     | )
|China  |   | 5,048,792 |  |   | 37,469       |  |   | 621,100 |  |   |                                               |  |   | 3,888,528                |  |   | 501,695                                                        |  
|USA    |   | 678,008   |  |   | 4,485        |  |   |        |  |   |                                               |  |   | 2,637,144                |  |   | (1,963,621                                                     | )
|Sweden |   | 386,097   |  |   | 188,866      |  |   |        |  |   |                                               |  |   | 1,337,937                |  |   | (1,140,706                                                     | )
|Other  |   |          |  |   |             |  |   |        |  |   |                                               |  |   | 25,985                   |  |   | (25,985                                                        | )

Total
    $
    13,323,492
    
    $
    1,611,070
    
    $
    621,100
    
    $
    1,429,670
    
    $
    16,829,218
    
    $
    (7,167,566
    )Interest expense and interestand other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,725Loss before income
      taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7,149,841
    )2007Canada
    $
    5,513,032
    
    $
    1,434,083
    
    $
    
    
    $
    
    
    $
    9,239,551
    
    $
    (5,160,602
    )China
    
    5,977,217
    
    
    79,489
    
    
    787,632
    
    
    
    
    
    3,026,743
    
    
    2,083,353USA
    
    1,038,728
    
    
    6,077
    
    
    
    
    
    
    
    
    1,754,626
    
    
    (721,975
    )Sweden
    
    582,025
    
    
    181,905
    
    
    
    
    
    
    
    
    1,565,896
    
    
    (1,165,776
    )Other
    
    
    
    
    5,998
    
    
    
    
    
    
    
    
    33,351
    
    
    (39,349
    )Total
    $
    13,111,002
    
    $
    1,707,552
    
    $
    787,632
    
    $
    
    
    $
    15,620,167
    
    $
    (5,004,349
    )Interest expense and interestand other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,677Note receivable
      recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,931Loss before income
      taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,719,741
    )2006Canada
    $
    5,832,869
    
    $
    1,417,331
    
    $
    
    
    $
    
    
    $
    11,628,079
    
    $
    (7,212,541
    )China
    
    4,751,684
    
    
    99,719
    
    
    595,157
    
    
    
    
    
    2,811,919
    
    
    1,244,889USA
    
    935,956
    
    
    6,606
    
    
    
    
    
    
    
    
    2,244,921
    
    
    (1,315,571
    )Sweden
    
    315,708
    
    
    169,160
    
    
    
    
    
    
    
    
    1,688,014
    
    
    (1,541,466
    )Other
    
    
    
    
    14,396
    
    
    
    
    
    
    
    
    105,563
    
    
    (119,959
    )Total
    $
    11,836,217
    
    $
    1,707,212
    
    $
    595,157
    
    $
    
    
    $
    18,478,496
    
    $
    (8,944,648
    )Interest expense and interestand other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209,556Loss before income
      taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,735,092
    )




2008
    
    
    2007Capital and intangible assets
    
    
    Other assets
    
    
    Identifiable assets
    
    
    Capital and intangible assets
    
    
    Other assets
    
    
    Identifiable assetsCanada
    $
    1,353,106
    
    $
    2,378,742
    
    $
    3,731,848
    
    $
    3,382,152
    
    $
    3,844,589
    
    $
    7,226,741China
    
    103,493
    
    
    2,649,909
    
    
    2,753,402
    
    
    117,690
    
    
    6,178,888
    
    
    6,296,578USA
    
    14,204
    
    
    56,559
    
    
    70,763
    
    
    17,117
    
    
    513,117
    
    
    530,234Sweden
    
    857,922
    
    
    910,520
    
    
    1,768,442
    
    
    1,136,585
    
    
    501,236
    
    
    1,637,821Other
    
    
    
    
    3,095
    
    
    3,095
    
    
    
    
    
    3,740
    
    
    3,740Total
    $
    2,328,725
    
    $
    5,998,825
    
    $
    8,327,550
    
    $
    4,653,544
    
    $
    11,041,570
    
    $
    15,695,114


The Canadian and U.S. operations include the majority of the
non-cash compensation expense related to issuance of employee stock options,
RSUs and RSAs in 2008 of $900,098 (2007  $891,064; 2006  $1,544,755). All
additions to software development costs of $1,231,363 in 2008 (2007 
$1,638,390; 2006  $1,407,204) are part of Canadian and Swedish operations.

- 26 -

---

Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

16. Supplemental Financial Information

Accrued liabilities

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

|                                         |   | 2008      |  |   | 2007      | 
|---------------------------------------- | - | --------- |  | - | --------- | 
|Compensation                             | $ | 1,316,496 |  | $ | 1,149,682 | 
|Litigation and legal                     |   | 1,014,730 |  |   | 11,784    | 
|Trade accounts payable                   |   | 985,861   |  |   | 1,539,077 | 
|Withholding tax and income taxes payable |   | 961,205   |  |   | 1,456,586 | 
|Accounting and other compliance          |   | 332,014   |  |   | 441,146   | 
|Other accrued
      liabilities          |   |          |  |   | 78,732    | 
|Total                                    | $ | 4,610,306 |  | $ | 4,677,007 | 

The following table highlights the change in the allowance for
doubtful accounts:

|                              |   | 2008     |   |   | 2007     |   |   | 2006     |  
|----------------------------- | - | -------- | - | - | -------- | - | - | -------- | -
|Balance, beginning of year    | $ | 454,070  |   | $ | 936,730  |   | $ | 426,697  |  
|Charged to costs and expenses |   | 40,078   |   |   | 192,938  |   |   | 750,535  |  
|Deductions and recovery       |   | (479,946 | ) |   | (675,598 | ) |   | (240,501 | )
|Balance, end of
      year    | $ | 14,202   |   | $ | 454,070  |   | $ | 936,731  |  

Loss per share

In 2008, anti-dilutive stock options, RSUs, warrants and
performance based escrowed shares of 6,225,066 have been excluded in the
calculation of diluted loss per share (2007  6,704,607; 2006  3,999,982).

17. Economic Dependence

In 2008, five Zi Technology customers accounted for 74 percent
(2007  58 percent; 2006  51) of the Companys total revenues. The loss of one
or more of these customers could significantly affect the Companys revenues.

18. Discontinued Operations

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

Because the Companys management had not previously been given
a mandate by the Board of Directors to locate a purchaser for its investment in
Archer, Archer was initially included in the Companys consolidated operating
loss for all previous periods. For the years ended December 31, 2007 and 2006,
Archers operating results have been reclassified to discontinued operations,
net of income taxes (see note 10) and disclosures elsewhere to conform with this
change.

|For the year ended
      December 31,                                     |   | 2008 |  |   | 2007    |  |   | 2006       |  
|------------------------------------------------------------------------- | - | ---- |  | - | ------- |  | - | ---------- | -
|                                                                          |   |      |  |   |         |  |   |            |  
|Revenue                                                                   | $ |     |  | $ |        |  | $ | 555,523    |  
|Cost of sales                                                             |   |     |  |   |        |  |   | (22,696    | )
|Operating expenses                                                        |   |     |  |   |        |  |   | (893,177   | )
|Interest income                                                           |   |     |  |   |        |  |   | 9,032      |  
|Equity interest loss in Archer (March 1,
      2006 to December 31, 2006) |   |     |  |   |        |  |   | (893,973   | )
|Gain on disposal
      of discontinued operations                         |   |     |  |   | 632,601 |  |   |           |  
|Net income (loss)                                                         | $ |     |  | $ | 632,601 |  | $ | (1,245,291 | )

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

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

- 27 -

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Notes to the Consolidated Financial
Statements For the years ended December 31, 2008, 2007 and 2006(All
amounts expressed in United States of America dollars except share amounts)

The Company has recognized its proportionate share of the loss
of Archers operations for the period between March 1, 2006 and December 31,
2006, in the amount of $893,973, and appropriately reduced its investment in
Archer by the same amount. No further losses will be recognized as Zi has no
commitment to fund further losses. As a result, the full amount of the proceeds
was recognized as a gain on disposal of discontinued operations for the period
ended March 31, 2007.

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

19. Employee Terminations

In the fourth quarter of 2008, the Company adjusted its cost
structure. As a result, the Company has recorded $43,103 in employee severance
costs in 2008 and expects to incur an additional $170,714 in the first quarter
of 2009. The severance costs will be recorded in the selling, general and
administrative, and product, research and development expenses. Any changes to
estimates will be reflected in future results of operations.

20. Subsequent Events

Tender Purchase Offer

On February 26, 2009, Nuance Communications, Inc. (Nuance)
and the Company entered into an agreement whereby, subject to shareholder and
other approvals, Nuance would acquire 100% of the common shares of the Company.
Under the terms of the agreement, consideration for the transaction is
approximately $35 million, comprised of approximately $17 million in cash and
$18 million in Nuance common stock. Shareholders of the Company are expected to
receive $0.34 in cash and $0.35 per share in Nuance common stock, subject to
adjustment as outlined below. The closing date is expected to be April 9, 2009.

Possible adjustment to the amount paid to the cash portion is
as follows. The exchange ratio of shares of the Company into shares of Nuance is
determined by dividing $0.35 by the Volume Weighted Average Price (VWAP) of
Nuance shares during the 10 trading days immediately preceding the signing of
the Arrangement Agreement. The VWAP for this 10-day period, which ended on
February 25, 2009, was $9.4431. Thus each share outstanding of the Company would
be exchanged for 0.03706 shares of Nuance. However, if the 10-day VWAP of Nuance
shares ending one day immediately preceding the closing date is less than
$9.4431 (to a limit of 15%), then the amount of cash received by shareholders of
the Company would increase, subject to a maximum of $0.0525 per share.

The transaction will be completed by way of statutory Plan of
Arrangement under the Business Corporations Act (Alberta). The Plan of
Arrangement is subject to customary closing conditions, court approval and must
be approved by two thirds of the votes cast by Zis shareholders at a special
meeting of shareholders expected to be held on April 9, 2009.

Zis directors and several members of management and Lancer
Management Group LLC, that collectively hold 18,799,198 shares representing
approximately 37 percent of Zis issued and outstanding common shares, have
entered into support agreements with Nuance pursuant to which they have agreed
to vote their shares in favor of the transaction. The factors considered by the
Board of Directors of Zi and other relevant background information are included
in the Information Circular and Proxy Statement which was mailed to shareholders
of the Company on approximately March 16, 2009.

Option Cancellation

On February 26, 2009, an executive of the Company cancelled
920,000 stock options. The remaining unamortized expense of cancelled stock
options, aggregating $187,096, will be subject to accelerated expensing as of
the cancellation date. Accordingly, the amount will be expensed in the first
quarter of 2009.

- 28 -

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES

|Exhibit      |                                                                                                                                                                                                                                                                                                                                  
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. Item     | Description of Exhibit                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                  
|2.1%(1)      | Arrangement Agreement dated February 26, 2009
      by and among Nuance Communications, Inc., Nuance Acquisition ULC and Zi
      Corporation.                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                                  
|2.1**        | Certificate of Incorporation, together with all
      amendments. (Previously filed as Exhibit 1.1)                                                                                                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                                  
|3.2**        | Bylaws. (Previously filed as Exhibit 1.2)                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                                                                                                                                                                                  
|10.1+ %      | Employment Agreement dated February 5, 2001
      between Zi Corporation of America, Inc. and Roland Williams. (Previously
      filed as Exhibit 3.6)                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                  
|10.2*** %    | Employment Agreement effective July 30, 2005,
      between Zi Corporation of America, Inc. and Milos Djokovic. (Previously
      filed as Exhibit 4.5)                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                  
|10.2.1%(3)   | Amendment to Employment Agreement dated April
      24, 2006, between Zi Corporation of America, Inc. and Milos Djokovic.                                                                                                                                                                                                        
|             |                                                                                                                                                                                                                                                                                                                                  
|10.2.2**** % | Second Amendment to Employment Agreement, dated
      June 26, 2007, between Zi Corporation of America, Inc. and Milos Djokovic.
      (Previously filed as Exhibit 4.5.1)                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                  
|10.3** %     | 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)                                                                                                                                                             
|             |                                                                                                                                                                                                                                                                                                                                  
|10.4++       | Settlement Agreement made December 6, 2002
      between America Online, Inc., Zi Corporation and Zi Corporation of
      America, Inc. (Portions of this exhibit have been redacted, omitted and
      filed separately with the SEC pursuant to a request for confidential
      treatment.) (Previously filed as Exhibit 4.17)
|             |                                                                                                                                                                                                                                                                                                                                  
|10.5++       | Consent Judgment Order and Permanent Injunction
      dated December 20, 2002 made by The Honourable Maxine M. Chesney, United
      States District Court Judge in the United States District Court for the
      Northern District of California San Francisco Division. (Previously filed
      as Exhibit 4.18)              
|             |                                                                                                                                                                                                                                                                                                                                  
|10.6+++      | Settlement Agreement made February 22, 2007, by
      and among Zi Corporation, Marty Steinberg (solely in his capacity as court
      appointed receiver of certain Lancer Entities), Quarry Bay Investments
      Inc. and Michael Lobsinger. (Previously filed as Exhibit 4.12)                                             
|             |                                                                                                                                                                                                                                                                                                                                  
|10.7+++      | Interim Executive Services Agreement made
      August 23, 2006, between Tatum, LLC and Zi Corporation. (Previously filed
      as Exhibit 4.13)                                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                  
|10.8****     | 2007 Stock Incentive Plan. (Previously filed as
      Exhibit 4.14)                                                                                                                                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                                  
|10.9****     | Employment Agreement dated September 15, 2006,
      between Zi Corporation (H.K.) Limited and Axel Bernstorff. (Previously
      filed as Exhibit 4.15)                                                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                                  
|10.10****    | Employment Agreement dated December 20, 1999,
      between Zi Corporation of Canada, Inc. and Weigen Qiu (as amended).
      (Previously filed as Exhibit 4.16)                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                  
|10.11****    | Permanent Placement Agreement dated December
      31, 2007, between Zi Corporation and Tatum, LLC. (Previously filed as
      Exhibit 4.17)                                                                                                                                                                                     

- 29 -

---



|10.12(2) | Employment Agreement effective January 1, 2007
      between Zi Corporation of Canada, Inc. and Jason Paul.
|-------- | -----------------------------------------------------------------------------------------------------------
|         |                                                                                                            
|21(3)    | List of Subsidiaries.                                                                                      
|         |                                                                                                            
|31.1     | Section 302 Certification by Milos Djokovic,
      Chief Executive Officer dated April 1, 2009.            
|         |                                                                                                            
|31.2     | Section 302 Certification by Blair Mullin,
      Chief Financial Officer dated April 1, 2009.              
|         |                                                                                                            
|32.1     | Section 906 Certification by Milos Djokovic,
      Chief Executive Officer dated April 1, 2009.            
|         |                                                                                                            
|32.2     | Section 906 Certification by Blair Mullin,
      Chief Financial Officer, dated April 1, 2009.             
|         |                                                                                                            
|23.1     | Consent of Ernst & Young LLP, Independent
      Registered Chartered Accountants.                          
|         |                                                                                                            
|23.2     | Consent of Deloitte & Touche LLP,
      Independent Registered Chartered Accountants.                      
|         |                                                                                                            
|*        | Previously filed on Form 20-F Annual Report for
      December 31, 1999.                                   
|         |                                                                                                            
|+        | Previously filed on Form 20-F Annual Report for
      December 31, 2000.                                   
|         |                                                                                                            
|**       | Previously filed on Form 20-F Annual Report for
      December 31, 2001.                                   
|         |                                                                                                            
|++       | Previously filed on Form 20-F Annual Report for
      December 31, 2002.                                   
|         |                                                                                                            
|***      | Previously filed on Form 20-F Annual Report for
      December 31, 2004.                                   
|         |                                                                                                            
|+++      | Previously filed on Form 20-F Annual Report for
      December 31, 2006.                                   
|         |                                                                                                            
|****     | Previously filed on Form 20-F Annual Report for
      December 31, 2007.                                   
|         |                                                                                                            
|(1)      | Previously filed on Form 6-K on March 19, 2009.                                                            
|         |                                                                                                            
|(2)      | Previously filed on Form 14D-9 on December 11,
      2008.                                                 
|         |                                                                                                            
|(3)      | Previously filed on Form 10-K Annual Report for
      December 31, 2008.                                   
|         |                                                                                                            
|%        | Indicates management contract or compensatory
      plan                                                   

- 30 -

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SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

|                    |     | ZI CORPORATION                       
|------------------- | --- | -------------------------------------
|                    |     | (Registrant)                         
|                    |     |                                      
|Date: April 1, 2009 | By: | /s/ Milos Djokovic                   
|                    |     | Milos Djokovic                       
|                    |     | President and Chief Executive Officer

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

|/s/
      Milos Djokovic                     | Date: April 1, 2009
|-------------------------------------------- | -------------------
|Milos Djokovic, President and                |                    
|Chief Executive Officer                      |                    
|(principal executive officer)                |                    
|                                             |                    
|/s/
      Blair Mullin                       | Date: April 1, 2009
|Blair Mullin,                                |                    
|Chief Financial Officer                      |                    
|(principal financial and accounting officer) |                    
|                                             |                    
|/s/
      George C. Tai                      | Date: April 1, 2009
|George C. Tai, Chairman of the Board         |                    
|                                             |                    
|/s/ H.
      Donald Hyde                     | Date: April 1, 2009
|H. Donald Hyde                               |                    
|                                             |                    
|/s/
      Donald Moore                       | Date: April 1, 2009
|Donald Moore                                 |                    
|                                             |                    
|                                             | Date: April 1, 2009
|Robert P. Stefanski                          |                    
|                                             |                    
|/s/
      Andrew Gertler                     | Date: April 1, 2009
|Andrew Gertler                               |                    



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