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

FORM 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

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
£

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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

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.

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TABLE OF CONTENTS

|PART I   |                                                                                                                    |      |   
|-------- | ------------------------------------------------------------------------------------------------------------------ | ---- | --
|ITEM 1.  | BUSINESS                                                                                                           | Page | 1 
|ITEM 1A. | RISK FACTORS                                                                                                       | Page | 10
|ITEM 1B. | UNRESOLVED STAFF COMMENTS                                                                                          | Page | 20
|ITEM 2.  | PROPERTIES                                                                                                         | Page | 21
|ITEM 3.  | LEGAL PROCEEDINGS                                                                                                  | Page | 21
|ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS                                                          | Page | 23
|PART II  |                                                                                                                    |      |   
|ITEM 5.  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | Page | 23
|ITEM 6.  | SELECTED FINANCIAL DATA                                                                                            | Page | 25
|ITEM 7.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | Page | 25
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK                                                   | Page | 50
|ITEM 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | Page | 51
|ITEM 9.  | CHANGES IN AND DISAGREEMENTS
      WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         | Page | 76
|ITEM 9A. | CONTROLS AND PROCEDURES                                                                                            | Page | 76
|ITEM 9B. | OTHER INFORMATION                                                                                                  | Page | 76
|PART III |                                                                                                                    |      |   
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCE                                                       | Page | 76
|ITEM 11. | EXECUTIVE COMPENSATION                                                                                             | Page | 79
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               | Page | 86
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
      AND DIRECTOR INDEPENDENCE                                    | Page | 90
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
      SERVICES                                                                       | Page | 91
|PART IV  |                                                                                                                    |      |   
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES                                                                      | Page | 92

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Explanatory Note

Zi Corporation (Zi or the Company) is a Foreign Private
Issuer as defined in Rule 3b-4 under the U.S. Securities Exchange Act of 1934,
as amended (the Exchange Act). Although as a Foreign Private Issuer the
Company is eligible to file its annual report on Form 20-F, the Company has
voluntarily elected to file its annual report on Form 10-K.

Pursuant to Rule 3a12-3(b) of the Exchange Act, securities
registered by a Foreign Private Issuer are exempt from the provisions of
Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act.

CURRENCY INFORMATION

All dollar references in this Form 10-K are in United States
dollars, unless otherwise indicated. Exchange rates are based upon the noon
buying rate in New York City for cable transfers in foreign currencies, as
certified for customs purposes by the Federal Reserve Bank of New York. The noon
rate of exchange on March 23, 2009 as reported by the United States Federal
Reserve Bank of New York for the conversion of United States dollars into
Canadian dollars was CDN$1.2323 = US$1.00.

PART I

ITEM 1.

BUSINESS

Introduction

Zi Corporation is a corporation incorporated under the laws of
the province of Alberta, Canada and is referred to in this document, together
with its subsidiaries, as Zi or the Company.

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

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

History and Development of the Company

Zis head and principal office is located at Suite 2100, 840 -
7th Avenue S.W., Calgary, Alberta, Canada, T2P 3G2. The Companys
telephone number is (403) 233-8875 and its facsimile number is (403) 233-8878.
Zis common shares are listed on the Toronto Stock Exchange (TSX) under the
symbol ZIC and on the NASDAQ Capital Market (NASDAQ) under the symbol
ZICA.

The Company was incorporated under the Business Corporations
Act (Alberta) (the ABCA) in Alberta, Canada on December 4, 1987 as Cancom
Ventures Inc.. On August 30, 1989, the Company changed its name to Multi-Corp
Inc. and thereafter changed its name to Zi Corporation on June 24, 1997.

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

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

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

Acquisition and Development of Input Technology

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

- 1 -

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On December 17, 1997, Zi acquired full ownership rights to
United States patent number 5,109,352 (the 352 Patent or the ODell Patent)
which is entitled System For Encoding A Collection Of Ideographic Characters.
The 352 Patent can be generally described as a computer input system for Chinese
and Japanese characters where the different strokes forcomposing the
characters are classified into different groups, each identified by a code
number. The string of code numbers representing each character follows a
traditional writing sequence of the character from the very first stroke to the
end of the string of code numbers. The computer usually identifies the character
before the entire writing sequence is completed. Certain aspects of the
Companys eZiText products are based on the intellectual property covered under
the 352 Patent. The 352 Patent expires on April 28, 2009.

On July 26, 2001, Taiwanese patent No. NI139820 was issued to
the Company, which will expire on July 26, 2019. On February 12, 2003, Chinese
patent ZL99100625.9, Method and Apparatus of Chinese Character Text Input, was
issued to the Company, which will expire on February 13, 2018. These patents
protect the unique implementation of Zis Chinese language input technology on
cellular phones and other wireless devices and, in particular, protect those
combinations of elements which are of particular help to a user in improving the
speed of text creation. The Company was also granted an equivalent of this
patent in Hong Kong as patent number HK1020216 on August 22, 2003. In addition,
the Company has a number of patent applications pending in the United States,
Europe and Asia based on ideographic language input networks and software
utilities which use text as a key part of their operation.

The following is a partial list of certain U.S. patents which
have been issued to the Company, which further strengthen Zis competitive
position: U.S. patent No. 6,956,968 - Database Engines for Processing
Ideographic Characters and Methods Therefor issued on October 18, 2005 and set
to expire on October 18, 2025; U.S. patent No. 6,955,602 - Text Entry Within a
Video Game issued on October 18, 2005 and set to expire on October 18, 2025;
U.S. patent No. 6,864,809 - Korean Language Predictive Mechanism for Text Entry
By a User issued on March 8, 2005 and set to expire on March 8, 2025; U.S.
patent No. 6,801,659 - Text Input System for Ideographic and Non-Ideographic
Languages issued on October 5, 2004 and set to expire on October 5, 2024; U.S.
Patent No. 7,252,528  Method and Apparatus for Chinese Character Input issued
on August 14, 2007 and set to expire on August 14, 2027; U.S. patent Nos.
7,313,277 and 7,437,001 - Method and Device for Recognition of a Handwritten
Pattern issued on December 25, 2007 and October 14, 2008 and set to expire on
in 2027 and 2028, respectively; U.S. patent No. 7,256,769  System and Method
for Text Entry on a Reduced Keyboard issued on August 14, 2007 and set to
expire on August 14, 2027; U.S. patent No. 7,139,430  Character Recognition
issued on November 21, 2006 and set to expire on November 21, 2026; U.S. patent
No. 7,075,520  Key Press Disambiguation Using a Keypad of Multidirectional
Keys issued on July 11, 2006 and set to expire on July 11, 2026; and U.S.
patent No. 6,711,290  Character Recognition issued on March 23, 2004 and set
to expire on March 23, 2024. The Company has been granted, or has pending,
foreign equivalents to many of the above mentioned U.S. patents.

Acquisition of Assets of Decuma AB

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

Intellectual Property Litigation

In the course of its operating history, the Company has been
involved in several lawsuits, both as a plaintiff and as a defendant, with its
largest competitor in the field of text prediction, Tegic Communications, Inc.
(Tegic), which was a subsidiary of America OnLine Inc. (AOL) and which was
acquired by Nuance Communications, Inc. (Nuance) in 2007. The following is an
overview of these proceedings:

|(i) | Asian Communications Pty Ltd., and Tegic
      Communications, Inc. v. Zi Corporation and Zi Corporation of America, Inc.Pursuant to a complaint for patent infringement filed on March 21,
      2000 in the United States District Court in and for the Northern District
      of California, Asian Communications Pty. Ltd. (Asian Communications) and
      Tegic alleged that the Company and its affiliate, Zi Corporation of
      America, Inc. (Zi America) infringed certain Tegic patents in the United
      States ( the Tegic Lawsuit).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

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

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

- 2 -

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

|(ii) | Asian Communications Pty. Ltd. and Tegic
      Communications, Inc. v. Zi Corporation (Hong Kong) Ltd.The Company
      was served with a Writ of Summons filed on March 30, 2000, by Asian
      Communications and Tegic in the High Court of the Hong Kong Special
      Administrative Region Court of First Instance seeking, among other things,
      a declaration that one of the plaintiffs patents is valid and that the
      same has been infringed by Zi. A statement of claim dated May 10, 2000 was
      subsequently served on the Company. The Company is defending this lawsuit
      and filed a defence and counterclaim. To date, to the best of the
      Companys knowledge, no further action or proceeding has been undertaken
      in this lawsuit by either party.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On August 14, 2008, Nuance made a proposal to acquire all of
the issued and outstanding common shares of Zi. On August 15, 2008, Zi announced
that it had declined to enter into negotiations with Nuance regarding such
proposal, and stated that Zis Board of Directors (the Board) had concluded
that the proposal did not recognize the full value of Zi. Shortly thereafter,
Nuance initiated the following actions against Zi:

|(iii) | Tegic Communications, Inc. and Nuance Communications,
      Inc. v. Zi Corporation. Nuance filed a motion for contempt against Zi
      in the United States District Court, Northern District of California, San
      Francisco Division (the California Court) on August 19, 2008, alleging
      Zi violated a 2002 consent judgment which settled a previous patent
      litigation with Tegic involving Zis eZiText software (see Section (i)
      above). Tegic was acquired by Nuance on August 24, 2007. On November 7,
      2008, Zi filed a response to the motion for contempt and a cross-motion to
      compel arbitration. On November 19, 2008, the judge in the case ordered
      the dispute to arbitration and denied Nuances motion for contempt without
      prejudice.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(iv)  | Tegic Communications, Inc. v. Zi Corporation and Zi
      Corporation of America, Inc.On December 1, 2008, pursuant to the
      November 19, 2008 order, (see Section (iii) above), Tegic filed a demand
      for arbitration with the American Arbitration Association (AAA) in New
      York, NY. Tegic requested an order to permit Tegic to immediately execute
      on the remaining balance of the judgment in the previous action being
      US$4,500,000; disgorgement of Zis profits from the license or sale of its
      eZiText software that is not colorably different from eZiText software
      versions 4.0  4.2; a cease and desist order prohibiting Zi from the
      license or sale of eZiText software that is not colorably different from
      eZiText software versions 4.0  4.2; damages; and costs. On December 22,
      2008, Zi filed an answering statement and counterclaim denying all of
      Tegics claims and requesting a declaration that Tegic breached the 2002
      settlement agreement, denying that Zi owes any further sums to Tegic, and
      requesting an award of damages and loss caused by Tegics breach and
      actions. The parties have been unable to agree on an arbitrator and as a
      result, an arbitrator is being selected in accordance with the Commercial
      Rules of the AAA. Following the execution of the Arrangement Agreement (as
      defined below) among Zi, Nuance and its subsidiary Nuance Acquisition ULC
      (Subco), pursuant to which Nuance is to acquire all of the Zi Shares (as
      defined below) (see Nuance Acquisition of Zi pursuant to a Plan of
      Arrangement below), the parties agreed to a stay of proceedings in
      the arbitration proceedings until the closing of the Arrangement (as
      defined below).
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(v)   | Tegic Communications, Inc. and Nuance Communications,
      Inc. v. Zi Corporation.On August 25, 2008, Nuance launched a patent
      infringement lawsuit against Zi in the Federal Court in Toronto, Canada.
      The claim accuses Zi of infringing the intellectual property of Tegic with
      its Qix and eZiText products, and claiming among other things, an award of
      punitive damages in the amount of CDN$10,000,000. Nuance was ordered to
      post security in the amount of CDN$75,000 and subsequently amended its
      statement of claim to remove the claim for punitive damages. Zi filed its
      statement of defence and counterclaim on November 28, 2008. Following the
      execution of the Arrangement Agreement between Zi Nuance and Subco,
      pursuant to which Nuance is to acquire all of the Zi Shares (see
      Nuance Acquisition of Zi pursuant to a Plan of Arrangement
      below), the parties agreed to a stay of proceedings regarding this
      litigation, until the closing of the Arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Dispositions and Discontinued Operations

For a discussion concerning dispositions and discontinued
operations relating to Oztime, EnglishPractice Inc., Telecom Technology
Corporation Limited and the Magic Lantern Group of Companies, see Zis previous
regulatory filings with the Securities Exchange Commission (SEC), including
the Companys annual report on Form 20-F for the year ended December 31,
2006.

- 3 -

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For a discussion concerning the disposition of Archer Education
Group Inc. (Archer), see Zis previous filings with the SEC, including the
Companys annual report on Form 20-F for the year ended December 31, 2007.

Acquisition of Zi Shares by the Lancer Funds

The Company reported in its Form 20-F for the fiscal year ended
2001, based on information provided by Lancer (as defined in Item 1A  Risk
Factors), that Lancer and its affiliated companies held or controlled,
directly or beneficially, a total of 3,675,100 common shares of the issued and
outstanding capital of the Company, which represented approximately 9.67 percent
ownership in the Company. In the course of preparing the Form 20-F for the year
2002, management of the Company observed what appeared to be a concentration of
its common shares held at a major brokerage firm. Through its attorneys,
management requested an update from Lancer concerning the level of Lancer
ownership in the Company, but despite several requests did not receive a
response.

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

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

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

Under the United States Securities Act of 1933, as amended (the
Securities Act) the Receiver is deemed to be an affiliate (as such term is
defined in Rule 405 of the Securities Act) of the Company and its holdings in
the Company are therefore subject to certain additional resale restrictions
absent registration under the Securities Act. Under Rule 144 promulgated under
the Securities Act (Rule 144), the amount of securities that may be publicly
sold in the United States by an affiliate within any three-month period may not
exceed the greater of one percent of the total number of Company shares
outstanding, or the average weekly reported volume of trading in Company shares
during the four weeks prior to the filing of a notice with the SEC of an
intention to sell. If resales are made other than in reliance upon Rule 144, the
volume limitation does not apply to sales by the Receiver on the TSX; however,
the Receiver must still comply with the resale requirements set forth in
Regulation S promulgated under the Securities Act.

On January 11, 2005, the Receiver filed an intention to sell in
the aggregate up to 3,363,396 common shares in the ninety days thereafter
pursuant to Rule 144. According to amendments to Schedule 13D, the Receiver sold
an aggregate 689,356 shares of Zi during January and February 2005. On February
10, 2005, the Receiver filed Form 45-102F1 in Canada stating its proposal to
sell 2,875,132 shares of Zi. On March 11, 2005, the Receiver filed Form 45-102F1
in Canada stating its proposal to sell 2,674,040 shares of Zi. No shares were
sold in March 2005. On April 8, 2005, the Receiver filed Form 45-102F1 in Canada
stating its proposal to sell up to 2,674,040 shares of Zi. On April 18, 2005,
the Receiver filed an intention to sell in the aggregate up to 2,674,040 common
shares in the ninety days thereafter pursuant to Rule 144. No shares were sold
in April 2005. On May 6, 2005, the Receiver filed Form 45-102F1 in Canada
stating its proposal to sell up to 2,674,040 shares of Zi. Notwithstanding the
Receivers filings concerning the possible sale of shares of Zi, to the best of
the Companys knowledge, no shares have been sold by the Receiver since February
2005. According to the Receivers filings with the SEC, as of the date of this
Report, the Receiver holds approximately 37 percent of Zis issued and
outstanding shares.

In July 2004, Zi completed a private placement for gross
proceeds of CDN$10 million. As a condition of the financing, the Receiver, among
others, agreed to a 150 day lock up of its shares. In return for this
consideration, the Company agreed, among other things, to appoint one director
to the Companys Board as a nominee of the Receiver. The Company subsequently
appointed Donald Moore to the Board as the Receivers nominee.

In 2005, the Receiver contacted the Company to request certain
shareholder information with a view to calling a special meeting of the
Companys shareholders, the purpose of which would be to elect a slate of
directors proposed by the Receiver.

The Company sought the advice of legal counsel and concluded,
among other things, that it would not cooperate with the Receiver in effecting
what the Company believed was an unlawful takeover of the Company. In its
filings to the Court of Queens Bench of Alberta (the Alberta Court), the
Company cited Lancers failure to comply with Alberta laws regarding takeover
bids. The Alberta Court issued an interim order that, among other things,
prohibited the Receiver from requisitioning a shareholders meeting. The
Receiver brought a motion to contest the Alberta Courts jurisdiction and to
seek to have all related matters dealt with in a Florida Court. The Alberta
Court, in a decision dated January 31, 2006, denied the Receivers application
to change venue, citing the Alberta Court as the proper forum to consider
matters under theABCA and the Securities Act (Alberta)and
refused to set aside its interim order against the Receiver.

- 4 -

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The Company brought a companion proceeding before the Alberta
Securities Commission (the ASC) on December 5, 2005, seeking among other
things an order requiring the Receiver to either dispose of the Lancer Funds' Zi
shares or make a lawful takeover bid to all of Zi's shareholders. On March 16,
2006, the ASC dismissed a motion by the Receiver to stay or dismiss the ASC
proceedings.

Separately, the Receiver instituted a contempt of court hearing
before the U.S. District Court for the Southern District of Florida (the
Florida Court) claiming that the Companys filing before the Alberta Court
violated a case management order which mandated that all proceedings against the
Receiver be brought in the Florida Court. The Company was not a party to any
previous proceeding before the Florida Court and argued that it was not subject
to the case management order.

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

At the Companys annual general meeting of shareholders held on
December 22, 2006, the Receiver voted in favor of the Companys managements
recommendation as to the composition of the Companys Board of Directors. In
February 2007, the Company and the Receiver entered into a settlement agreement,
which aimed to settle any and all outstanding claims and issues between the
Receiver, the Lancer Funds and the Company. Pursuant to the settlement
agreement, the Receiver and the Company agreed to immediately discontinue, with
prejudice, all litigation and regulatory proceedings of any kind. For further
information concerning the settlement agreement, see Zis previous filings with
the SEC, including the Companys annual report on Form 20-F for the year ended
December 31, 2007.

Nuance Acquisition of Zi pursuant to a Plan of
Arrangement

Commencing in August 2007, representatives of Zi and Nuance
engaged from time to time in preliminary discussions regarding a potential
transaction between the companies.

In January 2008, Zi engaged Ridgecrest Capital Partners
Incorporated (Ridgecrest) as a financial advisor to assist Zi in evaluating
strategic opportunities, including the evaluation of a potential transaction
with Nuance. Between January 2008 and June 2008, representatives of Zi and
Ridgecrest engaged with Nuance and its financial advisors in periodic
discussions regarding a potential transaction. Throughout 2008 and 2009, a
number of offers and counter-offers were made and received, including an
unsolicited bid made by Nuance on August 14, 2008 whereby Nuance offered to buy
all the issued and outstanding common shares of Zi (the Zi Shares) at $0.80
per common share, which was declined by the Board on the basis that it did not
recognize the full value of the Company. Shortly thereafter, on August 19, 2008,
Nuance filed a motion filed against Zi in the California Court. The motion
accused Zi of violating a 2002 consent judgment which settled a patent
litigation with Tegic (a company acquired by Nuance) involving Zis eZiText
software (see Section (iii) of Intellectual Property Litigation above).
On November 26, 2008, Nuance commenced an unsolicited offer to purchase all of
the Zi Shares for the consideration of $0.40 per Zi Share. On December 11, 2008,
the Board of Zi unanimously recommended that the holders of Zi Shares (the Zi
Shareholders) not tender their Zi Shares to such take over bid. Following the commencement of such unsolicited offer, Zi and
Nuance engaged in negotiations regarding the acquisition of Zi Shares by Nuance.

Pursuant to an Arrangement Agreement dated February 26, 2009
among Nuance, Subco and Zi (the Arrangement Agreement), Nuance will acquire
all of the Zi Shares in exchange for shares of common stock in the capital of
Nuance (the Nuance Common Stock), which is listed on the NASDAQ Global Select
Market, and cash for the aggregate consideration of approximately $0.69 per Zi
Share (the Arrangement).

Under the Arrangement, the Zi Shareholders will receive
consideration consisting of approximately 0.03706 shares of Nuance Common Stock
and, subject to the adjustment discussed below, $0.34 in cash for each Zi Share.
Pursuant to the Arrangement, Nuance, through Subco, will acquire all of the
issued and outstanding Zi Shares (other than those in respect of which the
rights of dissenting Zi Shareholders have been exercised) in exchange for shares
of Nuance Common Stock and cash for an aggregate value of approximately $0.69
per Zi Share as at February 26, 2009 (the Arrangement Agreement Date).

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It is anticipated that the transaction closing date will occur
sometime in early to mid-April, 2009, as defined by the Arrangement Agreement
(the Closing Date).

The cash component of the consideration will be increased up to
a maximum of 15% or $0.0525 per Zi Share to the extent that the volume-weighted
average trading price of the shares of Nuance Common Stock, rounded to four
decimal places, on the NASDAQ Global Select Market in the period commencing on
the tenth business day immediately preceding the Closing Date to and including
on the business day immediately preceding the Closing Date is less than $9.4431,
being the volume-weighted average trading price per share of Nuance Common Stock
on the NASDAQ Global Select Market for the period beginning on the tenth
business day immediately preceding the Arrangement Agreement Date and concluding
on the business day immediately preceding the Arrangement Agreement Date.
Subject to this maximum, the amount of any upward adjustment in the cash
component of the consideration payable for each Zi Share will be equal to the
product of (i) 0.03706 and (ii) the absolute value of the Closing Price less
the Signing Price, in each case as defined in the Plan of Arrangement.

In addition, under the Plan of Arrangement:

|(i)   | All outstanding stock options issued to directors,
      officers, employees, consultants and other service providers of Zi
      permitting the holders thereof the right (whether or not vested) to
      purchase Zi Shares (the Zi Options) shall become fully vested
      immediately prior to the time at which the Articles of Arrangement and
      Plan of Arrangement are filed with the Alberta Registrar of Corporations
      (the Effective Time) and on the date that the Arrangement becomes
      effective (the Effective Date). Zi Options exercisable for Zi Shares at
      less than $0.69 per Zi Share, referred to as the In-the-Money Options,
      shall be surrendered for the In-the-Money Option Consideration as defined
      below and all other Zi Options shall be surrendered for cash consideration
      of $0.0001 per Zi Option;
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(ii)  | All Zi Shares underlying the outstanding Restricted Stock
      Units (RSUs) and Restricted Stock Awards (RSAs) shall be released to
      the holders of such RSUs and RSAs, and each such Zi Share shall be deemed
      to be transferred to Subco in exchange for the same consideration as all
      other Zi Shares as described above, including any upward adjustments;
      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(iii) | All common share purchase warrants of Zi (the Zi
      Warrants) shall be exchanged for warrants to purchase shares of Nuance
      Common Stock (Nuance Warrants) with the appropriate adjustments to the
      exercise price and number of shares of Nuance Common Stock subject to
      exercise, based on an exchange ratio of 0.0731 per Zi Share, being $0.69
      divided by the Signing Price, $9.4431. The term to expiry, conditions to,
      manner of exercising and all other terms and conditions of a Nuance
      Warrant will be the same as for a Zi Warrant.                                                                                                                                                                                                                                                                                          

The consideration to be received by the holders of In-the-Money
Options (the In-the-Money Option Consideration) is an amount per Zi Share
underlying the Zi Option equal to $0.69 less the exercise price of the Zi
Option. The In-the-Money Option Consideration shall be paid by an amount in cash
equal to 34/69ths of the In-the-Money Option Consideration and shares
of Nuance Common Stock equal to 35/69ths of the In-the-Money Option
Consideration divided by $9.4431, being the ten day volume-weighted average
sales price per share on the NASDAQ Global Select Market of shares of Nuance
Common Stock on the Arrangement Agreement Date.

The cash payment comprising part of the In-the-Money Option
Consideration is subject to an upward adjustment, determined in accordance with
the Plan of Arrangement, in the event the ten day volume-weighted average
trading price of Nuance Common Stock on the Closing Date falls below $9.4431, to
a maximum of $0.0525 per Zi Share underlying such In-the-Money Option.

No fractional shares of Nuance Common Stock shall be issued
pursuant to the Arrangement. In the event that the Arrangement results in a Zi
Shareholder being entitled to a fractional share of Nuance Common Stock, each
registered Zi Shareholder otherwise entitled to a fractional interest in shares
of Nuance Common Stock will receive the nearest whole number of shares of Nuance
Common Stock (with fractions equal to or greater than 0.5 being rounded up and
fractions less than 0.5 being rounded down). In calculating such fractional
interests, all Zi Shares registered in the name of each Zi Shareholder shall be
aggregated.

See The Arrangement  Details of the Arrangement as
disclosed in the Information Circular, for further details in respect of the
Arrangement. The Special Meeting of the Shareholders of the Company is to be
held on April 9, 2009.

Voting Support Agreements

Certain Zi Shareholders (including all of the directors of Zi)
who hold an aggregate of 18,799,198 Zi Shares (representing approximately 37.1%
of all the outstanding Zi Shares) have agreed to vote their Zi Shares in favour
of the special resolution of the Zi Shareholders approving the Arrangement
Resolution, subject to the terms of their respective voting support agreements
with Nuance (Voting Support Agreements).

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As further inducement for Nuance to enter into the Arrangement
Agreement and in consideration thereof, the Receiver of Lancer and Gerald A.
McHale, Jr., as the liquidating trustee of Lancer Partners LLP (the Trustee)
entered into a Voting Support Agreement with Nuance. Nuance did not pay any
additional consideration to the Receiver or the Trustee in connection with the
execution and delivery of their Voting Support Agreement.

Post Arrangement Structure

Following the Effective Date of the Arrangement, Zi
Shareholders will, as part of the consideration for the Arrangement, own shares
of Nuance Common Stock and be entitled to the receive the cash portion of the
consideration. Nuance will own, indirectly through Subco, all of the issued and
outstanding Zi Shares. Assuming that there are no dissenting shareholders and no
Zi Options nor Zi Warrants are exercised prior to the Effective Time, an
aggregate of approximately $18 million in shares of Nuance Common Stock will be
issued and an aggregate of approximately $17 million paid in cash for Zi Shares,
resulting in Zi Shareholders holding approximately 1.88million shares of
Nuance Common Stock on the Effective Date. In addition, there will be Nuance
Warrants entitling the holders thereof to acquire an aggregate of approximately
124,967 shares of Nuance Common Stock if all such Nuance Warrants are exercised.

It is presently anticipated that the Zi Shares would be
delisted from trading on the TSX and NASDAQ as soon as practicable after the
Effective Date.

The Plan of Arrangement provides that any certificate
representing Zi Shares that is not validly deposited with the appointed transfer
agent on or prior to the sixth (6th) anniversary of the Effective
Date shall cease to represent a right or claim of any kind or nature including
the right of the holder to receive the consideration for the Arrangement.

For more detailed information regarding the Arrangement
Agreement, including the background leading up to the Arrangement Agreement, see
the Information Circular.

Business Overview

Zi in General

The business of the Company is organized as follows.

The principal business unit of the Company is the Zi Technology
business unit in which the Companys core eZiText, eZiType, Decuma and Qix
business is carried on. Zis core technology product, eZiText, and its companion
application, eZiType, are predictive text input solutions that predict words
and/or phrases for use in messaging and other applications needing text input.
eZiText supports 60 languages and dialects while eZiType supports 55 languages.
By offering word candidates as text is being entered, eZiText increases the
ease, speed and accuracy of text input on electronic devices for applications
such as short messaging, e-mail, e-commerce and Web browsing. In January 2005,
Zi acquired the assets of handwriting recognition software specialists Decuma
AB. In February 2005, Zi announced a new product, Qix. Qix is a natural
discovery solution designed to assist users to easily find and use features,
services and content on a mobile phone. A real word request using the keypad
is entered by the user and Qix presents a list of meaningful and actionable
suggestions based on the word entry. For more information regarding Qix, see
Item 1  Business Overview Description of Qix.

Research and Development, Patents and Licenses, etc.

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

The amount spent during each of the last three years on
company-sponsored research and development activities are as follows: 2008 -
$4.1 million; 2007 - $4.1million; 2006 - $5.1 million.

For a more detailed description of Zis patents, see Item 1 
History and Development of the Company - Acquisition and Development
of Input Technology.

Zi Technology Business Unit

Description of eZiText and eZiType

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Although eZiText can be used in 60 written languages, it was
initially developed in an effort to resolve the problem of inputting
ideographic-based languages, such as Chinese, into a computer or other
electronic device with an alphanumeric keyboard. The following example
illustrates how eZiText Chinese is applied to resolve this challenge and
illustrates how the principles of eZiText Chinese can also be applied to
alphabet-based languages.

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

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

In addition to offering completed characters, eZiText Chinese
also considers partial character structures that could be created with the
entered sequences and displays these as well. Thus when a user is confronted
with having to enter a character that is infrequent, the ability to select the
structural aspect as controlling parameter greatly simplifies use. This
particular aspect is part of Zis Chinese Patent ZL-99100625.9 and is believed
to be popular with the user community.

In alphabetic languages, eZiText disambiguates single key
presses where each key has several letters mapped to it. The most common
implementation of this approach is the numeric keypad found on a cellular
telephone. In English, the letters A, B, and C are all mapped to key 2, D, E,
and F to key 3, and so on according to ETSI standard. Words are assembled from a
sequence of key presses and predicted for the user even where the word has more
letters than the number of keys pressed. Because of the structures of alphabetic
languages, eZiText for Latin-based languages does not attempt to offer
candidates to the user at the first alphabetic key press unless the entered key
is a valid single letter word such as a or I in English. Instead, eZiText
waits until a second keypress is made whereupon candidates are offered which are
of significantly better quality than otherwise seen. This is an implementation
more suited to the way that a typical user interacts with the display of the
device.

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

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

eZiText also includes a predictive multi-tap mode (formerly
offered as part of a separate product called eZiTap), wherein each character is
deterministically established by the user by tapping the keys, rather than
having the particular characters predicted for the user.

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

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

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

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

Licensing of eZiText

As of March 23, 2009, Zi has entered into approximately 100
agreements with parties who include original equipment manufacturers that embed
eZiText into their respective products, as well as value-added resellers
(VARs) and integration licensees. These licensees include among others,
cellular phone manufacturers, set-top box manufacturers and game manufacturers

The majority of Zis revenues are derived from licensing
agreements. In addition to licensing of Zis technology, Zi has also entered
into various strategic alliances to expand the reach of its technology. In 2008,
Zi derived approximately 92 percent of its total revenue from eZiText licensing
fees and royalties. The majority of the Companys eZiText customers are OEMs for
cellular telephones. The majority of licensees pay Zi, among other fees, a
royalty fee. The royalty amount varies from customer to customer and may vary in
accordance with unit volumes produced by the licensee. Since cellular phones are
consumer products, Zis revenues are subject to seasonality associated with
cellular phone sales and are highly dependent on the market presence, marketing
prowess, manufacturing and distribution capabilities of the OEMs, and consumer
acceptance and demand for the Companys licensees finished cellular telephone
product. Zis revenues from royalties may also be effected by the overall global
market downturn which began in the second half of 2008. In the year ended
December 31, 2008, Zis top two customers accounted for 44 percent of Zis total
revenue and Zis top five customers accounted for 74 percent of Zis total
revenue.

Description of Qix

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

At the Mobile World Congress 2008, Zi announced that Telus
would offer the mobile discovery solution Qix on select models of TELUS phones
and PDAs. Subsequent announcements were made by Zi and TELUS in 2008 announcing
the availability of certain Qix-enabled mobile phones on the TELUS mobile
network. TELUS is the first carrier in North America to offer the solution to
its customers.

Description of Decuma Handwriting Recognition Solutions

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

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

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

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

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

The Decuma Chinese input method supports word-by-word input and
mimics the natural writing process. In mainland China and Singapore, a
simplified form of the traditional Chinese characters is employed, where nearly
7,000 characters are used instead of the traditional Chinese character set which
contains around 13,000 characters. Traditional characters are used in Taiwan and
Hong Kong and there are also some Hong Kong and Shanghai-specific characters.
Decuma's recognition software includes databases for both simplified and
traditional Chinese, as well as the region-specific characters.

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

Impact of Governmental Policies and Other Factors on
Operations and Investments

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

Descriptions of the material effects of government regulations
on Zis business can be found elsewhere in this Form 10-K, including in the
discussions contained in Item 1A Risk Factors.

Employees

As of March 23, 2009, the Company had 71 regular, full-time
employees:

ZI
      TECHNOLOGYNorthAsia
    America
    Europe
    TotalSales & Marketing
    9
    2
    3
    14Technical
    13
    19
    7
    39Admin/Corp
    7
    11
    0
    18ZI TECHNOLOGY
      TOTAL
    29
    32
    10
    71


If the Arrangement is not consummated, the Company believes
that its future success will depend on its continued ability to attract and
retain highly skilled and qualified employees. None of Zis employees are
represented by a collective bargaining agreement. At December 31, 2008, Zi had
77 regular, full-time employees; at December 31, 2007, Zi had 90 regular,
full-time employees; and at December 31, 2006, Zi had 78 regular, full-time
employees. The Company believes that it enjoys good relationships with its
employees.

ITEM 1A.

RISK FACTORS

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

Risks related to the Pending Acquisition of Zi by
Nuance

Failure to complete the Arrangement with Nuance could
materially and adversely affect Zis results of operations and share
price.

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On February 26, 2009, Zi entered into the definitive
Arrangement Agreement with Nuance. Consummation of the Arrangement is subject to
customary closing conditions, court and other regulatory approvals and approval
by the Zi Shareholders. Zi cannot provide assurance that these conditions will
be met or waived, that the necessary approvals will be obtained, or that Zi will
be able to successfully consummate the Arrangement as currently contemplated
under the Arrangement Agreement, or at all. As a result of the pending
Arrangement, or if the Arrangement is not consummated:

- The Zi Shareholders may not receive $0.69 per Zi Share, consisting of
  approximately 0.03706 shares of Nuance Common Stock and, subject to the
  adjustment, $0.34 in cash for each Zi Share, which Nuance has agreed to pay in
  the Arrangement Agreement, and Zis share price would likely decline;
- Zi is liable for significant transaction costs, including legal,
  accounting, financial, advisory and other costs related to the negotiation and
  completion of the Arrangement;
- Under some circumstances, Zi may have to pay a termination fee to Nuance
  in the amount of $1.5 million;
- The attention of Zis management and its employees has been diverted from
  day-to-day operations as they focus on the planning and closing the
  Arrangement;
- Zis customers may seek to modify or terminate existing agreements, or
  prospective customers may delay entering into a new agreement or purchasing Zi
  products as a result of the announcement of the Arrangement, which could cause
  Zis revenues to materially decline or any anticipated increases in revenue to
  be lower than expected; and
- Zis ability to attract new employees and retain its existing employees
  may be harmed by uncertainties associated with the Arrangement, and Zi may be
  required to incur substantial costs to recruit replacements for lost
  personnel.

The occurrence of any of these events individually or in
combination could have a material adverse affect on Zis results of operations
and share price.

Zis officers and directors have certain interests in the
Arrangement that are different from, or in addition to, interests of Zis
securityholders.

Zis officers and directors have certain interests in the
Arrangement that are different from, or in addition to, interests of Zis
securityholders. Several of Zis executive officers are parties to employment
agreements with Zi, which may provide severance and other benefits in the case
of qualifying terminations of employment in connection with a change of control
of Zi, including consummation of the Arrangement. Executive officers and
directors of Zi have rights to indemnification and directors and officers
liability insurance that will survive consummation of the Arrangement. Zis
securityholders should be aware of these interests when considering the Boards
recommendation to approve the Arrangement. Securityholders are encouraged to
review the section entitled Interests of Management and Others in the
Arrangement in the Information Circular furnished under the cover of Form
6-K on March 19, 2009 for more information.

Zi and Nuance may not be able to obtain, or may be
delayed in obtaining, the regulatory approvals required to consummate the
Arrangement.

Completion of the Arrangement is conditioned upon the receipt
of all required governmental consents and authorizations, including by the
approval of the Court of Queen's Bench of Alberta. Complying with requests from
such governmental agencies, including requests for additional information and
documents, could delay consummation of the Arrangement.

In certain instances, the Arrangement Agreement requires
Zi to pay a termination fee of $1.5 million to Nuance. This payment could affect
the decisions of a third-party considering making an alternative acquisition
proposal to the Arrangement.

Under the terms of the Arrangement Agreement, Zi will be
required to pay to Nuance a termination fee of $1.5 million if the Arrangement
Agreement is terminated under certain circumstances. As well, according to the
Arrangement Agreement, Zi is restricted from soliciting third parties to make an
acquisition proposal. Also, before Zi can support any third party acquisition
proposal, the Arrangement Agreement requires that any third party seeking to
acquire Zi must submit an acquisition proposal that is, among other things, at a
value per Zi Share in excess of the consideration to be paid by Nuance by at
least $0.05 per Zi Share. These conditions could affect the structure, pricing
and terms proposed by a third-party seeking to acquire Zi and could deter such
third-party from making a competing acquisition proposal.

If the Arrangement is not consummated, Zi may face
significant litigation risks with Nuance.

Zi currently has several litigation matters involving Nuance.
See also Item 3 Legal Proceedings. If the Arrangement is not
consummated, Nuance may seek to even more aggressively pursue litigation against
Zi. If Nuance were to pursue additional litigation against Zi, the cost of such
litigation to Zi and the distraction to Zis management and Board from Zis
business and operations may be significant.

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If the Arrangement is not consummated, Zi will likely
need additional funding to fund its operations.

If the Arrangement is not consummated, Zi will likely need
additional financing to fund its operations. Such additional financing may
involve the issuance of additional common shares or other equity and/or debt
securities and other forms of borrowing. Issuances of additional equity
securities may dilute the per share value of common shares held by Zis existing
shareholders. If Zi issues debt securities or obtains other forms of borrowings,
Zi may have to accept terms or borrowing arrangements that limit its ability to
incur additional debt, or that require it to maintain certain financial ratios
or subject it to other covenants that could restrict its business and growth.
Further, any such financing may not be available to Zi on terms acceptable to
it, if at all. If any such financing is not available to Zi, Zi may be required
to significantly curtail its operations.

Risks that May Impact Zis Business or Results of
Operations if the Arrangement is not Consummated

Zi has incurred net losses to date and may not become
profitable.

The Company has a limited history of operating profits. Zis
consolidated net losses totalled $7.4 million for its fiscal year ended December
31, 2008, $5.1 million for its fiscal year ended December 31, 2007, and $11.0
million for its fiscal year ended December 31, 2006. As of December 31, 2008,
Zis accumulated deficit was $121.1 million. Zi faces significant and
potentially costly challenges in simultaneously pursuing key research and
development goals while attracting customers for its products and
services.

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

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

In August 2003, Zi became aware of information that suggested a
group of funds, including Lancer Partners LP and Lancer Offshore Inc.
(collectively, the Lancer Funds or Lancer Entities), had accumulated a
significant percentage of Zis outstanding common shares. This information
followed the appointment in July 2003 of the Receiver for the Lancer Funds who
was appointed as a result of a U.S. Securities and Exchange Commission (the
SEC) enforcement proceeding which alleged securities law violations by the
management of the Lancer Funds. In December 2003, Zi learned through Lancer
Funds regulatory disclosure that the Lancer Funds believed their ownership
amounted to approximately 49% of Zis outstanding shares at the time. The
accumulation was done in apparent violation of U.S. and Canadian securities
laws, and without Zis knowledge or assistance. Based on the Receivers most
recent regulatory filings, the Receiver holds 18,718,008 of Zis common shares,
which amounts to 37% of Zis outstanding common shares as of December 31, 2008.
Certain legal disputes arose between the Company and the Receiver, which were
settled pursuant to a settlement agreement signed in February, 2007.

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

- the Company incurred significant legal fees in connection with issues
  concerning the Receiver;
- promising acquisition candidates and possible financing sources terminated
  discussions with Zi based upon uncertainty regarding the future composition of
  Zis Board and management of the Company and the possible impact of sales of
  Zis securities by the Receiver;
- Zis customers and potential customers similarly raised concerns about the
  future management of the Company and its ability to live up to its contractual
  commitments;
- Zis efforts to recruit highly qualified members of executive management
  and additional directors from the Companys industry were hampered by the
  disputes between the Company and the Receiver; and
- Scarce management resources were diverted from Company operations to
  addressing the foregoing concerns raised by Zis customers, employees,
  shareholders and potential acquisition candidates.

Pursuant to the settlement agreement, the parties discontinued,
with prejudice, all litigation and regulatory proceedings of any kind. In
addition, the Receiver, and certain of Zis current and former directors
delivered mutual releases. Nevertheless, there can be no assurance that disputes
with the Receiver and the adverse effects resulting therefrom noted above will
not occur again in the future.

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

According to the Receivers filings with the SEC, as of the
date of this Report, the Receiver holds approximately 37 percent of Zis
outstanding shares. The Receiver has in the past, and may in the future,
announce an intention to sell shares in the open market. These announcements,
whether or not they are accompanied by contemporaneous sales, may have a
depressive effect on the market price for Zis securities. SeeItem I History and Development of the Company- Acquisition of Zi Shares by the
Lancer Funds.

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The Receiver may negotiate the resale or transfer of all
or a significant portion of its shares in Zi without Zis involvement at any
time.

The Receiver was appointed by a court of law to manage all of
the assets of the Lancer Funds, including the Lancer Funds position in Zi.
Although the Receiver has continued to maintain a significant ownership interest
in Zi since its initial appointment, the Receiver may attempt to divest itself
of such interest. The Receiver may negotiate with third parties, without Zis
involvement, the Receivers resale or transfer of all or a significant portion
of its shares in Zi in a private transaction or as a part of a takeover or
acquisition proposal. In light of the number of shares held by the Receiver, any
such resale or transfer could result in a third-party acquiring a significant
ownership interest in Zi or possibly result in a change of control of Zi. As a
result of the historical relationship between Zi and the Receiver, there can be
no assurance that Zi will have input as to whom and at what price such shares
may be transferred or sold.

Declining general economic, business and industry
conditions have adversely affect Zis business and results of operations.

The recent disruptions in global economic conditions have
significantly adversely affected the software and telecommunications industries
as a whole and have also impacted upon Zis business and results of operations
as well. Concerns over credit conditions resulting from the recent financial
crisis affecting the banking system and financial markets, slower economic
activity, concerns about inflation and deflation, volatility in energy costs,
decreased consumer confidence and spending, reduced corporate profits and
spending, and generally adverse business conditions have contributed to
increased volatility and diminished expectations for the global economy and
expectations of slower global economic growth going forward. As a result, Zi has
experienced deferrals and a slowdown in orders and anticipates this trend to
continue as the current recession is expected to last through 2009. These
conditions make it extremely difficult for Zis customers, Zis vendors and Zi
to accurately forecast and plan future business activities, and they could cause
businesses to further slow spending on Zis products and services, which would
delay and lengthen sales cycles. Furthermore, during challenging economic times
such as the current recession, Zis customers may face issues gaining timely
access to sufficient credit, which could impair their ability to make timely
payments to Zi. If that were to occur, Zi may be required to increase its
allowance for doubtful accounts and Zis accounts receivable days sales
outstanding would be negatively impacted. The current economic downturn and any
future downturn may reduce Zis revenue and its ability to secure financing in
the future on favourable terms, if at all. Zi cannot predict the timing,
strength or duration of any economic slowdown or subsequent economic recovery,
worldwide, or in the software and telecommunications industries. If the economy
or the markets in which Zi operates do not improve from their current condition
or if they continue to deteriorate, Zis customers or potential customers will
continue to reduce or delay their product development, which could impact Zis
business and results of operations. Further, given the current economic
downturn, there is significant uncertainty the Company will be successful in
marketing Qix to OEMs and ODMs.

Zi operates in a new and developing market and the
Company may not be able to sustain the rapid development required in its
industry to remain competitive.

The development of Zis input technology market depends upon:

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

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

The market for Zis products has been characterized by:

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

Zi believes that these trends will continue into the
foreseeable future. Zis success will depend, in part, upon its ability to:

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

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

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

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

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

Zi operates in an intensely competitive environment and
it may not be able to compete successfully or gain market acceptance.

The software industry is intensely competitive and is
characterized by rapid technological advances, evolving industry standards,
price competition and technological obsolescence. Major Asian, European and
North American software and technology companies engage in development of input
or other interface software. Zis actual or potential input technology
competitors include, but are not limited to: Motorola; Nuance; Nokia; Openwave;
Microsoft; Research in Motion, Abaxia, FujiSoft, Adaptx, Vision Objects, Diotek,
HanWang, Guobi and Chinastar. Many of Zis competitors have longer operating
histories and have greater financial, technical, sales, marketing and other
resources. To a great extent, Zis ability to compete will depend on such
factors as product features, technical superiority, ease of use, price, quality,
technical support and services, product development capabilities, marketing,
distribution channels, and ability to meet delivery schedules. There can be no
assurance that Zis products and services can compete successfully or gain
market acceptance. Other companies with greater financial and technical
resources and larger marketing organizations could enter the market and pose a
potential threat if they can develop technologies and products that can rival
those developed by Zi.

Zis products may contain defects that could harm its
reputation, be costly to correct, expose the Company to litigation and harm its
operating results and financial condition.

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

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

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

Zi relies on large and small customers to adopt its
technology and its financial success may be affected if these customers either
do not implement Zis technology or suffer their own financial hardships.

Zis royalty and licensing fee-based revenues depend in
substantial part on Zis ability to successfully integrate and maintain
compatibility of its technology with the applications of its customers. Because
Zi relies heavily on third party integration of its technology into customer
products, lead time to revenue recognition can be longer than software products
directly released into consumer channels. Purchase of Zis products by customers
often requires significant expenditure of time and resources by the customers.
Accordingly, the decision to purchase Zis products typically requires
significant pre-purchase evaluation. Zi may spend significant time educating and
providing information to prospective customers regarding the use and benefits of
its products and technologies. During this evaluation period, Zi may expend
substantial sales, marketing and management resources.

Furthermore, Zis products and technologies sold and integrated
into customer applications are subject to both customer production schedules and
customer success in marketing the products and generating product sales. Zis
revenues are thus subject to delays and possible cancellation resulting from customer integration risks
and delays. Zi may not be successful in continuing to be selected as a
technology provider for these customers, and the failure to be selected by Zis
customers would have a material adverse effect on Zis sales. In addition, the
resolution of a patent infringement claim with a principal competitor restricts
the Company and its affiliates from using and selling certain no-longer
distributed earlier versions of eZiText for Latin-based languages in the United
States. Furthermore, due to Zis royalty-based revenue model, the failure of
Zis key customers to achieve market acceptance of products incorporating Zis
software could have a material adverse effect on its business, operating results
and financial condition. There is an increased number of customers who have
negotiated fixed pricing into their licensing agreements which means that Zis
total compensation for successful products incorporating Zis software could be
capped at a level that is below the compensation it might have received from a
royalty-based license agreement and, as a result, these capped amounts may have
a material adverse effect on Zis revenue growth.

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As well, the Company has invested money, time and resources
into the acquisition and development of Decuma and Qix technologies, both of
which are recent additions to the Zi portfolio of products. Zi may not be
successful in persuading new customers to license such technologies. Potential
customers may spend significant amounts of time evaluating Zis technologies
prior to their decision to license and deploy Zis products. Furthermore, any
customers who do license such technology may fail to achieve market acceptance
of products incorporating such technologies. Due to Zis license-fee and
royalty-based revenue models, any of the above-referenced potential failures
could have a material adverse effect on Zis business, operating results and
financial condition.

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

Zis customers are subject to highly competitive demand and
pricing structures for products and services prevalent in the telecommunications
industry. In 2008, 2007 and 2006 Zi derived 44%, 33% and 37% respectively of its
total revenue from two customers. Zi believes that revenue derived from current
and future customers who dominate handset phone manufacturing will continue to
represent a significant portion of Zis total revenue for its technologies. Zis
inability to continue to secure and maintain a sufficient number of contracts
from such dominant customers would have a material adverse effect on Zis
business, financial condition, operating results and cash flows derived from
Zis technologies. Moreover, Zis success will depend in part upon its ability
to obtain orders from new customers, as well as the financial condition and
success of its customers and general economic conditions. As well, certain of
Zis key customer licenses are at, or approaching, the end of their license
terms and it is uncertain whether Zi will be successful in negotiating renewals
with these customers.

Zis overall market breadth for products and services may be
constrained by:

- the increasing market share of major handset industry leaders;
- the influence of software integrators and platform suppliers in serving
  new customers with pre-packaged solutions; and
- dependence on a small number of customers, and potential customers with a
  trend in the industry towards increased consolidation among the customer base.

Zis ability to operate could be hindered by the
proprietary rights of others and its inability to adequately protect its
intellectual property rights.

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

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

For a summary of material legal proceedings related to the
Company, see Item 3 Legal Proceedings.

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Existing copyright, trademark, patent and trade secret laws
only afford limited protection for Zis proprietary rights. Third parties may
attempt to copy or reverse engineer aspects of Zis products or proprietary
information. As well, performance improvements in computing capability of
appliances that serve Zis market may make it easier for competitors to
replicate the appearance and functionality of Zis products without impinging on
certain technical elements of Zis intellectual property. Accordingly, Zi may
not be able to adequately protect its intellectual property.

Zis business may be adversely affected by a settlement
agreement with a principal competitor.

As described in Item 1 History and Development of the
Company - Intellectual Property Litigation, the Company and AOL (including
its affiliates) settled a judgment under U.S. based litigation by a written
settlement agreement dated December 6, 2002. Under the settlement agreement, the
Company consented to, among other things, an injunction under a consent judgment
which prohibits the sale or use in the United States of earlier versions of the
Companys eZiText product. Such earlier versions of eZiText are not currently
sold or offered for sale or used by the Company in the United States. This
injunction does not apply to or prohibit the sale or use of such earlier
versions of the Companys eZiText product in countries other than the United
States. In the ordinary course of business, the Company, Nuance. (Zis principal
competitor in the text input market and acquirer of Tegic, a former AOL
subsidiary) and others seek to protect their intellectual property in various
countries and jurisdictions through administrative proceedings and civil
litigation. The settlement of the AOL lawsuit dealt only with certain patent
infringement claims in the United States.

Zi needs to be able to manage its growth or else its
operating results and financial condition will be materially adversely
affected.

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

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

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

Zi depends on its key personnel and failure to attract
and retain these people could have a negative impact on Zis operations.

Zis success will be dependent, in part, on the performance of
the Companys personnel who develop Zis technology and manage its business. Zi
has personnel that it believes are competent in the development of its
technology, services and software related products and have endeavored to hire
and retain qualified managerial and technology development services people for
the development and expansion of the Zi Technology business. Nevertheless,
failure to retain their expertise or to attract and retain key personnel with
necessary technological and marketing skills, could have a materially adverse
effect upon Zis ability to grow and operate profitably. Likewise, failure to
retain the services of Milos Djokovic, President and Chief Executive Officer,
Blair Mullin, Chief Financial Officer, Roland Williams, Senior Vice President
Intellectual Property, Axel Bernstorff, Vice President of Global Sales, Brandon
Mensinga, Senior Director  Products, Weigen Qiu, Director - Technology
Development and Blevins Tang, Director - Quality Assurance, could have a
materially adverse effect upon Zis ability to grow and operate profitably. The
Companys insurance coverage does not include key-man life insurance for any of
the above mentioned individuals.

Zi operates in diverse geographic markets and faces
regulatory and political risks abroad which could negatively impact its
operations.

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

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Zis global business may be materially adversely affected by,
among other things:

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

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

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

Zi anticipates the need for additional capital to support
its operations and future growth.

Zi anticipates that it will require capital to sustain its
operations and to finance the continued growth of operations. To date, Zi has
raised capital primarily through private placements of common shares. Unless
Zis cash flow from operations is sufficient to meet its operating capital
requirements, any shortfall must be covered by Zis cash position, the sale of
securities or through other forms of third party financing. Zi may still require
additional financing to support its product expansion or continued operations.
There can be no assurance that sufficient financing will continue to be
available to sustain Zis operations and growth, to develop new and existing
markets or to complete development of products that fully exploit Zis owned or
licensed technologies. Failure to obtain adequate additional financing on a
timely basis could have a material adverse effect on Zis business and
operations.

Zis quarterly results are subject to fluctuations which
could negatively affect its financial results.

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

- dependence on the market acceptance and sales of Zis licensees products
  in which its technologies are embedded;
- seasonality of sales of Zis licensees products;
- changes in the demand for Zis technology;
- the introduction or enhancement of products and services by Zi and its
  competitors and market acceptance of those enhancements or products;
- delays in the introduction of products or enhancements by Zi;
- the timing of significant orders, delivery and implementation of Zis
  products;
- the gain or loss of any significant customer;
- changes in Zis pricing policies or those of Zis competitors;
- the mix of distribution channels through which products are sold and the
  mix of products and services sold;
- the mix of international and North American revenues;
- exchange rate fluctuations;
- the timing of any acquisitions and related costs;
- foreign currency exchange rates and general economic conditions; and
- legal and other costs associated with defense and resolution of patent
  infringement claims and other litigation the Company is involved in.

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

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

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

The laws and policies restricting foreign alliances,
partnerships, investments, distribution or sale in the software technology
industry could change and adversely affect Zis operations in the foreign
countries in which it operates.

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

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

Zi is subject to foreign currency exchange risks;
accordingly, fluctuations in exchange rates could have a material effect on its
results of operations.

A significant portion of Zis expenses have been, and will
likely continue to be, incurred or generated in currencies other than the U.S.
dollar, principally, the Canadian dollar, Hong Kong dollar, Chinese renminbi,
Swedish krona, British pound and the Euro. Zis results are reported in U.S.
dollars. Accordingly, fluctuations in exchange rates have a material effect on
Zis results of operations. In 2005, Chinese authorities re-valued the renminbi
and it is no longer pegged against the U.S. dollar. To date, Zi has not engaged
in foreign currency exchange rate hedging activities. If Zi implements hedging
techniques in the future with respect to foreign currency transactions, there
can be no assurance that Zi will be successful in such hedging activities.
Conversion of the Chinese renminbi to other currencies is subject to approval by
the government of China. Foreign exchange gains or losses for the past three
years have been: a loss of $437,066, a gain of $293,079 and a gain of $235,113
in each of 2008, 2007 and 2006, respectively. These gains and losses generally
relate to balances on Zis balance sheet that are denominated in currencies
other than the U.S. dollar. It should be noted that Zis expenses are higher in
2008 compared to 2007 due to the depreciation of the U.S dollar against other
currencies in general, especially against the Canadian dollar which has
contributed most significantly to the increase in expenses. Zi estimates that
expenses have increased by approximately $400,000 in 2008 compared to 2007 due
to the depreciation of the U.S. dollar.

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

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

- 18 -

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Zi is subject to examinations by taxation authorities of
the jurisdictions in which it operates in the normal course of
operations.

In the past, Zi has been subject to examination by tax
authorities, including an examination by the Canada Revenue Agency (the CRA),
regarding Zis international transfer pricing policies and procedures and
documentation for the 2002 and 2003 taxation years. Such examination by the CRA
has been successfully resolved, however Zi may in the future be subject to
additional examinations by various tax authorities. In responding to such
examinations, Zi may incur significant costs and the expenditure of significant
amounts of time, even if such examinations do not lead to an adjustment of the
taxes payable by Zi. If an examination does reveal a discrepancy in Zis tax
reporting, Zi may be subject to increased tax payments, interest and/or
penalties.

If the Company is characterized as a passive foreign
investment company, its shareholders may be subject to adverse U.S. federal
income tax consequences.

Although Zi has never made an annual determination of its
passive foreign investment company (PFIC) status, as such term is defined by
US taxation legislation for US taxation purposes for any of its taxable years,
Zi is not aware of any factor that would cause it to believe that it has ever
been a PFIC, or would be for the current taxable year. PFIC classification is
factual in nature, generally cannot be determined until the close of the taxable
year in question, and is determined annually. There can be no assurance that Zi
will not be considered a PFIC for any past or current taxable year.

If Zi were classified as a PFIC for any taxable year during
which a U.S. holder (as defined in the Information Circular) holds Zi Shares,
any gain recognized on the sale of such shares and any excess distributions
(as specifically defined in the United States Internal Revenue Code of 1986, as
amended (the Code)) paid on the shares must be ratably allocated to each day
in a U.S. holders holding period for the shares. The amount of any such gain or
excess distribution allocated to prior years of such U.S. holders holding
period for the shares generally will be subject to U.S. federal income tax at
the highest tax applicable to ordinary income in each such prior year, and the
U.S. holder will be required to pay interest on the resulting tax liability for
each such prior year, calculated as if such tax liability had been due in each
such prior year.

The Company may be deemed to be a controlled foreign
corporation under the Code.

If more than 50% of the voting power of all classes of shares
or total value of the shares of the Company is owned, directly or indirectly, by
citizens or residents of the United States, United States domestic partnerships
and corporations or estates or trusts other than foreign estates or trusts, each
of whom owns 10% or more of the total combined voting power of all classes of
shares of the Company, the Company could be treated as a controlled foreign
corporation, or CFC as such term is defined under Subpart F of the Code. This
classification would effect many complex results including the required
inclusion by such United States shareholders in income of their pro rata shares
of Subpart F income (as specifically defined by the Code) of the Company.

Based on information available to it, Zi does not believe that
it is a controlled foreign corporation. However, there can be no assurance that
Zi is not a controlled foreign corporation. The controlled foreign corporation
rules are very complicated, and U.S. holders should consult their own financial
advisor, legal counsel or accountant regarding the controlled foreign
corporation rules and how these rules may impact their U.S. federal income tax
situation.

The Company does not currently meet certain NASDAQ bid
requirements, and if Zi is unable to meet such requirements, its common shares
may be delisted from the NASDAQ.

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 US$1.00 per share for 30 consecutive days. As a result, in accordance with
NASDAQ 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
US$1.00 or more for a minimum of 10 consecutive business days. As of July 28,
2008, the Company had not regained compliance with the minimum bid price
requirement. On August 1, 2008, the Company received a letter from NASDAQ (the
Determination Letter) indicating that because the Company was not eligible for
an additional 180 calendar day compliance period given that it did not meet the
NASDAQ initial inclusion criteria set forth in NASDAQ Marketplace Rule 4310(c),
trading of the Companys common shares would be suspended at the opening of
business on August 12, 2008 and a Form 25 would be filed with the SEC to remove
the Companys common shares from listing on the NASDAQ.

On August 8, 2008, the Company notified NASDAQ of its intention
to appeal NASDAQs determination to delist Zis common shares from the NASDAQ.
The delisting of these shares was then postponed, pending the outcome of the
appeal. On August 29, 2008, the Company submitted its plan to regain compliance
with the minimum bid price requirement (the Plan of Compliance). Zis Plan of
Compliance indicated, among other things, that it would undertake to effect a
reverse share split by December 22, 2008 if it was not able to demonstrate compliance with the minimum bid price
requirement in the near term. On September 18, 2008, the Company presented an
oral argument at a hearing before a NASDAQ Hearings Panel (the Panel) to
request a time period of 180 calendar days, pursuant to Marketplace Rule
4802(b), from the date of the Determination Letter to regain compliance with the
minimum bid price requirement.

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On October 16, 2008, NASDAQ suspended the minimum bid price
requirement for all NASDAQ-listed issuers, including the Company, through
January 16, 2009. On December 23, 2008, NASDAQ extended this suspension of the
minimum bid price requirement for all NASDAQ-listed issuers through April 20,
2009. On March 23, 2009, NASDAQ further extended this suspension of the minimum
bid price requirement for all NASDAQ-listed issuers through July 20, 2009.

As of October 16, 2008, the Panel had not yet issued a decision
on the Companys appeal. The Companys appeal is stayed during the period from
October 16, 2008 through July 20, 2009. Should the Company not have demonstrated
compliance with the US$1.00 minimum bid price requirement by July 20, 2009, then
Zis common shares may be delisted unless the Panel allows it to submit an
updated Plan of Compliance.

There can be no assurance that the Panel will permit Zi to
submit an updated Plan of Compliance or that it will grant Zi additional time to
achieve compliance with the minimum bid price requirement. Further, there can be
no assurance that Zi will be able to meet the minimum bid requirement, even if
granted additional time, and therefore, its shares may be delisted from the
NASDAQ.

The Company may not be successful in continuing to
implement an inter-company royalty program in order to access cash in its
Chinese Subsidiaries that is currently classified on its balance sheet as
Restricted Cash.

On April 7, 2008, Zi successfully transferred $2.1 million in
cash held in Zis subsidiary in China to the Company. The $2.1 million cash is
part of the $2.7 million reported in the Companys audited financial statements
as Restricted Cash as of December 31, 2007. The transfer of this cash resulted
from the implementation of an inter-company royalty program which was developed
in order to provide an ongoing mechanism to make all cash balances of the
Company fully available to fund the day-to-day operations of Zi globally, while
at the same time complying with international transfer pricing rules and
regulations. The portion of the $2.7 million that was not transferred was
partially used to pay required taxes to effect the transfer and the remainder
was left in Zis Chinese subsidiary for working capital purposes. The continued
implementation of the inter-company royalty program requires ongoing actions on
the part of Zi. There can be no assurance that such continuing implementation
will be successful.

Zi may be contractually restricted from announcing the
details of important licensing agreements.

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

Certain of Zis significant customers may terminate their
agreements with Zi in the event of a partial change of control of Zi.

According to license agreements signed with certain of Zis
significant customers, such customers have the right to terminate their license
agreements with Zi in the event of a change of control of Zi, including a
partial change of control. As a result, these termination rights may be
applicable, even if the Arrangement with Nuance is not consummated, in the event
that a partial change of control takes place.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

The Companys current facilities include administrative and
sales offices, and engineering offices. The table below describes Zis material
properties:

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ApproximateLocation
    Purpose
    Owned or leased
    Square footageCalgary, Alberta
    Corporate head office and
      engineering office
    Lease expires June 30, 2012
    13,355 sq ftVancouver, British Columbia
    Software development
    Lease expires May 31, 2009. Lease automatically
      renews every six months until terminated with 60 days advance notice
    140 sq ftMartinez, California
    North American sales office
    Lease expires November 30, 2009
    350 sq ftHong Kong, SAR
    Asia Pacific sales and engineering office
    Lease expires November 18, 2009
    893 sq ftBeijing, PRC (ZST)
    PRC R&D office
    Lease expires February 28, 2010
    3,606 sq ftBeijing, PRC (ZiB)
    PRC sales and engineering office
    Lease expires December 31, 2009
    4,252 sq ftLund, Sweden
    Corporate head office and
      engineering office for Decuma
    Lease expires June 30, 2012.
      Lease automatically renews every twelve months until terminated with nine
      months advance notice.
    4,237 sq ft


Zi believes its facilities are adequate for its operations and
has no plans to add facilities during the remainder of 2009.

ITEM 3.

LEGAL PROCEEDINGS

Zi and its subsidiaries may be involved in certain litigation
matters arising in the ordinary course of business. Information on material
litigation is described below.

Events Preceeding the Litigation Referenced In Sections
1-3 Below

On August 14, 2008, Nuance made a proposal to acquire all of
the outstanding common shares of Zi. On August 15, 2008, Zi announced that it
had declined to enter into negotiations with Nuance regarding such proposal, and
stated that Zis Board had concluded that the proposal did not recognize the
full value of Zi.

1.Tegic Communications, Inc. and Nuance
Communications, Inc. v. Zi Corporation

Nuance filed a motion for contempt against Zi in the California
Court on August 19, 2008, alleging Zi violated a 2002 consent judgment which
settled a previous patent litigation with Tegic involving Zis eZiText software
(see Item 1  History and Development of the Company  Intellectual Property
Litigation). Tegic was acquired by Nuance on August 24, 2007. On November
7, 2008, Zi filed a response to the motion for contempt and a cross-motion to
compel arbitration. On November 19, 2008, the judge in the case ordered the
dispute to arbitration and denied Nuances motion for contempt without
prejudice.

2.Tegic Communications, Inc. v. Zi
Corporation and Zi Corporation of America, Inc. (collectively Zi)

On December 1, 2008, pursuant to the November 19, 2008 order,
(see Item 1  History and Development of the Company  Intellectual Property
Litigation), Tegic filed a demand for arbitration with the AAA in New York,
NY. Tegic requested an order to permit Tegic to immediately execute on the
remaining balance of the Judgment in the previous action being US$4,500,000;
disgorgement of Zis profits from the license or sale of its eZiText software
that is not colorably different from eZiText software versions 4.0  4.2, a
cease and desist order prohibiting Zi from the license or sale of eZiText
software that is not colorably different from eZiText software versions 4.0 
4.2; damages; and costs. On December 22, 2008, Zi filed an answering statement
and counterclaim denying all of Tegics claims and requesting a declaration that
Tegic breached the 2002 settlement agreement, denying that Zi owes any further
sums to Tegic, and requesting an award of damages and loss caused by Tegics
breach and actions. The parties have been unable to agree on an arbitrator and
an arbitrator is being selected in accordance with the Commercial Rules of the
AAA. Following the execution of the Arrangement Agreement between Zi, Nuance and
Subco, pursuant to which Nuance is to acquire all of Zi Shares (see Item 1 
History and Development of the Company  Nuance Acquisition of Zi Pursuant
to the Arrangement), the parties agreed to a stay of proceedings in the
arbitration proceedings, until the closing of the Arrangement.

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3.Tegic Communications, Inc. and Nuance
Communications, Inc. v. Zi Corporation

On August 25, 2008, Nuance launched a patent infringement
lawsuit against Zi in the Federal Court in Toronto, Canada. The claim accuses Zi
of infringing the intellectual property of Tegic with its Qix and eZiText
products, and claiming among other things, an award of punitive damages in the
amount of CDN$10,000,000. Nuance was ordered to post security in the amount of
CDN$75,000 and subsequently amended its statement of claim to remove the claim
for punitive damages. Zi filed its statement of defence and counterclaim on
November 28, 2008. Following the execution of the Arrangement Agreement between
Zi, Nuance and Subco, pursuant to which Nuance is to acquire all of the Zi
Shares (see Item 1  History and Development of the Company  Nuance
Acquisition of Zi Pursuant to the Arrangement), the parties agreed to a
stay of proceedings regarding this litigation, until the closing of the
Arrangement.

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

(i) Dalian Hanpu Applied Technology Co., Ltd., Hu
Xianhua & Hu Bin v. Ericsson (China) Co., Ltd. and Beijing Ericsson Mobile
Telecommunication Co., Ltd., (the "First Dalian Ericsson Action").The First
Dalian Ericsson Action is in the Higher Peoples Court (the "High Court") in
Beijing, China. The High Court served Beijing Ericsson Mobile Telecommunication
Co., Ltd. on August 16, 2000, and Ericsson (China) Co., Ltd. with the
plaintiffs complaint on August 17, 2000. The complaint alleges that Ericsson
(China) Co. Ltd. and Beijing Ericsson Mobile Telecommunication Co., Ltd.
infringed the plaintiffs intellectual property rights, namely Chinese patent
ZL96120693.4, "Keyboard Assignment of Stroke Input and its Screen Prompt." On
August 18, 2000, Ericsson sent Zi a request for indemnification pursuant to the
license agreement between Ericsson Mobile Communications AB and Zi Corporation
of Canada, Inc. The Company and its affiliates have not been named as a party in
the First Dalian Ericsson Action.

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

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

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

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(iii) Dalian Hanpu Applied Technology Co., Ltd., Hu
Xianhua & Hu Bin v. Alcatel Suzhou communication Co., Ltd and Another (the
"Dalian Alcatel Action").On April 5, 2001, the Company received a notice
from Alcatel Suzhou Communication Co., Ltd. that Alcatel Suzhou Communication
Co., Ltd, and Yanshaqiro Trading Branch of Beijing Yingcong Science and Trade
Center have been made parties to a patent infringement claim in the PRC (the
"Alcatel/Hu Bin Claims") filed in the Lower Court for infringement of Chinese
patent ZL96120693.4 (the same patent in both of the First Dalian Ericsson Action
and the Second Dalian Ericsson (Panda) Action). On April 19, 2001, Alcatel sent
Zi Corporation of Canada, Inc. a request for indemnification pursuant to the
license agreement between Alcatel Business Systems and Zi Corporation of Canada,
Inc. Zi responded on May 8, 2001 denying the applicability of the indemnity and
the Company has not received any answering response from Alcatel. The Company
and its affiliates have not been named as a party in the Dalian Alcatel
Action.

A ruling in Alcatels favour on this matter was also issued by
the Lower Court on May 23, 2002. The rulings by the Lower Court in this Dalian
Alcatel Action are substantially similar to those given in the Second Dalian
Ericsson (Panda) Action.

The plaintiff has filed a notice of appeal to the High Court in
order to appeal this Lower Court ruling. To the Companys knowledge, Alcatel is
defending this appeal.

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

5.Commencing on March 11, 2005, the Board of
Regents of the University of Texas System ("U of T") filed federal lawsuits
against numerous alleged infringers of U.S. Patent No. 4,674,112 (the "112
Patent") in the U.S. District Court for the Western District of Texas, Austin
Division. Of the named parties, the majority were 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, as a
business decision, the Company settled the claims against four of the Companys
relatively minor customers.

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

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

On May 3, 2007, the court issued an Order entering the parties
stipulation of non-infringement of the asserted patent, dismissing pending
counterclaims and entering final judgment in favour of the defendants. U of T
filed a notice of appeal on May 23, 2007. The Court of Appeals rendered their
decision in July 2008, upholding the decision of District Court. On August 7,
2008, the Board of Regents filed a Petition for Panel Rehearing and Rehearing En
Banc, which was denied. Zi has been advised by its attorneys that this matter is
now closed.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS

No matters were submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders of the Company
through a solicitation of proxies or otherwise.

PART II

ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Companys common shares are listed for quotation on the
NASDAQ on the NASDAQ Stock Market System under the symbol ZICA, and on the TSX
under the symbol ZIC.As of March 23, 2009, the Company had
50,667,957 common shares issued and outstanding, held by approximately 193 shareholders of record.
On March 23, 2009, the closing price of the Companys common shares on the
NASDAQ was $0.71 and the closing price on the TSX was CDN$0.89.

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The high and low sales prices per common share of the Company
for each quarter for the two years ended December 31, 2008, as reported by the
NASDAQ and the TSX, are shown in the table below. During these periods, the
Company did not issue any cash dividends.

NASDAQ (in US$):

2008
    
    
    2007Quarter
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst
    $
    1.13
    
    $
    0.50
    
    $
    2.73
    
    
    1.54Second
    
    0.65
    
    
    0.38
    
    
    1.64
    
    
    1.05Third
    
    0.76
    
    
    0.29
    
    
    1.37
    
    
    0.66Fourth
    
    1.23
    
    
    0.24
    
    
    1.35
    
    
    0.75


Toronto Stock Exchange (in CDN$):

2008
    
    
    2007Quarter
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst
    $
    1.03
    
    $
    0.51
    
    $
    3.20
    
    
    1.80Second
    
    0.65
    
    
    0.38
    
    
    1.88
    
    
    1.14Third
    
    0.80
    
    
    0.30
    
    
    1.48
    
    
    0.68Fourth
    
    0.90
    
    
    0.32
    
    
    1.35
    
    
    0.77


Dividend Policy

To date, Zi has not paid any dividends on shares, and does not
anticipate doing so in the foreseeable future. The declaration of dividends on
Zis common shares is within the discretion of the Board and will depend upon,
among other factors, earnings, capital requirements, and the operating and
financial condition of the Company.

Exchange Controls

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

Except as provided in the Investment Canada Act, the
Company knows of no limitations under the laws of Canada, the Province of
Alberta, or in the Articles of Incorporation, the By-Laws or any other
constituent documents of the Company imposed on the right of foreigners to hold
or vote the common shares of the Company.

Material Canadian Income Tax Consequences

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

This summary is based on the current provisions of the Tax Act
and the regulations thereunder (the Regulations), all specific proposals to
amend the Tax Act and Regulations publicly and officially announced by the
Minister of Finance (Canada), the current provisions of the Convention and
counsels understanding of the current administrative policy and practices of
the CRA published in writing prior to the date hereof.

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

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

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

Share Repurchases

The Company did not repurchase any of its outstanding
securities in the quarter ended December 31, 2008.

ITEM 6.

SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Information

This Form 10-K annual report contains "forward-looking
statements" within the meaning of applicable United States and Canadian
securities laws. Shareholders can identify these forward-looking statements by
the use of words such as "expect", "anticipate", "estimate", "believe", "may",
"potential", "intends", "plans" and other similar expressions or statements that
an action, event or result "may", "could" or "should" be taken, occur or be
achieved, or the negative thereof or other similar statements. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors which may cause the Companys actual results, performance or
achievements, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by these
forward-looking statements. Such statements include, but are not limited to, the
Companys expectation that revenues will increase as a result of its sale
agreements and marketing efforts related to the Companys Qix and Decuma
products, its belief that a significant revenue stream will be created from its
licensing agreement with ZTE Corporation and from its relationship with Sony
Ericsson, its belief that it has the potential to increase business with UT
Starcom, its ability to implement its business plan, and its belief that its
inter-company royalty program will continue to be successful, . These factors
include, among others, the following: uncertainties regarding the outcome of the
offer to acquire the Zi Shares by Nuance, the Companys history of operating
losses and uncertainty of future profitability; financing and market risks
associated with the ownership by the Receiver of approximately 37% of the
Companys issued and outstanding shares; the possible impact of future
financings; uncertainty as to the degree of and continuing market acceptance of
the Companys products and services; uncertainties relating to product
development; risks associated with the number, amount and timing of new product
introductions; uncertainty regarding patents, proprietary rights and software
piracy; variability in customer demand; the Companys dependence on third party
performance under marketing and licensing arrangements; risks associated with
the contingent nature of continued performance under major sales contracts;
rapid technological change, product obsolescence and competition; uncertainty
regarding the pricing and collection of accounts; risks associated with
dependence on sales in foreign countries; the potential for adverse developments
in pending litigation; risks associated with the settlement of patent
infringement lawsuits; risks associated with the settlement of a U.S. patent
infringement lawsuit; fluctuations in foreign exchange rates; uncertainties
associated with changes in government policy and regulation, particularly in the
Peoples Republic of China; uncertainties associated with the Canadian Revenue
Agencys audit of any of the Companys cross border transactions; adverse
changes in general business conditions in any of the countries in which the
Company does business; changes in the Companys size and structure; the
effectiveness of the Companys management and its strategic relationships; risks
related to possible defects in the Companys products; risks associated with the
Companys ability to attract and retain key personnel; uncertainties regarding
the Companys need for additional capital; uncertainty regarding the
fluctuations of the Companys quarterly results; risks related to the Companys
acquisitions of companies and technologies; uncertainties relating to the
Companys status as a non-U.S. corporation; foreign currency exchange risks; the
ability to enforce civil liabilities under U.S. securities laws outside the
United States; the ability to maintain Zis listing on NASDAQ; risks associated
with the Company being considered a "passive foreign investment company" or a
"controlled foreign corporation" under the applicable provisions of the U.S.
Code; contractual restrictions on announcing the details of important licensing
agreements; risks associated with Zis investments; risks related to the
worldwide economic downturn; risks related to the continued viability of the
Companys inter-company royalty program; uncertainties regarding the outcome of
the offer for Zis Shares by Nuance; and other risks and uncertainties described
under Item 1A Risk Factors" and elsewhere in this Form 10K.

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Managements Discussion and Analysis of Financial
Condition and Results of Operations

This discussion and analysis of financial condition and results
of operations for the years ended December 31, 2008, 2007 and 2006 should be
read in conjunction with the audited consolidated financial statements and
related notes in this report. The Management Discussion and Analysis, has been
prepared as at March 25, 2009.

Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) has been prepared with reference to the
Companys audited consolidated financial statements and notes which have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP). All financial information herein is
presented in United States of America dollars (U.S. Dollars), except as
otherwise indicated.

Overview

Zi Corporation is incorporated under the Business Corporations
Act of Alberta, Canada. The Companys corporate headquarters is in Calgary,
Alberta with offices in the United States, Sweden, China, and Hong Kong; and a
sales team that markets the Companys products to customers around the globe.

The Company develops and markets software designed to provide
discovery and usability solutions for mobile search, input and advertising. The
Companys embedded software products make electronic devices such as mobile
phones, PDAs, hand-held computers, video gaming consoles, television set-top
boxes, printers and other similar devices more intuitive and easier to use.
Users are able to enter data more efficiently and are able to circumvent complex
and tedious interfaces by accessing key features directly, thereby improving the
user experience by allowing the user to utilize the full potential of these
devices.

The mobile handset market experienced a year of two halves in
2008. In the first half, mobile handsets shipments were increasing at
approximately 14% year over year. In the second half, third quarter handsets
shipments slowed by 8% before crashing into the red in the fourth quarter with a
reduction of 10% units shipped. The recent economic downturn has made
forecasting 2009 problematic with ranges of 2-3% growth (RBC Capital Markets,
November 2008) to a 10% contraction in unit shipments (Nokia, January 2009).
However, the mobile handset market remains one of the largest and most vibrant
global electronics markets with an estimated global subscriber base of
approximately 3.3 billion in late 2007, growing to 3.7 billion by 2008 (RBC
Capital Markets, November 2008).

Management is adjusting the Companys business plan to manage
the economic slowdown. These adjustments include the renewal patterns which
fixed a substantial portion of the Companys revenue streams at historically
high levels, and planned cost reductions for 2009 and subsequent years. In
addition, mainland China, a market in which the Company has strength, is
expected to grow by 8 to 10 percent in 2009 (Economist, January 2009).

In addition, positive trends include the continued growth of
mobile handsets in emerging markets, with sales of entry level devices growing,
and increased sales of feature phones as replacement devices. The Company is
uniquely positioned to benefit from this trend, based on the Companys proven
ability to develop mobile solutions in multiple languages, for devices ranging
from proprietary entry level ultra low cost handsets and replacement feature
phones, to smartphones based on open architectures.

Another positive trend is the increase in use of smartphones.
Despite the economic slowdown, smartphone use is expected to increase, driven by
the consumers desire to gain access to the outside world with them, in an
environment that recognizes the unique challenges of the mobile device. The
Companys product portfolio helps deliver on the promise of the smartphone,
through improved input, search, and service discovery.

As the handset market has grown and evolved, wireless carriers
worldwide have begun to deliver services which are uniquely positioned to the
personal always on nature of the mobile phone. Content and product downloads,
and other services unrelated to voice continue to deliver revenue growth, and
services such as mobile advertising are beginning to gain strategic importance
to the operator and subscriber alike. Informa estimates that worldwide mobile
advertising revenues should increase from $1.7 billion in 2008, to almost $12
billion in 2013. In a recent market survey, Nielsen reported that almost 25
percent of U.S. mobile subscribers reported seeing mobile advertising, and of
those, over 50 percent reported responding to it. The Companys mobile search
and discovery solutions facilitate the effective, relevant, and context
sensitive delivery of these non-voice services. The advent of the global
recession has the potential to significantly reduce global advertising. However,
mobile marketing watch noted that advertisers may shift advertising revenues
from higher cost media such as television to lower cost alternatives such as
mobile advertising. Accordingly, mobile advertising is expected to grow despite
the economic downturn.

To enable users to enter data more efficiently, circumvent
complex and tedious interfaces, to utilize features offered by smartphones, and
to capitalize on the potential advertising market, the Company offers a
differentiated line of products that customers can conveniently and easily design into their products that can
help them address the needs of global markets. By supporting keypad, keyboard,
pen and other input methods, the Companys products can significantly increase
the ease, speed and accuracy of text input on electronic devices. The Companys
text entry solutions are available in over 60 languages, representing languages
spoken and written by two thirds of the world's population. The Companys
handwriting solution is available in over 70 languages. The Companys products
allow for natural human interaction in such complex written languages as Arabic,
Chinese and Japanese.

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The Companys worldwide solutions include eZiText for
one-touch predictive text entry; eZiType predictive keyboard with
auto-correction; Decuma for natural handwriting recognition with prediction
technology; and Qix, a mobile search and service discovery solution designed to
enhance the user experience, and drive client and network service usage and
adoption. The Company is also repositioning Qix to create different product
versions tailored to meet the customers specific market requirements.

The Companys primary customers are original equipment
manufacturers (OEMs) and original design manufacturers (ODMs) seeking to
embed a text input solution in their device products for consumer use. The
Company has also begun selling products to network operators seeking to promote
more service use and achieve revenue and innovation advantage. As more consumers
use smartphones, Qix is well positioned to enhance the user experience by making
it easier to utilize the advanced functions, and thereby, increasing the use of
the advanced features by users.

The Companys customer and alliance base of OEMs and ODMs is
extensive and continually growing with handset manufacturing and gaming console
customers from around the world, including: Nokia, ZTE, Sony Ericsson, Samsung,
Kyocera, Lenovo, Sony, Sony Computer Entertainment, Nintendo, Motorola, LG
Electronics, and UT Starcom.

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

Network operators, on the other hand, can increase service
usage with Qix, because Qix makes it easier for consumers to use advanced
services. In the first quarter 2008, the Company announced the Companys second
revenue generating agreement with TELUS, a leading national telecommunications
company in Canada. TELUS began shipping Qix embedded units in the fourth quarter
of 2008. As the global economic downturn is diminishing the average revenue per
user (ARPU) benefit for carriers, the Company is adjusting its strategy by
segmenting Qix into different products to meet customer specific requirements,
and by increasing the marketing efforts to OEMs and ODMs, whose business model
more easily integrates Qix onto mobile devices. Given the current economic
downturn, there is significant uncertainty the Company will be successful in
marketing Qix to OEMS and ODMs.

In summary, the Companys product portfolio includes:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|eZiText offers fast, easy,
    accurate text input for a range of electronic devices, including mobile
    phones, telematic systems, set-top boxes, printers and gaming consoles.
    Key Features
    Full word prediction
      Single mode entry for different languages and applications
      Dual language prediction for multilingual users
      Passive and active learning of user vocabulary
      Cross-application indexing and context-sensitive vocabulary



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|eZiType is a business text
    input product for advanced mobile email handsets that is designed to
    increase speed, accuracy and make it easier to input text.
    Key Features
      Full word prediction
      Auto-correction of common
      misspellings and keyboard errors
      Single mode entry for different
      languages and applications
      Dual language prediction for
      multilingual users
      Passive and active learning of user
      vocabulary
      Cross-application prediction and
      context-sensitive vocabulary
      Works on virtual or hardware
      keyboards



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Qix is a natural discovery engine that embeds on any mobile device and
    easily integrates with handset features, applications and content sources.
    It complements the user interface by providing an alternative to the
    standard menu. Qix allows users to access the full range of phone features
    simply and intuitively without having to remember where or how to locate
    them. Field tests have shown that this simplicity motivates users to find
    and use revenue-producing features more often.
    Key FeaturesOn-device searchNatural language access to handset features and applications, bypassing
      the menu and encouraging repeated useOperator content discovery



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Decuma is a
    new class of input for pen-based devices. It unites industry leading
    handwriting recognition and predictive text technology, which greatly
    enhances the user experience. Decuma recognizes naturally shaped letters,
    numbers, symbols and punctuation in more than 70 languages. There is no need
    to adjust to a prescribed writing style or learn a special alphabet.
    Key FeaturesGlobal coverage in 70 languagesWorld class predictive text featuresUser interface flexibility and simple integration

Recent Developments:

The Company believes that 2008 was a significant year as
demonstrated by the following press releases which demonstrated the Companys
value and achievements to the marketplace.

Market Related Events:

On December 18, 2008, the Company announced a new licensing
agreement with ZTE Corporation. After licensing eZiText for over eight years,
ZTE is including all currently available Zi input solutions, including eZiType
and Decuma across their entire handset portfolio in multiple languages, creating
a significant revenue stream for the next few years.

On November 26, 2008,the Company announced that TCT
Mobile International Ltd. (TCT), a China-based mobile handset manufacturer of
the TCL and ALCATEL brands signed a multi-year license renewal with Zi for
eZiText. TCT is a subsidiary of TCL Communication Technology Holdings Limited,
one of the largest consumer electronics producers in the world, which has
achieved its tenth consecutive profitable quarter in the challenging economic
environment.

On October 16, 2008, the Company announced the successful
completion of several new licensing agreements within the Asian mobile space
with Guohong Communication and Digital Technology Company, UTStarcom, Longcheer
Telecommunication (H.K.) Limited, and CK Telecom. These successes are in
addition to other licensing agreements announced earlier with Chinese giants
Lenovo Mobile; and global manufacturers, UTStarcom, Kyocera Corp., and
Trolltech. The Chinese Ministry of Information reported that mobile telecom
revenue in China hit a record high of RMB 176.85 billion (USD $24.97 billion) in
the first five months of 2008, an increase of 16.5% from the previous year.
Short message service (SMS) figures in China were also up 24.6% year-on-year,
with 287.26 billion SMS sent in the same period. By capitalizing on this growth,
the Company has captured a significant share of the Asian market and has further
solidified its position as a leading provider of innovative text input products.

On September 25, 2008, the Company announced the availability
of the first of a series of Qix enabled mass-market phones to be shipped in
Canada by TELUS. Branded TELUS Quick Find, Qix is being introduced to Canadian
consumers for the first time on the HTC Touch Dual. In addition, on October 1,
2008, the Company announced the availability of a second cell phone in a series
of Qix-enabled mass-market phones from TELUS available on Motorolas RAZR VE 20.
These are important milestones in an effort to introduce Mobile Discovery to
North American consumers.

On September 15, 2008, the Company announced that Sony Ericsson
has agreed to significantly expand their existing licensing relationship with
the Company. The new arrangement is expected to generate multi-million dollars
in revenues over the remainder of the contract, representing an approximate
increase of 33 percent in revenues per year from shipments of the Companys
predictive text software when compared to the previous year of this
agreement.

On August 27, 2008, the Company announced the renewal of the
Companys license agreement with Nokia Corporation for a multi-year period. The
contract included a 100 percent increase in cash receipts in the first year
compared to the previous contract, and a significant initial payment payable
upon signing followed by quarterly instalments during the life of the contract.
The initial payment was paid on October 16, 2008. Nokia is the worlds number one
manufacturer of mobile devices, with an estimated 40 percent share of the global
device market, selling approximately 437 million mobile phones in more than 150
countries in 2007.

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On August 21, 2008, the Company announced that UTStarcom, a
major international IP and wireless technology manufacturer began shipping
Internet Protocol TV set-top-boxes in China featuring the Companys predictive
text input solution. The Company believes this move by UTStarcom has solidified
the Companys relationship with UTStarcom and opens the door to other potential
applications for the Companys leading input products within the UTStarcom
family of products and solutions.

On August 19, 2008, the Company announced that Samsung had
integrated the Companys eZiText and Decuma text entry solutions onto its L258
and G618 handsets in China. This integration means the Companys market proven
Decuma Chinese V4.1 handwriting recognition technology is now featured on two
GSM handsets in China. Decuma is bundled with predictive text entry software
eZiText, to provide Samsung with a complete text input solution.

On July 2, 2008, the Company announced that Kyocera
Corporation, a leading global handset manufacturer based in Japan, has chosen
the Companys eZiText and eZiType predictive text technologies for select
devices within its advanced mobile phone portfolio. This contract not only
continues the Companys relationship with Kyocera, but also licenses the
Companys products on Kyoceras Sanyo-branded mobile handsets worldwide.

On June 9, 2008, the Company announced the availability of the
Companys innovative predictive text software for Hewlett Packard (HP)
Multifunction Printers (MFPs). The Companys software can be integrated onto
selected HP LaserJet MFPs now being shipped worldwide.

On February 7, 2008, the Company announced a license agreement
with TELUS, a leading national telecommunications company in Canada, to offer
Qix on select models of TELUS smart phones and feature phones. TELUS because the
first carrier in North America to offer Qix. The Company believes the
implementation of Qix with TELUS is an important breakthrough for the Company.
It reinforces that Qix technology is now easy to adapt and can be used on a
broad range of handsets, regardless of the operating system.

On January 10, 2008, the Company announced a new license
agreement for eZiText and eZiType with Norway-based Trolltech ASA. Trolltech has
integrated eZiText and eZiType as part of the Qtopia Greensuite initiative,
which offers pre-integrated market leading partner components on top of Qtopia
Phone Edition.

Other Significant Events

Solicited Tender Offer and Plan of Arrangement

On August 14, 2008, the Companys Board of Directors
(Directors) received an unsolicited proposal to acquire the shares of Zi at a
price of $0.80 per share from Nuance Communications, Inc. (Nuance). Further,
the Company announced that the Directors declined to enter into negotiations
regarding such proposal because the Directors determined, in consultation with
Ridgecrest Capital Partners, a financial advisor, and other advisors, that the
proposal did not recognize the full value of Zi. The Company subsequently
announced the commencement of communications with Nuance, through the Companys
investment bankers, and at the same time was considering all available strategic
alternatives.

On August 20, 2008, the Company announced that notice was
received on August 19, 2008 from Nuance of a motion filed against Zi in the
United States District Court, Northern District of California, San Francisco
Division. The motion claims that the Company has violated a 2002 consent
judgment which settled a patent litigation with Tegic Communications, Inc.
(Tegic) involving the Companys eZiText software. Tegic was recently acquired
by Nuance. The Companys believes that the motion for contempt is without merit,
and that the Company is examining all legal remedies available with respect to
this motion.

On August 27, 2008, the Company announced receiving another
notice from Nuance of a patent infringement claim filed against Zi in the
Federal Court in Toronto, Canada, claiming that Zi infringes on the intellectual
property of Tegic with its Qix and eZiText products. The Company has no reason
to believe that the Company infringes on any patent claims of Nuance. The
Company is examining all legal remedies available to the Company with respect to
this action.

On November 28, 2008, the Company was advised that Nuance
commenced an unsolicited tender offer to purchase all of Zi's outstanding common
shares at $0.40 per share in cash. The Company responded by announcing that the
Directors would carefully review and consider Nuance's offer, and advise Zi's
shareholders of the Directors position regarding the offer by no later than
December 11, 2008, as required under applicable securities laws.

On December 11, 2008, the Directors unanimously recommended
that shareholders reject the $0.40 Nuance offer and not tender their shares. The
recommendation was based on the report submitted by a special committee of
independent directors that carefully reviewed and considered the offer and reported on that review, after receiving
the benefit of advice from its legal and financial advisors.

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On February 26, 2009,the Company and Nuance announced
an agreement under which Nuance will acquire Zi for US$0.69 per share in a cash
and stock transaction under the Arrangement. Under the terms of the Arrangement,
consideration for the transaction is approximately $35 million, comprising
approximately $17 million in cash and $18 million in Nuance common stock. The
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.

The Board of Directors of Zi has unanimously concluded that the
transaction with Nuance under the Plan of Arrangement is in the best interests
of Zi shareholders, and recommends that shareholders of Zi vote in favor of the
transaction at the special meeting of shareholders to be held to approve the
transaction.

Other Announcements

On August 14, 2008, the Company announced the completion of the
Companys European Qix trials which showed compelling data results. The results
from these independent trials validates the value that Qix offers, and will be
instrumental in negotiating new Qix deals with carriers.

On April 30, 2008, the Company announced that Qix would be
offered as a download version to T-Mobile customers in the UK. Qix will be
available on select device models on the T-Mobile network. The downloadable
version of Qix is instrumental in completing Qix trials and making Qix available
to the Companys customers subscribers without the requirement to purchase new
mobile devices.

On April 9, 2008, the Company announced the successful transfer
of $2.1 million in cash held in the Companys Chinese subsidiary to a Canadian
subsidiary. The transfer resulted from the implementation of an inter-company
royalty program developed in order to provide an ongoing mechanism to make all
cash balances available to fund the Companys day-to-day operations globally.
This program provides an ongoing mechanism to access cash accumulated in the
Companys Chinese subsidiaries, providing the Company with more flexibility in
managing the Companys cash flows.

|Summary of Results of Operations                                        |   |        |  |   |        |  |   |        | 
|----------------------------------------------------------------------- | - | ------ |  | - | ------ |  | - | ------ | 
|                                                                        |   |        |  |   |        |  |   |        | 
|For the years ended December 31,                                        |   | 2008   |  |   | 2007   |  |   | 2006   | 
|(Thousands except per share amounts)                                    |   |        |  |   |        |  |   |        | 
|Revenues                                                                | $ | 13,323 |  | $ | 13,111 |  | $ | 11,836 | 
|Gross margin                                                            | $ | 13,065 |  | $ | 12,847 |  | $ | 11,430 | 
|Loss  continuing operations                                            | $ | 7,377  |  | $ | 5,759  |  | $ | 9,750  | 
|Net loss                                                                | $ | 7,377  |  | $ | 5,127  |  | $ | 10,995 | 
|Total assets                                                            | $ | 8,328  |  | $ | 15,695 |  | $ | 14,547 | 
|Net loss per share from continuing operations  basic and
      diluted | $ | 0.15   |  | $ | 0.11   |  | $ | 0.21   | 
|Net loss per share - basic and diluted                                  | $ | 0.15   |  | $ | 0.10   |  | $ | 0.24   | 
|Outstanding shares, weighted average                                    |   | 50,612 |  |   | 49,641 |  |   | 46,503 | 
|Outstanding shares, end of period                                       |   | 50,668 |  |   | 50,558 |  |   | 46,689 | 

All dollar amounts are in U.S. dollars and in conformity with
U.S. GAAP. This information should be read in conjunction with the Companys
audited financial statements and notes, which have been included elsewhere in
this annual report.

Critical Accounting Policies and Estimates

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

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The Company has identified the following critical accounting
policies that affect the more significant estimates and judgments used in the
preparation of the Companys consolidated financial statements:

Going Concern Uncertainty

As at December 31, 2008, the Company had an accumulated deficit
of $121,078,664 and for the year ended December 31, 2008, incurred a 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 capital, if and when necessary to
meet the Companys obligations and repay liabilities when they come due.

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

The Company was also successful in establishing an
inter-company royalty program. This program provides an ongoing mechanism to
access cash accumulated in the Companys profitable Chinese subsidiaries,
providing an additional source of capital and more flexibility in managing the
Companys cash flows globally.

The Companys 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.

Principles of Consolidation

The consolidated financial statements include the accounts of
Zi and its subsidiaries. All inter-company transactions and balances have been
eliminated. All subsidiaries are controlled by the Company.

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 of which, there were
none at December 31, 2008 and December 31, 2007, or have the ability to exert
control over a subsidiary. Control is normally established when ownership
interests exceed 50 percent in an entity. However, when 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.

Software Development Costs

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

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

The Company reviews the carrying value of its software
development costs annually in the third quarter. Due to the global economic
downturn, an additional review was conducted as at December 31, 2008. As a
result of the review, an impairment provision of $1.4 million was recorded in
the fourth quarter (see additional discussion under the Operating Results 
Impairment of Software Development Costs section).

Revenue Recognition

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

- 32 -

---

Under software licensing arrangements, the Company recognizes
revenues provided that: a license agreement has been signed and fees are
non-refundable; the software and related documentation have been delivered;
there are no uncertainties regarding customer acceptance; collection of the
resulting receivable is deemed probable; the fees are fixed and determinable;
and no other significant vendor obligations exist. Any revenue associated with
contracts having multiple elements is deferred and recognized ratably over the
period of the contract unless clear evidence exists with respect to the fair
value of each separate element of the contract. 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 and cannot 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.

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

Revenues from software licensing royalties related to the sale
of the product in which the Companys technologies have been embedded are
generally recorded as earned. For customers whose collectability is uncertain,
royalties are recorded when payment is received.

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

Stock-based Compensation

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

Contingencies

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

Accounting for Income Taxes

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

- 33 -

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The Company accounts for income taxes under 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 de-recognition, classification, interest and penalties,
accounting in interim periods and disclosure.

Recent Accounting Pronouncements

The Canadian Institute of Chartered Accountants (CICA) has
mandated the adoption of International Financial Reporting Standards (IFRS)
for years starting after January 1, 2011. In addition, the Securities and
Exchange Commission (SEC) is considering mandating IFRS in 2014, 2015 or 2016,
and will be releasing additional information in the near future. While the
Company reports under U.S. GAAP, the Company is listed on the Toronto Stock
Exchange (TSX) and therefore may be affected by the change to IFRS when filing
with the TSX. The Company is also listed on the NASDAQ and will be affected
should the SEC implement mandatory adoption of IFRS. Accordingly, the Company
will be evaluating the impact of IFRS to the Companys financial reporting
during 2009, and will develop an implementation plan as appropriate. The Company
is currently exempt from the CICA mandate to convert to IFRS as it reports to
the SEC in U.S. GAAP. The Company will continue to monitor the convergence to
IFRS and will communicate the impact of adoption to IFRS in Canada and the U.S.
The Company intends to continue reporting under U.S. GAAP and will convert to
IFRS when mandated by the SEC.

In March 2008, FASB issued FAS 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161) which changes the
disclosure requirements for derivative instruments and hedging activities. The
intention of FAS 161 is 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 actively managing the Companys foreign
exchange risks which includes entering into derivative and hedging contracts if
appropriate. Accordingly, the Company will be required to disclose these hedging
activities, if any, in accordance of FAS 161 for years beginning after November
15, 2008.

In December 2007, FASB issued FAS 160, Noncontrolling 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 noncontrolling interest,
changes in a parents ownership interest and the valuation of retained
noncontrolling 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 noncontrolling
owners. FAS 160 is effective for fiscal years beginning after December 15, 2008.
The adoption of FAS 160 is not anticipated to have a material effect on the
Company.

The Company adopted FAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 (FAS 159). The statement provides companies with an option
to report selected financial assets and liabilities at fair value. The adoption
of FAS 159 has not had a significant impact on the Company.

The Company adopted FAS 157, Fair Value Measurements (FAS
157). 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 adoption of FAS 157 has not
had a significant impact on the Company.

The SEC commented that several registrants should have recorded
share purchase warrants that were issued in a currency other than their
functional currency as a derivative instrument in accordance with 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. 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 did not have
warrants outstanding that met this definition of a derivative under FAS 133 at
the time the matter was settled, and did not have warrants that met this
definition as at December 31, 2008. Accordingly, no adjustment is required.

- 34 -

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|                                                              |   |       |   |   |       |   |   |       |   |  |             |  |  |             | 
|------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | - |  | ----------- |  |  | ----------- | 
|Overall Performance                                           |   |       |   |   |       |   |   |       |   |  |             |  |  |             | 
|                                                              |   |       |   |   |       |   |   |       |   |  | Percent     |  |  | Percent     | 
|                                                              |   |       |   |   |       |   |   |       |   |  | Change 2008 |  |  | Change 2007 | 
|                                                              |   | 2008  |   |   | 2007  |   |   | 2006  |   |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages and per
      share amounts) |   |       |   |   |       |   |   |       |   |  |             |  |  |             | 
|Revenue                                                       | $ | 13.3  |   | $ | 13.1  |   | $ | 11.8  |   |  | 2%          |  |  | 11%         | 
|Loss from continuing operations                               | $ | (7.4  | ) | $ | (5.8  | ) | $ | (9.7  | ) |  | 28%         |  |  | -41%        | 
|Loss per share from continuing
      operations               |   | (0.15 | ) |   | (0.11 | ) |   | (0.21 | ) |  |             |  |  |             | 

In 2008, the Companys loss from continuing operations
increased by 28 percent from 2007. The increase resulted from the following:

- Increases in certain selling general and administrative (SG&A) costs
  (see additional discussion under the Operating Results  Selling, General and
  Administrative section);
- Increases in product research and development (PR&D) (see additional
  discussion under Operating Results  Product Research and Development
  section);
- An impairment of software development costs (see additional discussion
  under the Operating Results  Impairment of Software Development Costs
  section); offset by
- Decrease in income tax expense (see additional discussion under the
  Operating Results  Income Tax Expense section);
- Increase in revenues (see additional discussion under the Operating
  Results  Revenue section); and
- Decrease in business taxes (see additional discussion under the Operating
  Results  Business Taxes section).

In 2007, the Company focused on optimizing the Companys costs
while working to increase revenues in all product lines. As a result, the
Companys loss from continuing operations decreased in 2007 by 41 percent from
2006. This decrease resulted from the following:

- Increase in revenues of 11 percent compared to 2006 (see additional
  discussion under the Operating Results  Revenue section);
- Decreases in SG&A costs (see additional discussion under the
  Operating Results  Selling, General and Administrative section);
- Decreases in PR&D costs (see additional discussion under Operating
  Results  Product Research and Development section); and
- Significant decrease in bad debt expense; offset by
- Increases in business taxes (see additional discussion under the
  Operating Results  Business Taxes section).

Quarterly Overview

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

|                                               |   | Fourth  |  |   | Third   |  |   | Second  |  |   | First   | 
|---------------------------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- | 
|                                               |   | Quarter |  |   | Quarter |  |   | Quarter |  |   | Quarter | 
|                                               |   | 2008    |  |   | 2008    |  |   | 2008    |  |   | 2008    | 
|(In millions, except per share amounts)        |   |         |  |   |         |  |   |         |  |   |         | 
|Revenues                                       | $ | 3.3     |  | $ | 4.2     |  | $ | 2.7     |  | $ | 3.0     | 
|Selling, general and administrative            |   | 2.7     |  |   | 3.1     |  |   | 2.7     |  |   | 2.8     | 
|Business Taxes                                 |   | 0.4     |  |   | 0.4     |  |   | 0.2     |  |   | 0.0     | 
|Legal                                          |   | 1.1     |  |   | 0.5     |  |   | 0.3     |  |   | 0.2     | 
|Product, research and
      development        |   | 0.7     |  |   | 0.8     |  |   | 0.8     |  |   | 0.7     | 
|Depreciation and amortization                  |   | 0.4     |  |   | 0.4     |  |   | 0.4     |  |   | 0.4     | 
|Impairment of software
      development costs |   | 1.4     |  |   |        |  |   |        |  |   |        | 

|Operating loss                           |   | 3.5  |  |   | 0.9  |  |   | 1.7  |  |   | 1.1  | 
|---------------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- | 
|Loss from continuing
      operations    |   | 3.5  |  |   | 1.0  |  |   | 1.5  |  |   | 1.1  | 
|Net loss                                 | $ | 3.9  |  | $ | 1.0  |  | $ | 1.5  |  | $ | 1.1  | 
|Loss per share - Basic and
      diluted | $ | 0.08 |  | $ | 0.02 |  | $ | 0.03 |  | $ | 0.02 | 

- 35
      -

---



|                                              |   |         |  |   |         |  |   |         |  |   |         | 
|--------------------------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- | 
|                                              |   | Fourth  |  |   | Third   |  |   | Second  |  |   | First   | 
|                                              |   | Quarter |  |   | Quarter |  |   | Quarter |  |   | Quarter | 
|                                              |   | 2007    |  |   | 2007    |  |   | 2007    |  |   | 2007    | 
|(In millions, except per
      share amounts) |   |         |  |   |         |  |   |         |  |   |         | 
|Revenues                                      | $ | 3.6     |  | $ | 3.4     |  | $ | 3.5     |  | $ | 2.6     | 
|Selling, general and
      administrative     |   | 3.0     |  |   | 2.3     |  |   | 2.7     |  |   | 2.5     | 
|Business taxes                                |   | 0.7     |  |   | 0.1     |  |   | 0.3     |  |   | 0.2     | 
|Legal                                         |   | 0.6     |  |   | 0.5     |  |   | 0.4     |  |   | 0.4     | 
|Product, research and
      development       |   | 0.7     |  |   | 0.6     |  |   | 0.6     |  |   | 0.5     | 
|Depreciation and amortization                 |   | 0.4     |  |   | 0.4     |  |   | 0.4     |  |   | 0.5     | 
|Operating loss                                |   | 1.8     |  |   | 0.6     |  |   | 0.9     |  |   | 1.5     | 
|Loss from continuing
      operations         |   | 1.7     |  |   | 1.3     |  |   | 1.2     |  |   | 1.6     | 
|Net loss                                      | $ | 1.7     |  | $ | 1.3     |  | $ | 1.2     |  | $ | 1.0     | 
|Loss per share - Basic and
      diluted      | $ | 0.03    |  | $ | 0.02    |  | $ | 0.02    |  | $ | 0.02    | 

The net loss in the fourth quarter of 2008 was $3.9 million, or
a loss per basic and diluted share of $0.08, compared to a net loss of $1.0
million, or a loss of $0.02 per basic and diluted share, in the third quarter of
2008, an increase of 305 percent resulting primarily from a decrease in revenue,
an increase in legal expenses, and an impairment in software development costs,
partially offset by decreases in SG&A costs.

Revenues in the fourth quarter of 2008 were $3.3 million. This
compares to the 2008 third quarter revenues of $4.2 million, a decrease of 22
percent. The decrease in revenues resulted from the third quarter of 2008
benefiting from revenues that would have been recognized in the second quarter
of 2008 had certain contract negotiations been completed by June 30, 2008, and
from the recent financial crisis which had a significant impact on the fourth
quarter royalties reported by customers.

SG&A expense for the 2008 fourth quarter was $2.7 million
compared to $3.1 million in the third quarter of 2008, a decrease of 11 percent.
The decrease is due primarily to a reduction in staffing levels, lower bonuses
and commissions for employees and sales agents. Further to this, the Company
also benefited from the recent appreciation of the U.S. dollar which reduced the
Companys operating costs in Canada.

Business taxes for the 2008 fourth quarter were $0.4 million
compared to $0.4 million in the third quarter of 2008. While the business taxes
remained relatively stable, business taxes relating to the repatriation of cash
from the Companys Chinese subsidiaries through inter-company royalties have
increased. This increase has been offset with reduced taxes from lower
royalties.

Legal expense for the 2008 fourth quarter was $1.1 million
compared to $0.5 million in the third quarter of 2008. The increase is due to
additional legal expenses related to the Nuance patent infringement claims, and
the take-over bid by Nuance and subsequent negotiations.

- 36 -

---



|Operating Results                                |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|------------------------------------------------ | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                                 |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Revenues                                         |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|                                                 |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|                                                 |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|                                                 |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                                 |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except
      percentages)          |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Royalties, license and
      implementation fees | $ | 13.3 |  | $ | 13.1 |  | $ | 11.8 |  |  | 2%          |  |  | 11%         | 

Revenues have increased marginally in 2008 compared to 2007.
The increase resulted from:

- The renewal and renegotiation of agreements with some of the Companys
  significant customers which resulted in an increase in the Companys year over
  year revenues (see additional discussion under the Recent Developments
  section); offset by
- A decrease in units reported in the second half 2008 due to the
  unfavorable economic environment; and
- From 2007 benefitting from a one-time settlement of under-reported
  royalties.

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

- An increase in royalties from the Companys customers reporting more units
  shipped in which the Companys technology is embedded;
- A settlement relating to under-reported royalties by a significant
  customer; and
- New agreements with both new and existing clients.

The Company expects to continue to increase its recurring
revenues as it continues to conduct trials and market Qix. As a result of its
marketing efforts, the Company announced a new Qix agreement with TELUS in
February 2008, followed by first shipments of Qix on TELUS phones in October
2008. The Company believes this agreement validates its Qix technology to the
market and will be beneficial in marketing Qix to other potential customers.

As the global economic downturn diminishes the ARPU benefit for
carriers, the Company is adjusting its strategy by segmenting Qix into different
products to meet the customer specific requirements of OEMs and ODMs whose
business models more easily integrates Qix onto mobile devices. Given the
current economic downturn, there is significant uncertainty the Company will be
successful in marketing Qix to OEMS and ODMs.

The Company continues to make progress in licensing Decuma. One
of the Companys major customers shipped a significant number of units with
Decuma embedded in 2008. Additionally, a major customer started shipping units
with Decuma embedded in the fourth quarter of 2008.

Zi has also been successful in signing new and renewed license
agreements with its Predictive Text products  eZiText and eZiType. Some of
these agreements have been renewed with significant increases in revenues. It
should be noted, however, that some of these agreements contain early
termination clauses for changes in control. In the event an acquirer assumes
control of 25 percent or greater ownership in the Company, these early
termination clauses may be executed, which would probably negatively impact the
Companys future revenues. The early termination of any contract will not
affect revenues earned prior to the termination.

Revenues by Product and Classification

The Companys revenues are derived from three product groups:
Predictive Text - eZiText and eZiType; handwriting recognition -Decuma; and
mobile search and discovery - Qix. For the year ended December 31, 2008, 92
percent of the Companys revenues were derived from Predictive Text compared to
96 percent in the same period in 2007. The remaining portion was derived from
Decuma and Qix. The Company successfully signed a Qix deal with TELUS in the
first quarter of 2008 and reported its first revenues under this agreement in
the fourth quarter of 2008. The Company expects the percentage of revenues from
Decuma and Qix to increase in 2009 due to two factors  higher volumes of both
products and both Decuma and Qix commanding higher average selling prices than
Predictive Text.

The Company classifies revenues as software licensing
royalties, license and implementation fees, and maintenance and support fees.
Software licensing royalties are ongoing revenues based on the number of units
shipped in which the Companys technology is embedded. License and
implementation fees are one time fees charged at the outset of the relationship
for licensing the Companys technology and for providing services with
implementing or customizing the Companys technology for use on customer
platforms.

- 37 -

---

Maintenance and support fees are generated as those services
are provided. The following table sets forth the Companys percentage of revenue
by classification.

|                                      |  |      |  |  |      |  |  |      |  |  | Percent     |  |  | Percent     | 
|------------------------------------- |  | ---- |  |  | ---- |  |  | ---- |  |  | ----------- |  |  | ----------- | 
|                                      |  |      |  |  |      |  |  |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                      |  | 2008 |  |  | 2007 |  |  | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In percentages)                      |  |      |  |  |      |  |  |      |  |  |             |  |  |             | 
|Software licensing royalties          |  | 91%  |  |  | 82%  |  |  | 78%  |  |  | 13%         |  |  | 5%          | 
|License and implementation
      fees |  | 6%   |  |  | 13%  |  |  | 18%  |  |  | -55%        |  |  | -25%        | 
|Maintenance and support fees          |  | 3%   |  |  | 4%   |  |  | 4%   |  |  | -22%        |  |  | 7%          | 

The percentage of revenues from royalties in 2008 has increased
to 91 percent compared to 82 percent for the same period in 2007. Royalties are
increasing as the Company benefits from negotiating favorable contract terms
with existing customers, and customers continuing to embed the Companys
technology in their products who are also experiencing increasing volumes.
Revenues from license and implementation, and maintenance and service fees as a
percentage of total revenues has declined compared to prior years. The decrease
results from the economic recession and the competitive nature of the market
resulting in pricing pressure on the Companys license and implementation, and
maintenance and services fees. License and implementation fees can also
fluctuate significantly as they are one time fees that depend on the date
contracts are signed and subsequent delivery of services. As the Company
continues to market the Companys new Qix and Decuma technologies, the
percentage of royalties derived from total revenues is expected to remain high.

Revenues by Geographic Region

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

|                                        |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|--------------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                        |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                        |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except
      percentages) |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Canada                                  | $ | 7.2  |  | $ | 5.5  |  | $ | 5.8  |  |  | 31%         |  |  | -5%         | 
|United States                           |   | 0.7  |  |   | 1.0  |  |   | 0.9  |  |  | -35%        |  |  | 11%         | 
|Asia                                    |   | 5.0  |  |   | 6.0  |  |   | 4.8  |  |  | -16%        |  |  | 26%         | 
|Sweden                                  |   | 0.4  |  |   | 0.6  |  |   | 0.3  |  |  | -34%        |  |  | 84%         | 

The following table sets forth Zis revenues attributable to
the Companys customers on the regions in which they reside for the year ended
December 31:

|                                  |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|--------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                  |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                  |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages) |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Asia                              | $ | 6.6  |  | $ | 7.4  |  | $ | 6.7  |  |  | -10%        |  |  | 11%         | 
|Europe                            |   | 6.0  |  |   | 4.2  |  |   | 3.9  |  |  | 44%         |  |  | 7%          | 
|North America                     |   | 0.7  |  |   | 1.5  |  |   | 1.2  |  |  | -54%        |  |  | 19%         | 

Revenues have increased from Zis European customers from
successfully renewing fixed fee contracts with existing customers at higher
revenue levels. Revenues have decreased from Asian customers due to the
competitive nature of the Asian market. Revenues have decreased in North America
due to a significant customer reporting fewer units with the Companys
technology embedded.

- 38 -

---

Significant Customers

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

|                           |  |      |  |  |      |  |  |      |  |  | Percent     |  |  | Percent     | 
|-------------------------- |  | ---- |  |  | ---- |  |  | ---- |  |  | ----------- |  |  | ----------- | 
|                           |  |      |  |  |      |  |  |      |  |  | Change 2008 |  |  | Change 2007 | 
|                           |  | 2008 |  |  | 2007 |  |  | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In percentages)           |  |      |  |  |      |  |  |      |  |  |             |  |  |             | 
|Significant customer
    1 |  | 32%  |  |  | 23%  |  |  | 27%  |  |  | 39%         |  |  | -14%        | 
|Significant customer 2     |  | 12%  |  |  | 10%  |  |  | 10%  |  |  | 27%         |  |  | -3%         | 
|Significant customer
    3 |  | 12%  |  |  | 9%   |  |  | 4%   |  |  | 35%         |  |  | 97%         | 
|Top five customers         |  | 74%  |  |  | 58%  |  |  | 50%  |  |  | 27%         |  |  | 14%         | 

Revenues from the top five customers in 2008 have increased to
74 percent of total revenues from 58 percent in 2007. This upward trend reflects
the renegotiation and renewal of contracts with the Companys largest customers.
The Company expects the largest customers to continue to contribute a
significant portion of the Companys revenue.

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

|Selling, General and
      Administrative Expenses                                               |  
|------------------------------------------------------------------------------------------------ | -
|                                                                                                 |  
|                                                                                                 |  
|                                                                                                 |  
|(In millions, except percentages)                                                                |  
|Selling, general &
      administration                                                          | $
|The above table has been
      reclassified to reflect that business taxes are shown separately. |  

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

SG&A expenses in 2008 have increased by 7% percent compared
to the same period in 2007 for the following reasons:

- An increase in compensation costs including salaries, bonuses, and stock
  compensation expenses;
- An increase in consulting and agency fees;
- An increase in rental expense; offset by
- A decrease in professional fees as the Company completed its review of the
  cross-border transactions for the Canada Revenue Agency (CRA).

SG&A costs in 2007 have decreased marginally compared to
2006. The Companys costs decreased primarily due to:

- A reduction in the Companys recruitment and insurance costs;
- A significant decrease in the Companys bad debt expense; offset by
- A general increase due to appreciation of the Canadian dollar, in which
  denomination a large portion of the Companys expenses are incurred, against
  the U.S. dollar (see additional discussion under the Operating Results 
  Foreign Currency section);
- An increase in professional fees relating to the examination of the
  Companys cross-border transaction by CRA;
- An increase in professional fees relating to Sarbanes-Oxley 404 ("SOX")
  compliance in order to ensure timely compliance and confirm managements
  assessment of internal controls;
- An increase in rental expense; and
- An increase in commissions.

The Company is committed to cost optimization and has been
successful in reducing or containing certain costs, but has been affected by
external factors as they relate to other costs. With the advent of the global
recession, the Company has executed a business plan to reduce its costs wherever
possible. As a result, the Company expects to see reductions in its SG&A
costs in 2009.

- 39 -

---



|Business Taxes                          |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|--------------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                        |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|                                        |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                        |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except
      percentages) |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Business taxes                          | $ | 0.9  |  | $ | 1.3  |  | $ | 0.9  |  |  | -25%        |  |  | 36%         | 

Business taxes include withholding and value added taxes.
Withholding taxes represent amounts remitted to foreign governments for revenues
earned in those jurisdictions with which the Company does not have a permanent
establishment and withholding taxes applied to the Companys inter-company
royalties. Value added taxes represent taxes collected from the Companys
customers in China and remitted to the Peoples Republic of China (PRC) tax
authorities.

Business taxes in 2008 have decreased by 25 percent compared to
the same period in 2007 as a result of:

- Revenues earned from a geographic region with lower withholding taxes; and
- Business taxes incurred in 2007 for the receipt of inter-company royalties
  relating from prior years from the Companys Chinese subsidiaries.

Business taxes in 2007 have increased significantly compared to
2006. The Companys costs have increased primarily due to:

- Business taxes payable with respect to the Companys inter-company royalty
  program. These royalties relate to China revenues dating back to 2005 and thus
  a large portion of this expense can be considered one-time in nature; and
- Increases in revenues upon which the Companys business taxes are
  calculated.

|Legal                                   |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|--------------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                        |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|                                        |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                        |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except
      percentages) |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Legal                                   | $ | 2.1  |  | $ | 1.9  |  | $ | 3.4  |  |  | 10%         |  |  | -42%        | 

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

Legal expenses have increased in 2008 compared to 2007 due
primarily to the Nuance litigation announced in the third quarter of 2008, as
well as Nuances take-over bid and related proposals and discussion. This
increase has been offset by the termination of the U of T litigation in the
Companys favor (see additional discussion under Litigation/Indemnification
section).

Legal costs decreased in 2007 compared to 2006 as a result of
the successful conclusion of the U of T litigation. While the Company did
receive the order of non-infringement, the litigation was still on going in 2007
and the Company still incurred expenses related to its defense (see additional
discussion under the Litigation/Indemnification section).

In addition, legal fees were lower as a result of the
completion of the settlement agreement entered into with the Receiver of the
Lancer Entities which became effective on April 10, 2007 (see additional
discussion under Item 3  Legal Proceedings).

Product Research and Development Expense

|                                             |   |      |   |   |      |   |   |      |   |  | Percent     |  |  | Percent     | 
|-------------------------------------------- | - | ---- | - | - | ---- | - | - | ---- | - |  | ----------- |  |  | ----------- | 
|                                             |   |      |   |   |      |   |   |      |   |  | Change 2008 |  |  | Change 2007 | 
|                                             |   | 2008 |   |   | 2007 |   |   | 2006 |   |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages)            |   |      |   |   |      |   |   |      |   |  |             |  |  |             | 
|Gross product research and
      development | $ | 4.1  |   | $ | 4.1  |   | $ | 5.1  |   |  | 1%          |  |  | -20%        | 
|Capitalized costs                            |   | (1.2 | ) |   | (1.7 | ) |   | (1.4 | ) |  | -25%        |  |  | 16%         | 
|Product research and
      development       |   | 2.9  |   |   | 2.4  |   |   | 3.7  |   |  | 18%         |  |  | -35%        | 

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

- 40 -

---

Gross expenditures on product development (expenditures before
capitalization of costs related to new product development) have increased
slightly in 2008, compared to 2007. Gross expenditures are expected to be lower
in 2009 as the Company has executed a business plan to adjust its costs in light
of the global economic downturn.

It should be noted that the Company commercially released a
significant number of new products in the third quarter of 2008 which will
affect the Companys ability to defer future costs. Accordingly, the amount of
costs capitalized to deferred software costs is lower. Additionally, the Company
recorded an impairment provision for Qix as at December 31, 2008 which may limit
the amount of additional development costs that may be capitalized in the future
(see additional discussion under the Operating Results Impairment of Software
Development Costs section).

Gross expenditures on product development (expenditures before
capitalization of costs related to new product development) decreased by $1.0
million in 2007, compared to the same period in 2006, for the following
reasons:

- Decrease in salary, employment benefits, travel, and stock-based
  compensation cost caused by the elimination of an executive position; and
- Decrease in consulting fees as a result of reduced language database
  development and less reliance on consulting services in the development of
  Qix.

The Company will continue to incur costs in all of the
Companys product lines to add additional features, language databases, and to
implement on additional platforms. In addition, the Company expects to incur
costs for research and development related to potential new products. The
Company expects that PR&D expenses will continue to increase moderately in
the future as the Companys products are introduced into the market.

|Depreciation and Amortization                             |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|--------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                                          |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|                                                          |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|                                                          |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                                          |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages)                         |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Depreciation                                              | $ | 0.3  |  | $ | 0.3  |  | $ | 0.4  |  |  | -20%        |  |  | -22%        | 
|Amortization of deferred software development
      costs |   | 1.1  |  |   | 1.2  |  |   | 1.1  |  |  | -3%         |  |  | 7%          | 
|Amortization of other
      intangibles                   |   | 0.2  |  |   | 0.2  |  |   | 0.2  |  |  | 3%          |  |  | 8%          | 

The table above sets out the components of depreciation and
amortization expense.

Depreciation and amortization expense in 2008 has decreased
slightly compared to the same period in 2007 due to prior deferred software
development costs being completely amortized, thereby reducing the expense.
Depreciation and amortization expense increases when a product is commercially
released as the release of that product initiates the amortization of those
costs. When a product is fully amortized, the future depreciation and
amortization expense decreases as those costs have been completely expensed.

Given the impairment provision recorded for Qix, the
amortization expense in future periods is expected to be significantly lower
compared to 2008.

Depreciation and amortization expense in 2007 has remained
stable compared to the same period in 2006. Depreciation on furniture and office
equipment has decreased compared to 2006 due to prior capitalized furniture and
equipment costs being completely amortized, thereby reducing the expense. The
reduction for furniture and office equipment has been offset with increases in
the depreciation and amortization expense for deferred software costs and
intangibles.

|Impairment of Software Development
      Costs |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|---------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                               |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|                                               |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|                                               |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                               |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages)              |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Impairment of software
      development costs | $ | 1.4  |  | $ | 0.0  |  | $ | 0.0  |  |  | 100%        |  |  | 0%          | 

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 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. Based on
this review, the Company recorded an impairment charge of $1.4 million in
relation to its Qix product line.

- 41 -

---

The Company considers factors such as significant changes in
the business climate and projected discounted cash flows in determining the fair
value of software development costs. Based on the current challenging economic
environment and the Companys limited success in closing revenue generating Qix
agreements, it was determined that Qix was impaired.

The Company maintains a value of $0.4 million for Qix as at
December 31, 2008. The Company believes that a full write down is not warranted
as Qix still has  value. This value is evidenced through the
Companys pipeline of potential agreements, the re-focus of its market strategy
to target OEMs and ODMs, the segregation of Qix into separate products to meet
individual customer needs, and expected trends in the industry.

The Company will continue to the monitor the economic
environment and will re-evaluate Qix for further impairment.

Interest and Other Income

Interest and other income consist primarily of income from the
Companys interest bearing deposits. Interest and other income declined in 2008
and 2007 compared to their respective prior periods as average cash position
decreased from 2007 and 2006 respectively.

Income Tax Expense

|                                  |   |      |  |   |      |  |   |      |  |  | Percent     |  |  | Percent     | 
|--------------------------------- | - | ---- |  | - | ---- |  | - | ---- |  |  | ----------- |  |  | ----------- | 
|                                  |   |      |  |   |      |  |   |      |  |  | Change 2008 |  |  | Change 2007 | 
|                                  |   | 2008 |  |   | 2007 |  |   | 2006 |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages) |   |      |  |   |      |  |   |      |  |  |             |  |  |             | 
|Income tax                        | $ | 0.2  |  | $ | 1.0  |  | $ | 0.9  |  |  | -78%        |  |  | 17%         | 

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

Income tax expense for 2008 is $0.2 million, compared to $1.0
million in 2007. This decrease resulted primarily from the partial reversal of a
penalty accrual of $0.7 million recorded in the third quarter of 2007 relating
to the audit by the CRA of the Companys cross border transactions which is
discussed further below, and from a shift in revenue from the Companys taxable
Chinese subsidiary to the Companys Chinese subsidiary that is currently
benefiting from certain tax incentives. The Chinese subsidiaries were able to
deduct inter-company royalties which reduced the income tax payable by those
subsidiaries. These benefits were offset with a tax provision of $0.3 million
relating to a re-assessment of prior year taxes by the Inland Revenue Department
(IRD) for one of the Companys Hong Kong subsidiaries.

Income tax expense for 2007 is $1.0 million, compared to $0.9
million in 2006. The increase resulted from an accrual of $0.7 million in 2007
relating to the audit of the Companys cross border transactions by the CRA as
discussed below. The increase was mostly offset with a decrease in taxes
incurred by the Companys Chinese subsidiaries. The decrease resulted from
reduced profits in that subsidiary. It should be noted that this reduction in
profit was offset by increased profits in another Chinese subsidiary which has
qualified for favorable tax rates.

The Hong Kong IRD reviewed a prior year (2002-2003) transaction
relating to the transfer of intangible property from a Hong Kong subsidiary to a
Canadian subsidiary in consideration for the settlement of inter-company debt.
The Company and its tax advisors determined that the transaction was not
taxable. The IRD completed its review and determined that the transaction was
taxable, and reassessed the Company $248,576 in taxes. 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 and its current tax advisors believe that the initial interpretation is
correct, and plans to file an objection, 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.

- 42 -

---

The CRA commenced an examination of the Companys international transfer pricing policies and procedures and documentation for 2002 and 2003 in the second quarter of 2006. The Company prepared a submission for the 2002 and 2003 taxation years,
which was submitted to the CRA on July 10, 2007. In accordance with FIN 48, the Company accrued a provision of $652,278 in the Companys current liabilities in the third quarter of 2007 which represented possible penalties and interest,
assuming that the methodology used in the submission to the CRA with regard to the 2002 and 2003 taxation years was then applied to all tax years that were open in Canada at that time. As the Companys international transfer pricing adjustments
did not result in changes to tax payable, the Company proposed that no penalties or interest be charged. On July 19, 2008, the Company received an official letter from the CRA accepting the Companys submission as filed, including the decision
that no adjustments were required. In accordance with the CRAs acceptance of the Companys submission, the Company reversed $212,077 of the provision in the second quarter of 2008 for the 2002 and 2003 taxation years. It should be
noted that the Company had already reversed $58,061 in the first quarter of 2008 due to a prior year becoming statute barred. Further to this, on January 1, 2009, the 2001 taxation year has also become statute barred, and accordingly, the
Company will reverse an additional CDN $95,900 of the tax provision.

As of December 31, 2008, in accordance with FIN 48, the Company carries a provision of $306,265 representing the taxation years that remain open. The Company believes the likelihood of eventually paying tax relating to such provision is minimal,
as proven by the results of the now completed audit of 2002 and 2003. However, the Company is required by FIN 48 to maintain this tax provision for all open taxation years until they become statute barred or are effectively settled.

The tax incentives for the Companys new Chinese subsidiary will begin to be phased out after 2008. Accordingly, the subsidiarys income will become taxable for taxation years after 2008. The effective tax rate from 2009 to 2011 is
expected to be 7.5 percent, which is lower than the general PRC corporate tax rate of 25 percent. The rate is then expected to increase for 2012 and subsequent years and could eventually reach the corporate tax rate of 25 percent. However, the
implementation of the Companys inter-company royalty program effectively results in the opportunity to remove a substantial portion of taxable income from the Companys Chinese subsidiaries; thus the Company expects income tax expense
relating to the Companys operations in China to continue to be lower than historical levels.

The Company has net operating loss carry forwards of approximately $47.0 million, can be applied against future years' taxable income in their respective jurisdictions. A full valuation allowance has been recorded on the loss carry forwards due
to the Companys history of losses. In addition, the Company has $51.7 million of capital losses carry forward which are available to offset Canadian capital gains in future years. Taxable income earned by the Companys foreign
subsidiaries is subject to the Canadian foreign affiliate rules. For Canadian companies, there is no additional Canadian income tax on repatriated profits from active business operations in countries with which Canada has a tax treaty.

Discontinued Operations

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

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

The completion of this sale represents the end of the Companys involvement in the e-Learning business segment. As a result, for the three month period ended March 31, 2007 and the year ended December 31, 2006, the e-Learning business segment
has been reclassified to discontinued operations.

Impact of Inflation and Changing Prices
Inflation is not a major factor affecting operations.

Impact of Governmental Policies and Other Factors on Operations and Investments

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

- 43 -

---



|Liquidity and Capital Resources         |   |       |  |   |       |  |   |       |  |  |             |  |  |             | 
|--------------------------------------- | - | ----- |  | - | ----- |  | - | ----- |  |  | ----------- |  |  | ----------- | 
|                                        |   |       |  |   |       |  |   |       |  |  |             |  |  |             | 
|Financial Condition and
      Liquidity |   |       |  |   |       |  |   |       |  |  |             |  |  |             | 
|                                        |   |       |  |   |       |  |   |       |  |  | Percent     |  |  | Percent     | 
|                                        |   |       |  |   |       |  |   |       |  |  | Change 2008 |  |  | Change 2007 | 
|                                        |   | 2008  |  |   | 2007  |  |   | 2006  |  |  | versus 2007 |  |  | versus 2006 | 
|(In millions, except percentages)       |   |       |  |   |       |  |   |       |  |  |             |  |  |             | 
|Cash and cash
      equivalents         | $ | 3.2   |  | $ | 5.0   |  | $ | 1.7   |  |  | -36%        |  |  | 198%        | 
|Net Cash provided by (used in):         |   |       |  |   |       |  |   |       |  |  |             |  |  |             | 
|Operating
      activities              |   | (3.2) |  |   | 0.3   |  |   | (7.3) |  |  | -1075%      |  |  | -105%       | 
|Financing activities                    |   |      |  |   | 4.6   |  |   | 1.0   |  |  | -100%       |  |  | 366%        | 
|Investing
      activities              |   | 1.2   |  |   | (1.9) |  |   | (3.7) |  |  | 161%        |  |  | -49%        | 
|Cash Requirements Outlook               |   |       |  |   |       |  |   |       |  |  |             |  |  |             | 

At December 31, 2008, the Company had cash and cash equivalents
of $3.2 million compared to $5.0 million as at December 31, 2007. Cash has
decreased in 2008 through the Companys operating activities. Restricted cash is
nil as the Company was successful in implementing its inter-company royalty
program, which is discussed further below in this section.

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

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

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

In the first quarter of 2007, the Company completed private
placements for net proceeds of $5,533,644. The Companys business plan includes
achieving profitability through cost containment and revenue growth. In
addition, the Company was successful in establishing, with the Chinese
governments approval, an inter-company royalty program, the effect of which
will be that all cash held in the Companys Chinese subsidiaries, along with all
other cash of the Company, will effectively be available to fund the day-to-day
operations of the Company.

Given the Companys success in signing new contracts and
renewing contracts with favorable year over year revenue increases as well as
beneficial payment structures, the Company may not need additional capital to
support the Companys operations, provided that the Company can become
profitable in the near future. The Company plans to generate positive cash from
operations in the future (see additional discussion under the Critical
Accounting Policies and Estimates  Going Concern Basis section). The Company
will continue to consider various alternatives to address the Companys capital
requirements, including consummation of contracts for new revenue leading to
achievement of profitable operations, as well as, if necessary or beneficial,
seeking financial resources in the capital markets. The ability of the Company
to obtain financing, if at all, that is not cost prohibitive, may be severely
compromised for the foreseeable future.

Economic Environment

The second half of 2008 was dominated by changes to the
economic environment which started with the U.S. sub-prime mortgage crisis,
which has grown into a worldwide economic crisis. The crisis has resulted in an
expected and difficult worldwide recession. The result is the disappearance of
once famous financial institutions, plunging stock market values, and the lack
of available credit.

The Company is currently implementing its strategy to manage
this environment. The Company is implementing its strategy by continuing to
market Qix and Decuma, and is reviewing its market strategy and segregating its
products where applicable to meet
customers specific needs. The Company is also executing a business plan to adjust its cost structure, which includes the reduction of discretionary costs such as investor relations, consulting, travel, and staffing levels. The reduction in
staffing levels started to take effect in the fourth quarter of 2008. Accordingly, the Company has recorded $43,103 in employee severance costs in 2008. The remaining reduction of staffing levels will be completed in 2009, and the Company
expects to incur an additional $170,714 in employee severance costs. Once the adjustments to staffing levels are complete, the Company estimates the cost savings to be approximately $0.7 million per annum.

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With the reduction in staffing levels, the Company is re-organizing its internal structure to become more efficient. These efficiencies will allow the Company to continue to develop the Companys products and meet client expectations while
maintaining a lower cost structure.

The Company recorded an impairment charge of $1.4 million in relation to its Qix product line as discussed previously. The Company believes that a full write down was not warranted as Qix still has
significant value. The Company will continue to monitor the economic environment and record any adjustments as necessary in future periods.

While the Company believes the mobile phone market will soften in 2009, the Company also believes the smartphone market will continue to grow. Given the complexity of smartphones, the Companys products are well suited to make smartphones
easier and more intuitive to use. In addition, the Company was successful in securing a number of significant fixed revenue agreements in 2008 which increased the Companys year over year revenues compared to previous years. These fixed fee
contracts reduce a significant amount of revenue volatility compared to the previous contracts that were variable in nature.

As the Company continues to grow revenues, aggressively reduce costs, and as fixed fee revenues increase as a percentage of total revenue, the Company believes it is positioning itself to manage the financial crisis. The Company plans to continue to
monitor the mobile industry, identify additional cost reductions as necessary, and generate cash internally to meet its obligations.

Restricted Cash

Funds held in one of the Companys Chinese subsidiaries had previously been classified as restricted because it was not fully available to fund operations of the Company outside of China. In the first quarter of 2008, the Company was successful
in establishing an inter-company royalty program pursuant to which the Company transferred to Canada most of the cash balances held by its subsidiary in China, which were previously classified as restricted cash. The continued existence of the
inter-company royalty program allows the Company to classify cash balances in China as cash and cash equivalents rather than restricted cash. The Company expects to be able to continue such classification of cash in the future. Accordingly, all cash
balances as at December 31, 2008 are classified as available cash.

The Company had nil restricted cash as at December 31, 2008 compared to $2,740,702 as at December 31, 2007.

Bank Indebtedness

In September 2008, the Company secured a $1,250,000 credit facility with the Companys principal bank, HSBC Bank Canada (HSBC). The loan is secured by a single trade receivable, and is insured by Export Development Canada. The
loan is due on demand, or the earlier of the collection of the receivable or October 31, 2008. The loan is also secured by a first priority interest in all capital assets of the Company and bears interest at HSBCs base U.S. rate plus 1
percent. The loan and accrued interest thereon was repaid in full on October 16, 2008.

In December 2007, the Company secured a $2,000,000 credit facility with HSBC. The loan was secured by a single trade receivable which was insured by Export Development Canada. The outstanding amount on the loan was due on demand, or the earlier
of the collection of the receivable, or January 31, 2008. The loan was received and repaid with interest at the banks U.S. base rate plus 0.5 percent in December 2007.

In December 2006, the Company secured a $1,000,000 credit facility with HSBC. The loan was secured by a single trade receivable, and was insured by Export Development Canada. The outstanding amount on the loan was due on demand, or the earlier
of the collection of the receivable or March 1, 2007. The loan was secured by a first priority interest in all capital assets of the Company, and bore interest at LIBOR plus 2 percent. The loan and accrued interest thereon was repaid in full on
January 10, 2007.

The proceeds from the above credit facilities were used to augment the Companys cash balances for operating purposes.

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Cash Flows - Summary

During the year ended December 31, 2008, the Companys available cash balances decreased by $1.8 million primarily represented by:

- $3.4 million in cash losses from continuing operations (i.e., $7.4 million loss from continuing operations less $4.0 million of non-cash expenses including depreciation and amortization expense, stock compensation expense, and an
impairment to software development costs); and
- $1.6 million in deferred software development costs and capital asset additions; offset by
- $2.7 million from the reclassification of restricted cash to non-restricted;
- $0.3 million foreign exchange gains from foreign cash balances; and
- $0.2 million decrease in non-cash working capital, ($0.6 million decrease in accounts receivable and prepaid expenses, offset by a $0.4 million decrease in deferred revenue and deferred taxes).

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

- $5.6 million increase in cash from financing activities resulting from the net proceeds of the Companys private placement and exercise of stock options;
- $3.6 million decrease in non-cash working capital, ($3.1 million decrease in accounts receivable and prepaid expenses, a $0.6 million increase in accounts payable and accrued liabilities, offset by a $0.1 million decrease in deferred
revenue and future income taxes);
- $0.6 million gain from the sale of Archer (see additional discussion under the Operating Results  Discontinued Operations section); offset by
- $3.0 million in cash losses from continuing operations (i.e., $5.7 million loss from continuing operations less $2.7 million of non-cash expenses including depreciation and amortization expense and stock compensation expense);
- $2.0 million in deferred software development costs and capital asset additions;
- $1.0 million in repayment of indebtedness; and
- $0.6 million increase in restricted cash.

It should be noted that the Companys non-cash working capital has increased slightly in 2008 compared to 2007. Non-cash working capital decreased in 2007 by benefiting from the collection of a significant annual receivable from an individual
customer twice within the same year.

Cash applied to Operating Activities

Cash used in operating activities in 2008 was $3.2 million, a decrease of $3.5 million when compared to the $0.3 million received in operating activities in 2007. The increase in uses of cash results from an increased investment in
non-cash working capital, the majority relating to a significant receivable from one of the Companys largest customers.

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

Financing Activities

In 2008, the Company received $1.25 million in financing from a credit facility. The credit facility was due on demand or the earlier of the collection of a significant receivable or October 31, 2008. The amount with interest thereon was repaid
on October 16, 2008.

In 2007, the Company received a net amount of $4.6 million from the Companys financing activities, which included $5.6 million in net proceeds from the issuance of shares from a private placement and the exercise of stock options,
offset by the repayment of $1.0 million in bank indebtedness from year ended December 31, 2006. The bank credit facility was terminated upon repayment of the $1.0 million.

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

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Investing Activities

The Company received $1.2 million from investing activities in
2008 compared to using $2.5 million in 2007, an increase of $3.7 million. The
increase resulted primarily from the implementation of the Companys
inter-company royalty program in 2008 which allowed the Company to record all
cash balances as non-restricted. Accordingly, the Company reclassified $2.7
million from restricted to non-restricted in the first quarter of 2008

The Company used $2.6 million in investing activities in 2007
compared to using 3.3 million in 2006, a decrease of $0.7 million compared to
2006. The decrease is due primarily to a relative decrease in the amount of cash
classified as restricted. In 2007 the restricted cash balance increased by $0.6
million, compared to an increase of $1.5 million in 2006, a relative change of
$0.9 million. This benefit was offset by an increase in cash used to purchase
capital assets and for deferred software development costs.

Commitments and Contractual Obligations

As at December 31, 2008 and December 31, 2007, the Company did
not have any long-term debt.

The Company rents premises under operating leases, which expire
at various dates up to June 2012. Annual rental payments under these leases for
each of the next five years are as follows:

|                                                                                         |  | Payments due by
      Period | 
|---------------------------------------------------------------------------------------- |  | ---------------------------- | 
|Contractual obligations                                                                  |  |                              | 
|                                                                                         |  | Total                        | 
|Long term debt obligations                                                               |  |                             | 
|Capital lease obligations                                                                |  |                             | 
|Operating lease obligations                                                              |  | 2,330,829                    | 
|Purchase obligations                                                                     |  |                             | 
|Other Long-Term Liabilities
      Reflected on the Registrant's Balance Sheet under GAAP |  |                             | 

These lease commitments are expected to be paid from revenues
from operations, existing working capital and if necessary, additional capital.
The Company does not have any long-term debt, capital lease, purchase or other
obligations as at December 31, 2008 and 2007.

Transactions with Related Parties

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 | )

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  |  | $ |        | 
|Legal services provided by a law firm in which a former
      director is a partner |   |        |  |   | 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                            |   |        |  |   |        |  |   | 34,248  | 
|Fees paid on behalf of a significantly
      influenced company                     |   |        |  |   |        |  |   | 7,247   | 

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Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements as at December 31, 2008 and December 31, 2007.

Capital Expenditure Commitments

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

Research and Development, Patents and Licenses, etc.

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

Litigation/Indemnification

Nuance Litigation

In the third quarter of 2008, Nuance launched two lawsuits against Zi. On August 19, 2008 the Company received a motion filed against Zi in the United States District Court, Northern District of California, San Francisco Division. The motion claims
that Zi 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 in accordance with the settlement agreement.

The Company received a patent infringement claim on August 27, 2008, filed in the Federal Court in Toronto, Canada, which claims that Zi has infringed Nuances intellectual property with the Companys Qix and eZiText products.

The Company responded to both claims and believes both are without merit. The Company is examining and pursuing all legal remedies available with respect to these claims.

It should be noted that the Nuance litigation will be terminated should the Companys shareholders approve the purchase of Zi by Nuance on April 9, 2009.

U of T Litigation

Commencing on March 11, 2005, U of T filed federal lawsuits against numerous alleged infringers of U.S. Patent No. 4,674,112 (112 Patent) in the U.S. District Court for the Western District of Texas, Austin Division. The defendants
included customers of the Company as well as customers of its competitors. The Company was not a named party in the action. In order to defend the legitimacy of the licensed software and maintain the relationships with its licensees, the Company
made the business decision to actively participate in the costs of the legal defense. Accordingly, and without any admission of liability, the Company agreed to assume the defense of five of its customers, four of which were settled since the costs
of defense would have outweighed the cost of settlement.

On May 2, 2007, the United States District Court for Western District of Texas issued an Order of Non-Infringement of U.S, Patent No. 4,674,112 against the Plaintiff, The Board of Regents of the University of Texas, and in favor of all remaining
Defendants, including the remaining customer whose defense the Company had assumed. 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 denied.

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

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

Subsequent Events

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.

CONCLUSIONS REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

The Companys Chief Executive Officer (the CEO), Chief Financial Officer (the CFO) and other key management personnel have conducted an evaluation of the effectiveness of the Companys disclosure controls and
procedures. Based on the evaluation conducted, the CEO and CFO have concluded that the design and operation of the Companys disclosure controls and procedures were effective as at December 31, 2008 to provide reasonable assurance that all
material financial information relating to the Company was made known to the CEO and CFO by others within the Company in order for them to complete their analysis and review of the financial position and results of the operations of the Company for
the year ended December 31, 2008.

CERTIFICATION OF INTERNAL CONTROLS OVER FINANCIAL REPORTING

As of December 31, 2008, an evaluation was carried out under the supervision of, and with the participation of the Companys management including the Chief Executive Officer and the Chief Financial Officer, of the design of the Companys
internal control over financial reporting. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design of internal control over financial reporting was appropriate as at December 31, 2008, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Various opportunities to improve the design and operation of internal
control over financial reporting have been identified and approved by management. The actions necessary to implement these opportunities have been identified and will be implemented in 2009. These improvement opportunities do not affect the
conclusions of the Chief Executive Officer and the Chief Financial Officer described above.

Additional Information

Additional information can be found in the Companys Form 10-K filed with the U.S. Securities and Exchange commission as well as in other public documents filed in Canada which can be accessed at www.sec.gov and www.sedar.com
respectively.

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ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative information about market risk

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.

Qualitative information about market risk

Interest Rate Risk

The Company does not maintain any market risk sensitive instruments for trading purposes or instruments entered into for purposes other than trading purposes, other than maintaining a short term investment portfolio consisting mainly of term
deposits purchased with an average maturity of less than three months. These securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly
by 10% of their levels at December 31, 2008, the fair value of the portfolio would decline by an immaterial amount. The Company generally has the ability to hold its fixed income investments until maturity and therefore it would not expect its
operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its investment portfolio.

Foreign Exchange Rate Risk

The Company reports in U.S. dollars but also has operations and expenses in Canada, Sweden, United Kingdom, Hong Kong and China. The Company incurs foreign exchange risk as revenues are primarily earned in U.S. dollars and Chinese Reminbi, and
incurs the majority of the Companys expenses in Canadian dollars, Swedish Krona, Chinese Reminbi and Hong Kong dollars. Assuming all of the above currencies appreciate by 100 basis points at the beginning of the year relative to the U.S.
dollar, the Company estimates the Companys expenses to increase by approximately $145,000 on an annualized basis. The Companys most significant foreign exchange risk is currently with the Canadian dollar. The Company estimates
expenses to increase by approximately $90,000 for every 100 basis point depreciation in the U.S. dollar, relative to the Canadian dollar, on an annualized basis assuming the rate increases at the beginning of the year.

Based on the actual appreciation of the Canadian dollar, Chinese Reminbi, Hong Kong dollar, and Swedish Krona relative to the U.S. dollar for the year ended December 31, 2008, the Company estimates that total expenses have increased by approximately
$0.4 million assuming the same expense level in the above foreign currencies remained unchanged from 2007. The reversal of advances made by currencies relative to the U.S. dollar resulted in relief to the expenses that had increased in the
earlier part of the year.

The U.S dollar has recently increased in strength against the majority of the worlds currencies. Should this strength continue throughout 2009, the Company expects its foreign currency denominated costs to decrease relative to 2008.

Given the recent volatility of the U.S. dollar, especially in comparison to the Canadian dollar, the Company has reviewed its foreign exchange risk and the appropriateness of hedging strategies. As a result of the review, the Company is examining
its foreign exchange policies and considering implementing a foreign exchange hedging program. Under this program, the Company would actively monitor market rates and may initiate hedging strategies when appropriate. The Company will also look to
naturally hedge its foreign currency expenses by matching the currencies of the Companys revenues and expenses.

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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.

|/s/
Milos Djokovic                    | /s/
Blair Mullin       
|------------------------------------- | -----------------------
|Milos Djokovic                        | Blair Mullin           
|President and Chief Executive Officer | Chief Financial Officer
|March 25, 2009                        |                        

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> Report of Independent Auditors

To the Shareholders ofZi 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.

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

[signed] "Ernst & Young LLP"

Independent Registered Chartered Accountants
Calgary, Canada 
March 25, 2009

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

United States reporting standards for auditors require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern,
such as those described in Note 2 to the consolidated financial statements. Although we conducted our audit in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
(United States), our report to the Shareholders dated March 25, 2009, is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors report when these are adequately
disclosed in the financial statements.

[signed] "Ernst & Young LLP"

Independent Registered Chartered Accountants
Calgary, Canada

March 25, 2009

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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

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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   

- 54 -

---

> 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.

- 55 -

---

> 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.    | 

- 56 -

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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.        |   |            |   |   |            |   |   |            |  

- 57 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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.

4. 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.

-
58 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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 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.

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.

- 59 -

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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)

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 and cannot 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.

- 60 -

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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)

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.

- 61 -

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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).

|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        | 
|                              |   |           |  |   |              |  |   |                | 
|                              |   |           |  |   |              |  |   |                | 
|- 62 -                        |  



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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)



|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.

|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 | 

- 63 -

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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 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).

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.

- 64 -

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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 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.

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.

- 65 -

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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 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 | 



|                                                                                       |  | 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 | 

- 66 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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)

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      |   |  | Shares under      |  
|                              |  | options, and RSUs |   |   | grant date fair value |   |  | options, and RSUs |  
|Unvested, beginning of period |  | 2,253,670         |   | $ | 0.72                  |   |  | 404,499           |  
|Granted                       |  | 1,030,000         |   |   | 0.29                  |   |  | 2,361,700         |  
|Vested                        |  | (1,066,513        | ) |   | (0.53                 | ) |  | (463,697          | )
|Forfeited                     |  | (161,288          | ) |   | (0.49                 | ) |  | (48,832           | )
|Unvested, end of period       |  | 2,055,869         |   | $ | 0.52                  |   |  | 2,253,670         |  

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 exercisable | 
|------------------------------ |  | ---------------------------------------- |  |  | ---------------------------------------- | 
|                               |  |                                          |  |  | Weighted average                         | 
|                               |  | Number                                   |  |  | remaining                                | 
|Range
      of exercise prices |  | outstanding                              |  |  | contractual life                         | 
|$0.00  $1.64                  |  | 3,096,034                                |  |  | 3.85 years                               | 
|$1.65  $2.46                  |  | 935,000                                  |  |  | 2.48 years                               | 
|$2.47  $3.28                  |  | 254,500                                  |  |  | 1.23 years                               | 
|$3.29
       $4.11            |  | 230,000                                  |  |  | 0.83 years                               | 
|$0.00  $4.11                  |  | 4,515,534                                |  |  | 3.27 years                               | 

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 | 

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.

- 67 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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 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.

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.

- 68 -

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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 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.

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.

- 69 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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)

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 | )

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 | 

- 70 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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)

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:

|                               |   |            |  |   |              |  |   |         |  |   | Impairment of |  |   |            |  |   | Operating profit |  
|------------------------------ | - | ---------- |  | - | ------------ |  | - | ------- |  | - | ------------- |  | - | ---------- |  | - | ---------------- | -
|                               |   |            |  |   |              |  |   |         |  |   | software      |  |   | Other      |  |   | (loss) before    |  
|                               |   |            |  |   |              |  |   |         |  |   | development   |  |   | operating  |  |   | interest and     |  
|                               |   | Revenues   |  |   | Amortization |  |   | VAT     |  |   | costs         |  |   | expenses   |  |   | other income     |  
|2008                           |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   |                  |  
|Zi 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 interest  |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   |                  |  
|and
      other income         |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   | 17,725           |  
|Loss before income taxes       |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   | (7,149,841       | )
|2007                           |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   |                  |  
|Zi Technology                  | $ | 13,111,002 |  | $ | 1,601,040    |  | $ | 787,632 |  | $ |              |  | $ | 11,820,707 |  | $ | (1,098,377       | )
|Corporate                      |   |           |  |   | 106,512      |  |   |        |  |   |              |  |   | 3,799,460  |  |   | (3,905,972       | )
|Total                          | $ | 13,111,002 |  | $ | 1,707,552    |  | $ | 787,632 |  | $ |              |  | $ | 15,620,167 |  | $ | (5,004,349       | )
|Interest expense and interest  |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   |                  |  
|and other income               |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   | 153,677          |  
|Note
      receivable recovery |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   | 130,931          |  
|Loss before income taxes       |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  | $ | (4,719,741       | )
|2006                           |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   |                  |  
|Zi Technology                  | $ | 11,836,217 |  | $ | 1,534,027    |  | $ | 595,157 |  | $ |              |  | $ | 13,453,283 |  | $ | (3,746,250       | )
|Corporate                      |   |           |  |   | 173,185      |  |   |        |  |   |              |  |   | 5,025,213  |  |   | (5,198,398       | )
|Total                          | $ | 11,836,217 |  | $ | 1,707,212    |  | $ | 595,157 |  | $ |              |  | $ | 18,478,496 |  | $ | (8,944,648       | )
|Interest expense and interest  |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   |                  |  
|and other income               |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  |   | 209,556          |  
|Loss
      before income taxes |   |            |  |   |              |  |   |         |  |   |               |  |   |            |  | $ | (8,735,092       | )



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

- 71 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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)

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.

|                                    |   |                   |  |   |              |  |   |              |  |   | Impairment of     |  |   |              |  |   | Operating profit    |  
|----------------------------------- | - | ----------------- |  | - | ------------ |  | - | ------------ |  | - | ----------------- |  | - | ------------ |  | - | ------------------- | -
|                                    |   |                   |  |   |              |  |   |              |  |   | software          |  |   | Other        |  |   | (loss) before       |  
|                                    |   |                   |  |   |              |  |   |              |  |   | development       |  |   | operating    |  |   | interest and        |  
|                                    |   | Revenues          |  |   | Amortization |  |   | VAT          |  |   | costs             |  |   | expenses     |  |   | 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 interest       |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |  
|and other income                    |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   | 17,725              |  
|Loss
      before income taxes      |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  | $ | (7,149,841          | )
|2007                                |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   |                     |  
|Canada                              | $ | 5,513,032         |  | $ | 1,434,083    |  | $ |             |  | $ |                  |  | $ | 9,239,551    |  | $ | (5,160,602          | )
|China                               |   | 5,977,217         |  |   | 79,489       |  |   | 787,632      |  |   |                  |  |   | 3,026,743    |  |   | 2,083,353           |  
|USA                                 |   | 1,038,728         |  |   | 6,077        |  |   |             |  |   |                  |  |   | 1,754,626    |  |   | (721,975            | )
|Sweden                              |   | 582,025           |  |   | 181,905      |  |   |             |  |   |                  |  |   | 1,565,896    |  |   | (1,165,776          | )
|Other                               |   |                  |  |   | 5,998        |  |   |             |  |   |                  |  |   | 33,351       |  |   | (39,349             | )
|Total                               | $ | 13,111,002        |  | $ | 1,707,552    |  | $ | 787,632      |  | $ |                  |  | $ | 15,620,167   |  | $ | (5,004,349          | )
|Interest expense and interest       |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |  
|and other income                    |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   | 153,677             |  
|Note
      receivable recovery      |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   | 130,931             |  
|Loss before income taxes            |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  | $ | (4,719,741          | )
|2006                                |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   |                     |  
|Canada                              | $ | 5,832,869         |  | $ | 1,417,331    |  | $ |             |  | $ |                  |  | $ | 11,628,079   |  | $ | (7,212,541          | )
|China                               |   | 4,751,684         |  |   | 99,719       |  |   | 595,157      |  |   |                  |  |   | 2,811,919    |  |   | 1,244,889           |  
|USA                                 |   | 935,956           |  |   | 6,606        |  |   |             |  |   |                  |  |   | 2,244,921    |  |   | (1,315,571          | )
|Sweden                              |   | 315,708           |  |   | 169,160      |  |   |             |  |   |                  |  |   | 1,688,014    |  |   | (1,541,466          | )
|Other                               |   |                  |  |   | 14,396       |  |   |             |  |   |                  |  |   | 105,563      |  |   | (119,959            | )
|Total                               | $ | 11,836,217        |  | $ | 1,707,212    |  | $ | 595,157      |  | $ |                  |  | $ | 18,478,496   |  | $ | (8,944,648          | )
|Interest expense and
      interest |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |  
|and
      other income              |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   | 209,556             |  
|Loss before income taxes            |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  | $ | (8,735,092          | )
|                                    |   |                   |  |   |              |  |   |              |  |   |                   |  |   |              |  |   |                     |  
|                                    |   |                   |  |   | 2008         |  |   |              |  |   |                   |  |   | 2007         |  |   |                     |  
|                                    |   | Capital and       |  |   |              |  |   | Identifiable |  |   | Capital and       |  |   |              |  |   |                     |  
|                                    |   | intangible assets |  |   | Other assets |  |   | assets       |  |   | intangible assets |  |   | Other assets |  |   | Identifiable assets |  
|Canada                              | $ | 1,353,106 $       |  |   | 2,378,742 $  |  |   | 3,731,848    |  | $ | 3,382,152         |  | $ | 3,844,589    |  | $ | 7,226,741           |  
|China                               |   | 103,493           |  |   | 2,649,909    |  |   | 2,753,402    |  |   | 117,690           |  |   | 6,178,888    |  |   | 6,296,578           |  
|USA                                 |   | 14,204            |  |   | 56,559       |  |   | 70,763       |  |   | 17,117            |  |   | 513,117      |  |   | 530,234             |  
|Sweden                              |   | 857,922           |  |   | 910,520      |  |   | 1,768,442    |  |   | 1,136,585         |  |   | 501,236      |  |   | 1,637,821           |  
|Other                               |   |                  |  |   | 3,095        |  |   | 3,095        |  |   |                  |  |   | 3,740        |  |   | 3,740               |  
|Total                               | $ | 2,328,725 $       |  |   | 5,998,825 $  |  |   | 8,327,550    |  | $ | 4,653,544         |  | $ | 11,041,570   |  | $ | 15,695,114          |  

- 72 -

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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 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.

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.

- 73 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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)

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.

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.

- 74 -

---

|                                                                                    
|------------------------------------------------------------------------------------
|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)

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.

- 75 -

---

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of December 31, 2008, the Company carried out an evaluation,
under the supervision and with the participation of its principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Exchange Act). Based on this evaluation, the Companys
principal executive officer and principal financial officer have concluded that
as of December 31, 2008, the Companys disclosure controls and procedures were
effective to ensure that information required to be disclosed in its periodic
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the SECs rules and
forms, and accumulated and communicated to the Companys management, including
the principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure.

Management Report on Internal Control Over Financial
Reporting

The management of the Company is responsible for establishing
and maintaining adequate internal control over financial reporting. The
Companys internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.

Management conducted an evaluation of the effectiveness of the
internal controls over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

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

Management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2008. Based on managements
assessment and those criteria, management believes that the internal control
over financial reporting as of December 31, 2008 was effective.

Managements internal control report was not subject to
attestation by the Companys independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide only
managements report.

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

Changes in Internal Control Over Financial Reporting

During the period covered by this report, no changes occurred
in the Zis internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, Zis internal control
over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

-76-

---

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE

(a) Directors and Executive Officers of the Company

Each director is generally elected by a vote at the annual
meeting of shareholders in service for a term of one year. Each executive
officer will serve until his/her successor is elected or appointed by the Board
or his/her earlier removal or resignation from office. There are no family
relationships between any of the Companys executive officers and the Companys
directors. The following table lists the directors and senior management of the
Company together with their respective positions, since January 1, 2008:



|Name                                         | Position or office within the Company
|-------------------------------------------- | -------------------------------------
|Milos
      Djokovic(7)                      | Director                             
|Parker, Colorado,
      U.S.A.               | President and Chief Executive Officer
|H. Donald Hyde(1) (2) (4) (5) (9)            | Director                             
|Calgary, Alberta,
      Canada               |                                      
|Donald P.
      Moore(1) (3) (4) (6) (8) (9) | Director                             
|Abu Dhabi, UAE                               |                                      
|Robert P. Stefanski (2) (3) (6) (9)          | Director                             
|Palo Alto,
      California, U.S.A.          |                                      
|George C. Tai
      (5)                      | Chairman of the Board of Directors   
|Calgary, Alberta                             | Director                             
|Andrew M. Gertler (1) (4) (5) (8) (9)        | Director                             
|Montreal, Quebec                             |                                      
|Blair Mullin                                 | Chief Financial Officer              
|Newberg, Oregon,
      U.S.A.                |                                      
|Jason Paul                                   | Corporate Secretary                  
|Calgary, Alberta,
      Canada               |                                      
|Axel Bernstorff                              | VP Global Sales                      
|Lisbon, Portugal                             |                                      
|Roland Williams                              | Senior VP Intellectual Property      
|Martinez, California                         |                                      

Notes:

(1) Currently member of the Audit Committee. 
(2) Currently member of the Corporate Governance and
Compensation Committee. 
(3) Former member of the Compensation Committee during 2008 prior to merging
with the Corporate Governance Committee. 
(4) Member of the Audit Committee during 2008. 
(5) Former member of the Corporate Governance Committee during
2008 prior to merging with the Compensation Committee. 
(6) Former member of the
Compensation Committee during 2008 prior to merging with the Corporate Goverance
Committee. 
(7) Former member of the Strategic Committee during 2008. 
(8) Current member of the Strategic Committee. 
(9) Current member of the Special Committee of Independent
Directors.

MILOS DJOKOVIC, age 39, became the Companys President and
Chief Executive Officer, as well as a member of the Board, in May 2006. From
October 2004 and until May 2006, Mr. Djokovic served as the Companys Chief
Operating Officer and Chief Technical Officer. Mr. Djokovic was the founder in
1992 of Cygnus Corporation, an Ontario based developer of customer relationship
management software, which he sold in 1998 to TeleTech Holdings Inc., and
continued to serve as its chief technical officer until March 2003. Mr. Djokovic
also served as CEO of TeleTechs Enhansiv division from 2000-2002. From August
2003 until October 2004, Mr. Djokovic was employed with Accenture, an
international management consulting firm, where he was responsible for that
firms customer relationship technology strategy.

H. DONALD HYDE, age 57, was elected as a director at the
Companys annual general meeting held in June 2003 and is currently the chair of
the Audit Committee and serves on the Corporate Governance and Compensation
Committee and Special Committee. Mr. Hyde is a chartered accountant and has had
his own practice since 1991. Prior to setting up his own practice, Mr. Hyde was
the vice president of finance and administration for an international oil and
gas drilling and service company.

DONALD P. MOORE, age 45, was elected to the Board in August
2004 and is currently a member of the Audit Committee, the Special Committee and
the Strategic Committee. Mr. Moore is a lawyer in the Abu Dhabi office of
Holland & Knight LLP. Prior to joining Holland & Knight LLP in December
2005, Mr. Moore practiced law with Fowler White Burnett, P.A.

ROBERT PAUL STEFANSKI, age 47, was elected to the Board on
December 22, 2006. Mr. Stefanski is currently the chair of the Corporate
Governance and Compensation Committee and also is the chair of the Special
Committee. Mr. Stefanski is an executive vice president with TIBCO Software
Inc., a software company headquartered in Palo Alto, California. Prior to
joining TIBCO, Mr. Stefanski practiced law in New York with Weil, Gotshal &
Manges, a major international law firm. He also served as Director of
Intellectual Property for financial news and information provider Reuters.

- 77 -

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BLAIR MULLIN, age 55, was appointed Chief Financial Officer of
the Company on September 6, 2006. Mr. Mullin has been a Partner in the Portland
practice of Tatum, LLC since 2003, during which time, prior to joining Zi,
served as consultant and then Chief Financial Officer of Homax Products Inc.,
Vice President Finance of Yakima Products Inc., strategic advisor to Casey
Industrial Inc., a $100 million construction company engaged in construction of
major industrial facilities, and consultant to numerous manufacturers. Prior to
joining Tatum, Mr. Mullin was a strategic advisor and turnaround consultant for
two companies in the Telecom sector, before which he served as President and
Chief Operating Officer of International DisplayWorks, Inc., a manufacturer of
LCD displays and modules; and as Chairman, President and Chief Financial Officer
of Morrow Snowboards. Mr. Mullin has held other leadership positions at
Westbeach Canada, ULC, British Columbia Mercantile Corp., and Padovano Foods,
Ltd., as well as numerous consulting engagements in a variety of industries.

GEORGE C. TAI, age 43, was appointed to the Board on April 10,
2007 and assumed the role of Chairman on July 26, 2007. Mr. Tai practices
securities and business law with the law firm of Carscallen Leitch, LLP in
Calgary, Alberta. Prior to returning to the practice of law in 2004, Mr. Tai
held senior executive positions in legal, finance and operations with private
and public (TSX and NASDAQ) technology companies, including Zi Corporation,
where he served as Chief Operating Officer from 2000 to 2003.

ANDREW M. GERTLER, age 48, was appointed to the Board on June
27, 2007. Mr. Gertler has been the Vice President of Lester Asset Management
since July 2006. Prior thereto, he was Chairman and Chief Executive Officer of
Neutron Enterprises, Inc. from August 2004 to July 2006, and Managing Director
of Gestion Jean Paul Auclair from April 2001 to April 2004. Mr. Gertler is the
Chairman of the Companys Strategic Committee and is also a member of the Audit
Committee and Special Committee.

JASON PAUL, age 35, has been with the Companys legal
department since December 2004 and was appointed as the Companys General
Counsel in January 2007. Mr. Paul was also appointed as the Companys Corporate
Secretary in July 2007. Prior to joining the Company, Mr. Paul practiced law in
Israel with the law firm of Danziger, Klagsbald, Rosen & Co.

AXEL BERNSTORFF, age 46 has been with the Company since August
30, 2005 and was appointed VP of Global Sales at Zi Corporation on September 15,
2006. Prior to being appointed VP of Global Sales, Mr. Bernstorff successfully
ran Zi's European and Japanese regions. Mr. Bernstorff had 8 years experience in
the wireless technology sector prior to joining Zi and played an important role
during the formation of Symbian, the privately owned, market-leading OS provider
for smartphones where he subsequently managed several strategic global accounts.

ROLAND WILLIAMS, age 56 has been with the Company since July
25, 1995 and was appointed as the Senior Vice President Intellectual Property on
June 26, 2007. Dr. Williams is a professional engineer who holds a Masters
degree in semiconductor material science and a PhD in microwave engineering,
with over 30 years experience in the wireless industry. Prior to joining Zi, Dr.
Williams developed concept products for a cellular equipment manufacturer,
produced the world's first three-channel portable cell site and created the
first signal processing geophone for intelligent seismic survey.

Pursuant to an agreement signed in July 2004, the Company
agreed, among other things, to appoint one director to the Companys Board as a
nominee of the Receiver. The Company subsequently appointed Donald Moore to the
Board as the Receivers nominee. See Item 1 Business  History and
Development of the Company.

According to the terms of the settlement agreement between the
Company and the Receiver, signed in February 2007, both the Receiver and Mr.
Michael E. Lobsinger, each had the right to designate two persons as director
nominees to be elected or appointed as directors of the Company, up until the
Companys shareholders meeting held in respect of the fiscal year ended 2007,
and the Company is not permitted to nominate Mr. Lobsinger nor certain persons
or entities related to Mr. Lobsinger for appointment to the Companys Board.

Two of the Companys current directors serve as a director of
other reporting issuers. The names of the public companies on which the members
of the Companys Board also served as directors in 2008 are set out in the table
below:

|Director       | Additional Public Company
      Directorships
|-------------- | ---------------------------------------------
|George Tai     | VisionSky Corp. (CNQ:VSKY)                   
|Andrew Gertler | Stock-Trak Group Inc. (OTC BB: STKG.OB)      
|               | Avicena Group Inc. (OTC BB: AVGO.OB)         
|               | Northern Ethanol Inc. (OTC BB: NOET.OB)      
|               | Sinomar Capital Corp. (TSX-V: SMM.P-V)       

- 78-

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Zis Audit Committee is comprised of three independent
directors: Mr. Donald Hyde, who is a chartered accountant in private practice,
joined the Board in June, 2003 and was appointed Chairman of the Audit
Committee. Mr. Hyde was specifically recruited to the Board for his financial
and accounting skills. Mr. Hyde is a chartered accountant and has had his own
practice since 1991. Prior to setting up his own practice, Mr. Hyde was the vice
president of finance and administration for an international oil and gas
drilling and service company. The Board has determined that Mr. Hyde possesses
the necessary attributes for designation as the Company's Audit Committee
financial expert and has designated Mr. Hyde as its Audit Committee financial
expert. Management of the Company believes that Mr. Hyde and the other members
of the Audit Committee have the skills, experience and education that qualify
them to carry out their duties as members of the Audit Committee. Mr. Hyde is
independent as defined by the listing standards of the NASDAQ Market System. The
other members of the Audit Committee in 2008 and 2009 were Donald Moore and
Andrew Gertler, who are both financially literate and possess an understanding
of the accounting principles in connection with the accounting for estimates,
accruals and reserves, internal controls and procedures used by the Corporation.
All members of the Audit Committee are outside and unrelated directors and
independent from any interest in the Corporation.

(b) Code of Ethics

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

(c) Nasdaq Corporate Governance

The Companys common shares are listed on the Nasdaq Capital
Market. Under Rule 4350(a) of the Nasdaq Stock Market Rules (the Nasdaq
Rules), a foreign private issuer may follow its home country practice in lieu
of certain of the corporate governance requirements of the Nasdaq Rules (the
Foreign Exemption). The By-laws of the Company provide that the holder or
holders of five percent (5%) of the shares entitled to vote at a meeting of
shareholders present in person or represented by proxy shall constitute a quorum
for a meeting of shareholders. Although this quorum requirement is less than
that imposed by the rules of the Nasdaq Capital Market, the Company has operated
for the past years in reliance upon the Foreign Exemption from such requirements
as such a quorum requirement is consistent with normal business practices in the
Companys jurisdiction of incorporation.

ITEM 11.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

On May 29, 2008, the Corporate Governance Committee and the
Compensation Committee were merged into the Corporate Governance and
Compensation Committee (or the Committee). The Corporate Governance and
Compensation Committee is responsible for reviewing and recommending to the
Board the compensation for the Companys directors, as well as advising the
Board on the administration of the Companys Stock Incentive Plan and reviewing
and approving the recommendations of senior management relating to the annual
salaries, bonuses and stock option grants of the executive officers of the
Company. The members of the Committee are outside directors who report to the
Board, which in turn gives final approval to compensation matters.

Under the direction of the Corporate Governance and
Compensation Committee, the Company is committed to the fundamental principles
of pay for performance, improved shareholder returns and external
competitiveness in the design, development and administration of its
compensation programs. The Committee recognizes the need to attract and retain a
stable and focused leadership with the capability to manage the operations,
finances and assets of the Company. As appropriate, the Committee recognizes and
rewards exceptional individual contributions with highly competitive
compensation.

The major elements of the Companys executive compensation
program are salary, annual cash incentives and long-term incentives, through the
granting of stock options, RSAs and RSUs.

In connection with determining base salaries, the Company
maintains an administrative framework of job levels into which positions are
assigned based on internal comparability and external market data. The Corporate
Governance and Compensation Committees goal is to provide base salaries, for
its top performing employees, that are competitive with the Companys peers and
which also recognizes the differentials from such peers. While the Committee
does not specifically engage the services of a compensation committee consultant
with respect to its duties, the Committee does reference outside data consisting
of management compensation surveys and reports and compares the base salaries of the
Companys executive officers with compensation data for comparable organizations
available from such surveys and reports.

- 79 -

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

The Company has employment agreements or remuneration
arrangements with all of its executive officers. Each agreement or arrangement
provides for salary, benefits and bonuses for the executive officer. Many such
agreements or arrangements provide for incentive stock option grants. For
information regarding the employment agreements of the Named Executive Officers
(or NEOs), see Employment Contracts below. Except as described
herein, there are no agreements or other remuneration arrangements with any of
Zis directors.

Option-Based Awards

The Companys Stock Incentive Plan

The Board believes that employees should have a stake in the
future of the Company and that their interests should be aligned with the
interest of the Companys shareholders. Accordingly, under the Companys 2007
Stock Incentive Plan (the Plan), officers and employees who are selected to
participate are eligible to receive stock options that may be granted subject to
a vesting period proposed by the Corporate Governance and Compensation Committee
and approved by the Board to create a long-term incentive to increase
shareholder value. Awards of stock options and RSAs and RSUs (as defined further
below) are supplementary to the cash incentive plan and are intended to increase
the pay-at-risk component for officers and employees. Previous grants of
option-based awards may be taken into account, among other factors, by the
Company when considering new grants. Under the Plan, the Company currently has
in effect for its directors, officers, employees and consultants 7,600,193
common shares reserved for issuance as approved at the July 26, 2007 shareholder
meeting.

For information regarding treatment of outstanding options,
RSUs and RSAs under the Arrangement with Nuance, see Item 1  History and
Development of the Company - Nuance Acquisition of Zi pursuant to a Plan
of Arrangement.

Purpose of Plan

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

Eligibility

The Plan provides for the issuance of options (Options)
exercisable to acquire common shares of the Company and the issuance of RSAs and
RSUs (as described below) to directors, officers, employees and consultants.
The specific terms of each Option, Restricted Stock Award and Restricted Stock
Unit Award are provided in a separate participant agreement, as applicable.

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

- 80 -

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Restricted Stock Unit or RSU means a notional unit
evidencing the right of a participant to receive, at the time of vesting and
without payment to the Company, one common share issued from treasury.

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

Administration of the Plan

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

Amendment of the Plan

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

Necessary Approvals

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

Adjustment in Shares Subject to the Plan

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

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

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

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Executive Officer Compensation

Summary Compensation Table

The following table sets forth all annual and long-term
compensation for services in all capacities to the Company for the period ended
December 31, 2008, in respect of individuals who were acting in a capacity of
chief executive officer, chief financial officer, and the three other most
highly compensated executive officers who earned in excess of CDN $150,000 in
total salary and bonus during the fiscal year ended December 31, 2008 (the
Named Executive Officers).

|Name and principal          | Year(5) | Salary  | Share- | Option- | Non-equity     | Pension   | All other | Total  
|--------------------------- | ------- | ------- | ------ | ------- | -------------- | --------- | --------- | -------
|position                    |         | ($)     | based  | based   | incentive plan | value     | compen-   | compen-
|                            |         |         | awards | awards  | compensation   | ($)       | sation    | sation 
|                            |         |         | ($)    | ($)     | ($)            |           | ($)       |        
|                            |         |         |        |         |                |           |           |        
|                            |         |         |        |         | Annual         | Long-     |           |        
|                            |         |         |        |         | incentive      | term      |           |        
|                            |         |         |        |         | plans          | incentive |           |        
|                            |         |         |        |         |                | plans     |           |        
|                            |         |         |        |         |                |           |           |        
|Milos Djokovic (1)(7)       | 2008    | 300,000 | Nil    | 416,000 | 180,000        | Nil       | Nil       | Nil    
|President and Chief         |         |         |        |         |                |           |           |        
|Executive Officer           |         |         |        |         |                |           |           |        
|                            |         |         |        |         |                |           |           |        
|Roland Williams(2)          | 2008    | 188,750 | Nil    | 13,875  | 25,000         | Nil       | Nil       | Nil    
|Senior Vice President       |         |         |        |         |                |           |           |        
|Intellectual Property       |         |         |        |         |                |           |           |        
|                            |         |         |        |         |                |           |           |        
|Axel Bernstorff(3)          | 2008    | 179,567 | Nil    | 27,429  | 89,064         | Nil       | Nil       | Nil    
|Vice President, Global      |         |         |        |         |                |           |           |        
|Sales                       |         |         |        |         |                |           |           |        
|                            |         |         |        |         |                |           |           |        
|Blair Mullin (4)            | 2008    | 336,032 | Nil    | 16,434  | Nil            | Nil       | Nil       | Nil    
|Chief
    Financial Officer |         |         |        |         |                |           |           |        
|                            |         |         |        |         |                |           |           |        
|Jason Paul(6)               | 2008    | 148,409 | Nil    | 20,421  | 30,924         | Nil       | Nil       | Nil    
|Corporate Secretary and     |         |         |        |         |                |           |           |        
|General Counsel             |         |         |        |         |                |           |           |        

Notes:

(1) Mr. Djokovic was appointed as President and Chief Executive
Officer on May 26, 2006. Mr. Djokovic was appointed Chief Operating Officer and
Chief Technology Officer on October 25, 2004.

(2) Dr. Williams has been employed by the Company in various
capacities and at various times, since July 1995.

(3) Mr. Bernstorff was appointed VP Global Sales on September
15, 2006, from his previous position as Director Sales, Europe on joining the
Company on August 30, 2005.

(4) Mr. Mullin was appointed Chief Financial Officer on
September 6, 2006, pursuant to an agreement with an executive services and
consulting firm, which has subsequently been terminated, and Mr. Mullin remains
an employee of the Company. Please see discussion under Executive Employment
Contracts below. A consulting fee was paid by the Company to a consulting
firm in which Blair Mullin was a partner amounting to $42,500 during the period
from January 1, 2008 to December 31, 2008.

(5) For 2008 compensation, all Canadian dollar and British
pound denominated compensation was converted to U.S. dollars at 0.9371 and
1.8554 respectively, being the average conversion rate for 2008. Other annual
compensation is less than CDN$50,000 and less than 10 percent of the salary and
bonus of the respective Named Executive Officer.

(6) Jason Paul has worked for the Company since 2004. In
January 2007, Mr. Paul was promoted to the position of General Counsel. In July
2007, Mr. Paul was also appointed as the Companys Corporate Secretary.

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

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Executive Employment Contracts

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

The Company entered into an Interim Executive Services
Agreement with an executive services and consulting firm on August 14, 2006
pursuant to which Blair Mullin was appointed Chief Financial Officer of the
Company. The terms of the agreement provide for Mr. Mullin to be paid a salary
of U.S.$336,000 per annum. In a letter agreement dated December 26, 2007, the
Interim Executive Services Agreement was terminated, and Mr. Mullin remained an
employee of Zi. The Company entered into an employment agreement with Roland
Williams on February 5, 2001 pursuant to which Dr. Williams was appointed Senior
Vice President  Technical Innovations. The terms of the agreement provided for
Dr. Williams to be paid a base salary of U.S. $150,000 per annum. Effective June
1, 2005 Dr. Williams base salary increased to U.S.$165,000 per annum. Effective
January 1, 2006 Dr. Williams base salary increased to U.S.$180,000 per annum.
Effective April 1, 2007, Dr. Williams base salary increased to U.S.$185,000 per
annum. The Company may terminate Dr. Williams employment upon payment of an
amount equal to the Base Salary. An amount equal to three months base salary may
become payable upon Mr. Williams resignation following a change of control of
the Company, subject to certain conditions being met. Pursuant to Mr. Williams
employment contract, in the event of a change of control of the Company, all of
his options vest immediately. Dr. Williams was required to execute a
Confidentiality and Non-Competition agreement.

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

Jason Paul began working in the Companys legal department in
December 2004. The Company entered into an employment agreement with Mr. Paul
effective January 1, 2007, pursuant to which Mr. Paul was promoted to the
position of General Counsel. The terms of the agreement provided for Mr. Paul to
be paid a base salary of CDN$150,000 per annum. Effective April 1, 2008, Mr.
Pauls base salary increased to CDN$160,000 per annum. Mr. Paul was required to
execute a Confidentiality and Non-Competition agreement. On July 26, 2007, Mr.
Paul was also appointed as Corporate Secretary of the Company. There are no
change of control provisions in Mr. Pauls contract.

Incentive Plan Awards

Outstanding share-based awards and option-based awards

The following table summarizes the outstanding share-based
awards and option-based awards for each NEO for all awards outstanding as at
December 31, 2008, including awards granted before the most recently completed
financial year. The table also discloses the awards that have been transferred
at other than fair market value.

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|                      | Option-based Awards |                 | Share-based Awards
|--------------------- | ------------------- | --------------- | ------------------
|Name                  | Number of           |                 | Option            
|                      | Securities          | Option Exercise | Expiration        
|                      | underlying          | Price CAD       | Date              
|                      | unexercised         | ($)             |                   
|                      | Options/SARs        |                 |                   
|                      | granted             |                 |                   
|                      | (#)                 |                 |                   
|                      |                     |                 |                   
|(a)                   | (b)                 | (c)             | (d)               
|Milos
      Djokovic  | 230,000             | 4.14            | 26-Feb-09         
|Milos
      Djokovic  | 90,000              | 3.22            | 26-Feb-09         
|Milos
      Djokovic  | 200,000             | 2.01            | 26-Feb-09         
|Milos
      Djokovic  | 400,000             | 2.43            | 26-Feb-09         
|Milos
      Djokovic  | 500,000             | 1.15            | 26-Feb-09         
|Milos
      Djokovic  | 500,000             | 0.58            | 3-Apr-13          
|Axel
      Bernstorff | 10,000              | 2.73            | 30-Aug-10         
|Axel
      Bernstorff | 10,000              | 2.01            | 3-Apr-11          
|Axel
      Bernstorff | 100,000             | 0.99            | 15-Sep-11         
|Axel
      Bernstorff | 50,000              | 1.15            | 26-Nov-12         
|Roland Williams       | 6,500               | 3.60            | 25-Mar-09         
|Roland Williams       | 10,000              | 3.22            | 21-Jul-10         
|Roland Williams       | 50,000              | 2.01            | 3-Apr-11          
|Roland Williams       | 50,000              | 0.99            | 6-Sep-11          
|Roland Williams       | 25,000              | 1.15            | 26-Nov-12         
|Blair
      Mullin    | 50,000              | 1.15            | 26-Nov-12         
|Jason
      Paul      | 10,000              | 2.01            | 3-Apr-11          
|Jason
      Paul      | 20,000              | 0.99            | 6-Sep-11          
|Jason
      Paul      | 20,000              | 0.96            | 10-Jan-12         
|Jason
      Paul      | 40,000              | 1.15            | 26-Nov-12         

Incentive plan awards  value vested or earned during the
year

The following table sets out the value vested or earned in
respect of option-based, share-based and non-equity incentive plan compensation
for each NEO for the fiscal year completed December 31, 2008.

|Name            | Option-based awards  | Share-based awards  Value | Non-equity incentive plan  
|--------------- | --------------------- | -------------------------- | ---------------------------
|                | value vested during   | vested during the year     | compensation  Value earned
|                | the year              |                            | during the year            
|                | CAD ($)               | ($)                        | ($)                        
|(a)             | (b)                   | (c)                        | (d)                        
|Milos Djokovic  | 269,759               | -                          | 180,000                    
|Axel Bernstorff | 27,780                | -                          | 89,064                     
|Roland Williams | 13,890                | -                          | 25,000                     
|Blair Mullin    | 9,546                 | -                          | -                          
|Jason Paul      | 17,805                | -                          | 30,924                     

Long-term Incentive Plans

The Company currently has no long-term incentive plans, other
than stock options, RSUs and RSAs granted from time to time by the Board under
the provisions of the Companys Stock Incentive Plan described herein.

- 84 -

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Stock Appreciation Rights and Restricted Shares

No stock appreciation rights were granted by the Company to the
Named Executive Officers of the Company during the fiscal year ended December
31, 2008 or since incorporation.

Stock Option and SAR Repricing

No repricing took place during the fiscal year ended December
31, 2008 with respect to stock options held by the Named Executive Officers.

Please also see the discussion of the 2007 Stock Option Plan
under Compensation Discussion and Analysis for an explanation of the
significant terms of all plan-based awards, including non-equity incentive plan
awards, issued or vested, or under which options have been exercised during
2008, or outstanding at the year end.

Pension and Retirement Plans and Termination and Change
of Control Benefits

The Company does not have any pension or retirement plan which
is applicable to the Named Executive Officers [other than participation in a
401(k) plan in respect of Roland Williams. The Company has not provided
compensation, monetary or otherwise, during the fiscal year ended December 31,
2008, to any person who now acts or has previously acted as a Named Executive
Officer of the Company, in connection with or related to the retirement,
termination or resignation of such person other than as described in the
succeeding paragraphs and the Company has provided no compensation to such
persons as a result of a change of control of the Company, its subsidiaries or
affiliates. The Company is not party to any compensation plan or arrangement
with any person who now acts as a Named Executive Officer resulting from the
resignation, retirement or the termination of employment of such person other
than as described herein.

Please also see Executive Employment Contractsunder
Executive Compensation above for a discussion of the applicable change of
control or termination benefits

Director Compensation

Director Compensation Table

The following table sets out the compensation earned in the
fiscal year ended 2008 by the members of the Board of the Company who are not
NEOs.

|                 |             | Share- | Option- | Non-equity     |         |              |        
|---------------- | ----------- | ------ | ------- | -------------- | ------- | ------------ | -------
|                 |             | based  | Based   | incentive plan | Pension | All other    |        
|                 | Fees Earned | Awards | Awards  | compensation   | Value   | compensation | Total  
|Name             | ($)(1)      | ($)    | ($)     | ($)            | ($)     | ($)          | ($)    
|George Tai       | 63,224      | 9,952  | 27,730  |               |        | (2)         | 100,905
|Andrew Gertler   | 77,103      | 9,952  | 27,578  |               |        |             | 114,633
|Don
      Hyde   | 42,195      | 9,952  | 24,378  |               |        |             | 76,525 
|Donald Moore     | 71,710      | 9,952  | 24,378  |               |        |             | 106,040
|Robert Stefanski | 33,321      | 9,952  | 24,378  |               |        |             | 67,651 

Notes:

(1) Milos Djokovic (President and Chief Executive Officer) was
also a director in 2008. See the summary compensation table on page 81 for
information regarding his compensation.

(2) During the Companys fiscal year ended December 31, 2008,
the Company accrued and/or paid legal fees to a law firm of which George Tai is
a partner amounting, in the aggregate, to $259,556.

- 85 -

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Director Compensation

The Companys director compensation regime has been designed in
accordance with the following objectives: (a) to attract and retain suitably
qualified individuals; and (b) to compensate individuals serving as board and
committee members for the work, time and risks associated with being a director
and committee member.

On May 29, 2008, the Board approved certain changes to the
amounts of compensation payable to Board and committee members. Please See the
Companys Management Information Circular in respect of the 2008 annual general
meeting of the shareholders, held May 29, 2008, which describes the compensation
payable to Board and committee members prior to May 29, 2008.

The current compensation plan for directors (which does not
apply to any director serving as an executive officer) is as follows: The
Chairman of the Board receives a monthly retainer in the amount of $1,000 per
month. The Chairman of the Audit Committee receives an annual retainer of
$5,000, and all other members of the Audit Committee receive an annual retainer
of $2,500 each. The Chairman of the Corporate Governance and Compensation
Committee receives an annual retainer of $4,000, and all other members of the
Corporate Governance and Compensation Committee receive an annual retainer of
$2,000 each. All members of the Strategic Committee receive an annual retainer
of $4,000 each. Each director is paid $2,500 for each in-person meeting of the
Board provided that no director shall receive such in-person meeting payments in
respect of more than five in-person Board meetings per year. Board meeting fees
for telephonic meetings are $1,000 per participating director (however, any
telephonic meeting lasting longer than 2 hours may, at the Chairmans
discretion, incur a fee of $1,500 per participating director) with a sixteen
meeting limit per year on compensation paid. For each committee, each committee
member is paid $1,000 per meeting attended, regardless of whether such committee
member attended in person or via telephone. Under the compensation plan, each
director shall receive75,000 share options annually, and 25,000 RSUs or RSAs (as
applicable) annually, to be granted at the Companys annual general meeting of
shareholders.

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

During the fiscal period ended December 31, 2008, stock options
to purchase 375,000 common shares of the Company were granted to directors of
the Company, pursuant to the directors compensation plan, not including options
granted to Milos Djokovic in his capacity as an Executive Officer of the
Company. Executive officers of the Company, who also act as directors of Zi
Corporation, do not receive any additional compensation for services rendered in
such capacity, other than as paid by the Company to such executive officers in
their capacity as executive officers. See Executive Officer Compensationabove.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial
Owners

To the knowledge of the Company, the following table sets forth
the names of each of the persons or entities who beneficially hold, directly or
indirectly, or exercise control or direction over more than five percent (5%) of
the voting rights attached to the issued and outstanding shares of the Company
entitled to vote at the shareholder meetings of the Company as of March 24,
2009.

|                                       |  | Beneficial number    |  |  | Percentage of total | 
|-------------------------------------- |  | -------------------- |  |  | ------------------- | 
|Name and
      municipality            |  | of
      shares held |  |  | voting rights       | 
|Marty Steinberg,
      Receiver(1)     |  |                      |  |  |                     | 
|1111 Brickell
      Avenue, Suite 2500 |  |                      |  |  |                     | 
|Miami, Florida
      33131             |  | 18,718,008           |  |  | 37.0%(3)(4)         | 
|Michael E. Lobsinger(2)                |  |                      |  |  |                     | 
|Bay #4  12110 - 40th Street SE        |  |                      |  |  |                     | 
|Calgary, AB T2Z
      4K6              |  | 4,819,613            |  |  | 9.5%(3)             | 
|Nuance
      Communications, Inc.      |  |                      |  |  |                     | 
|1 Wayside Road                         |  |                      |  |  |                     | 
|Burlington, MA
      01803             |  | 20,665,098           |  |  | 40.8%(4)            | 

Notes:

(1) Marty Steinberg has represented to the Company that he is
the court appointed Receiver of Lancer Management Group LLC, and related
entities to Lancer Management Group LLC and responsible person for other related
parties that are currently debtors in possession under a Chapter 11 case pending before United States
courts. Marty Steinberg is a lawyer with and represented by the law firm Hunton
& Williams LLP of Miami, Florida. The information provided herein is based
upon filings made on the SEDI insider trading reporting system in Canada and on
a Schedule 13D (the "Schedule 13D") filed on December 11, 2003 with the SEC by
Marty Steinberg, Esq., as Receiver (the "Receiver") of Lancer Management Group,
LLC, Lancer Management Group II, LLC, Lancer Offshore, Inc., Lancer Partners,
LP, LSPV, Inc., LSPV, LLC, Omnifund, Ltd, G.H. Associates, Inc., and Alpha Omega
Group (the "Receivership Entities"). In the Schedule 13D the Receiver states
that due to the poor condition of the records of the Receivership Entities he
does not represent the truthfulness or accuracy of the Schedule 13D and the
Company takes no responsibility for the information provided herein based on the
Schedule 13D. The Schedule 13D was amended most recently on April 10, 2007. Such
amended Schedule 13D reported holdings of approximately 40% of Zis common
shares, but such percentage has been reduced to approximately 37% by virtue of
the private placement of the Zis shares which took place in March 2007.

- 86 -

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

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

(4) Pursuant to a Schedule 13D filed by Nuance on March 6,
2008, Nuance reported that certain common shares of Zi held by certain
shareholders, including the Receiver, are subject to voting support agreements
between such shareholders and Nuance.

The following table sets forth for (1) each director-nominee,
director, and named executive officer of the Company, and (2) all
director-nominees, directors, and executive officers of the Company as a group:
(i) the number of common shares of the Company beneficially owned on March 23,
2009; and (ii) such persons or groups percentage ownership of outstanding
common shares of the Company on such date. All of the Companys directors and
named executive officers receive mail at the Companys principal executive
office at 2100, 840  7th Avenue, S.W., Calgary, Alberta, Canada T2P
3G2.

|                                       |  | Number of Shares     |      |  | Percentage of |  
|-------------------------------------- |  | -------------------- | ---- |  | ------------- | -
|Name                                   |  | Beneficially Owned(1 | )    |  | Class(2       | )
|H.
      Donald Hyde                   |  | 337,495              | (5)  |  | *             |  
|Donald P. Moore                        |  | 343,695              | (6)  |  | *             |  
|Milos Djokovic                         |  | Nil (7               | )    |  | *             |  
|Robert P.
      Stefanski              |  | 175,000              | (8)  |  | *             |  
|Roland Williams                        |  | 108,166              | (9)  |  | *             |  
|Axel Bernstorff                        |  | 103,334              | (10) |  | *             |  
|Blair Mullin                           |  | 16,667               | (11) |  | *             |  
|George C. Tai                          |  | 166,700              | (12) |  | *             |  
|Andrew M. Gertler                      |  | 150,000              | (13) |  | *             |  
|Jason Paul                             |  | 49,999               | (14) |  | *             |  
|All directors and executive            |  | 1,451,056            |      |  | 2.8 %         |  
|officers as a
      group (10 persons) |  |                      |      |  |               |  
|*
      Indicates less than 1%         |  |                      |      |  |               |  

Notes:

(1) Includes options and RSUs exercisable within 60 days of
February 28, 2009. Except as noted to the contrary, in notes 1 to 15 below all
grant prices are expressed in Canadian dollars.

(2) Based upon the 50,667,957 outstanding common shares, as of
February 28, 2009.

- 87 -

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(5) In the case of Mr. Hyde, this comprises 12,495 common
shares held directly or beneficially by Mr. Hyde, 25,000 RSUs issued May 29,
2008 and 300,000 share options: 50,000 options at a grant price of $2.60 and
expire on September 16, 2009; 50,000 options granted May 26, 2005 at a grant
price of $3.64 and expire on May 26, 2010; 50,000 options granted April 4, 2006
at a grant price of $2.01 and expire on April 3, 2011; 50,000 options granted
January 10, 2007 at a grant price of $1.96 and expire on January 10, 2012;
25,000 options granted July 26, 2007 at a grant price of $1.10 and expire on
July 26, 2012, and; 75,000 options granted May 29, 2008 at a grant price of
$0.46 and expire on May 29, 2013.

(6) In the case of Mr. Moore, this comprises 18,695 common
shares held directly or beneficially by Mr. Moore 25,000 RSAs issued May 29,
2008 and 300,000 share options. The share options include: 50,000 options
granted September 16, 2004 at a grant price of $2.60 and expire on September 16,
2009, and; 50,000 options granted May 26, 2005 at a grant price of $3.64 and
expire on May 26, 2010; 50,000 options granted April 4, 2006 at a grant price of
$2.01 and expire on April 3, 2011, 50,000 options granted January 10, 2007 at a
grant price of $1.96 and expire on January 10, 2012, and; 25,000 options granted
July 26, 2007 at a grant price of $1.10 and expire on July 26, 2012, and; 75,000
options granted May 29, 2008 at a grant price of $0.46 and expire on May 29,
2013.

(7) In the case of Mr. Djokovic, there are 166,666 share
options that are exercisable within 60 days of March 23, 2009.

(8) In the case of Mr. Stefanski, this comprises 25,000 RSAs
issued May 29, 2008 and 150,000 share options which include: 50,000 options
granted January 10, 2007 at a grant price of $1.96 and expire on January 10,
2012; 25,000 options granted July 26, 2007 at a grant price of $1.10 and expire
on July 26, 2012, and; 75,000 options granted May 29, 2008 at a grant price of
$0.46 and expire on May 29, 2013.

(9) In the case of Dr. Williams, this comprises 108,166 share
options which include: 6,500 options granted March 25, 2004 at a grant price of
$3.60 and expire March 25, 2009; 10,000 options granted July 21, 2005 at a grant
price of $3.22 and expire July 21, 2010; 50,000 options granted April 4, 2006 at
a grant price of $2.01 and expire April 3, 2011; 33,333 options granted
September 6, 2006 at a grant price of $0.99 and expire September 6, 2011, and;
8,333 options granted November 26, 2007 at a grant price of $1.15 and expire
November 26, 2012.

(10) In the case of Mr. Bernstorff, this comprises 103,334
share options which include: 10,000 options granted August 30, 2005 at a grant
price of $2.73 and expire August 30, 2010; 10,000 options granted April 4, 2006
at a grant price of $2.01 and expire April 3, 2011; 66,667 options granted
September 15, 2006 at a grant price of $0.96 and expire September 15, 2011, and;
16,667 options granted November 26, 2007 at a grant price of $1.15 and expire
November 26, 2012.

(11) In the case of Mr. Mullin, this comprises 16,667 options
granted November 26, 2007 at a grant price of $1.15 and expire November 26,
2012.

(12) In the case of Mr. Tai, this comprises 25,000 RSUs issued
May 29, 2008 and 141,700 share options which include: 16,700 options granted
June 26, 2007 at a grant price of $1.22 and expire on June 26, 2012, 50,000
options granted July 26, 2007 at a grant price of $1.10 and expire on July 26,
2012, and; 75,000 options granted May 29, 2008 at a grant price of $0.46 and
expire on May 29, 2013.

(13) In the case of Mr. Gertler, this comprises 25,000 RSUs
issued May 29, 2008 and 125,000 share options which include: 50,000 options
granted July 26, 2007 at a grant price of $1.10 and expire on July 26, 2012,
and; 75,000 options granted May 29, 2008 at a grant price of $0.46 and expire on
May 29, 2013.

(14) In the case of Mr. Paul, this comprises 49,999 share
options which include: 10,000 options granted April 4, 2006 at a grant price of
$2.01 and expire April 3, 2011; 13,333 options granted September 6, 2006 at a
grant price of $0.99 and expire September 6, 2011; 13,333 options granted
January 10, 2007 at a grant price of $1.96 and expire January 10, 2012, and;
13,333 options granted November 26, 2007 at a grant price of $1.15 and expire
November 26, 2012.

See Item 1  History and Development of the Company -
Nuance Acquisition of Zi pursuant to a Plan of Arrangement for information
regarding the acquisition by Nuance of all the Zi Shares.

- 88 -

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Zi Options, RSUs and RSAs

Under the Arrangement: (i) all of the Zi Options, including
those held by directors and officers of Zi shall vest in full immediately prior
to the Effective Time and each In-the-Money-Option shall be surrendered for the
In-the-Money-Option Consideration and all other options shall be surrendered and
cancelled for cash consideration of $0.0001 per Zi Option; and (ii) all of the
Zi Shares underlying the RSUs or RSAs shall be released to the holders of RSUs
or RSAs to be transferred to Subco for the Arrangement consideration.

The directors and officers of Zi and their associates
beneficially own or exercise control or direction over an aggregate of
approximately 1,871,700 Zi Options, of which approximately 47% are In-the-Money
Options.

|                   |  |                                  |  |  |                       |  |  |            |  |  | RSAs   | 
|------------------ |  | -------------------------------- |  |  | --------------------- |  |  | ---------- |  |  | ------ | 
|                   |  |                                  |  |  | Number of             |  |  |            |  |  | and/or | 
|Name               |  | Position(s) Held                 |  |  | Zi Shares(i)(ii)(iii) |  |  | Zi Options |  |  | RSUs   | 
|Milos Djokovic     |  | President                        |  |  | -                     |  |  | 500,000    |  |  | -      | 
|                   |  | Chief Executive Officer          |  |  |                       |  |  |            |  |  |        | 
|Blair
      Mullin |  | Chief Financial Officer          |  |  | -                     |  |  | 50,000     |  |  | -      | 
|Axel Bernstorff    |  | VP, Global Sales                 |  |  | -                     |  |  | 170,000    |  |  | -      | 
|Roland Williams    |  | Senior VP, Intellectual Property |  |  | -                     |  |  | 141,500    |  |  | -      | 
|Andrew Gertler     |  | Director                         |  |  | -                     |  |  | 125,000    |  |  | 25,000 | 
|Donald Hyde        |  | Director                         |  |  | 12,495                |  |  | 300,000    |  |  | 25,000 | 
|Donald Moore       |  | Director                         |  |  | 18,695                |  |  | 300,000    |  |  | 25,000 | 
|Robert Stefanski   |  | Director                         |  |  | -                     |  |  | 150,000    |  |  | 25,000 | 
|George Tai         |  | Chairman                         |  |  | -                     |  |  | 183,400    |  |  | 25,000 | 
|                   |  | Director                         |  |  |                       |  |  |            |  |  |        | 

Notes:

(i) The information as to securities beneficially owned or over
which control or direction is exercised by each director and officer and by
their respective associates, not being within the knowledge of Zi, has been
provided by the respective directors and officers individually.

(ii) Does not include Zi Shares issued as RSAs.

(iii) On February 26, 2009, Mr. Djokovic surrendered for
cancellation 1,420,000 Zi Options.

Payments to Directors

The directors of Zi will receive their regular attendance fees
per meeting of the Board for meetings attended in connection with matters
relating to the Arrangement, resulting in aggregate meeting fees payable to the
members of the Board of $55,00 as at February 26, 2009. Regular attendance fees
are as follows: Each director is paid $2,500 for each in-person meeting of the
Board provided that no director shall receive such in-person meeting payments in
respect of more than five in-person Board meetings per year. Board meeting fees
for telephonic meetings are $1,000 per participating director (however, any
telephonic meeting lasting longer than 2 hours may, at the Chairmans
discretion, incur a fee of $1,500 per participating director) with a sixteen
meeting limit per year on compensation paid.

Except as set out above, with the exception of Milos Djokovic,
no director of Zi has an interest in the Arrangement Agreement or the completion
of the Arrangement Agreement except as a Shareholder a Zi Optionholder or a
holder of RSUs or RSAs and only on an identical basis as other Zi Shareholders,
Zi Optionholders or holders of RSUs or RSAs. In addition, no director of Zi has
any change of control agreement, or other remuneration payable as a result of
the completion of the Arrangement, other than Milos Djokovic, as described
below. All directors are independent of Zi, other than Mr. Djokovic, who is
Chief Executive Officer of Zi, and Mr. George Tai, who is the Chairman of
Zi.

- 89 -

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In order to ensure a smooth and efficient integration of Zi and
Nuance after the Arrangement becomes effective, on March 16, 2009 Nuance entered
into a consulting agreement (the Consulting Agreement) with Mr.
Djokovic. Pursuant to the Consulting Agreement, Nuance agreed to engage Mr.
Djokovic as a consultant performing such services as Nuance shall from time to
time reasonably request after the Effective Date of the Arrangement Agreement.
As consideration for such services, Nuance will issue Mr. Djokovic 25,000
restricted stock units of Nuance stock under Nuances 2000 Stock Plan, which
will vest in full 45 days after the Effective Date, subject to satisfactory
performance of the requested services by Mr. Djokovic. The Consulting Agreement
was not conferred for the purpose of increasing the value of the consideration
paid to Mr. Djokovic for securities relinquished under the Arrangement nor was
it entered into as a condition of Mr. Djokovic supporting the Arrangement in any
manner. At the time the Arrangement Agreement was entered into, Mr. Djokovic
beneficially owned, or exercised control or direction over less than 1% of the
issued and outstanding shares of Zi.

Securities authorized for issuance under equity
compensation plans.

|Equity Compensation Plan
      Information(1)
|---------------------------------------------
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|Plan
      category                          
|Equity compensation plans                    
|approved by
      security holders           
|Equity compensation plans not                
|approved by
      security holders           
|Total                                        

(1) Information as of December 31, 2008; all dollar figures in
Canadian dollars.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Except as set forth below and other than employment agreements
with executive officers, stock option grants described elsewhere in this report
or as otherwise disclosed in this report, the Company is not aware of any
related party transactions occurring or being made, or any loans made by the
Company or any of its subsidiaries to related parties, since January 1, 2008,
other than the following:

Since January 1, 2009

During the Companys period from January 1, 2009 to February
28, 2009, the Company accrued and/or paid legal fees to a law firm of which
George Tai, the Chairman of Zis Board, was a partner amounting, in the
aggregate, to $110,745.

From January 1, 2008 to December 31, 2008

During the Companys period from January 1, 2008 to December
31, 2008, the Company accrued and/or paid legal fees to a law firm of which
George Tai was a partner amounting, in the aggregate, to $259,556. A consulting
fee was paid by the Company to a consulting firm in which Blair Mullin, Zis
Chief Financial Officer, was a partner amounting to $42,500 during the period
from January 1, 2008 to December 31, 2008.

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

- 90 -

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Director Independence.

The Board is comprised of a majority of independent
directors, as defined by the listing standards of the NASDAQ as currently in
effect and applicable to Zi (the NASDAQ Listing Standards). Independent
directors do not receive consulting, legal or other fees from the Company, its
affiliates or its subsidiaries other than Board and committee compensation.
Although companies affiliated with certain of these directors may provide goods
and services to the Company, its subsidiaries and its affiliates, the Board has
determined in accordance with the NASDAQ Listing Standards that these
independent directors have no relationships with the Company, its subsidiaries
or its affiliates that would interfere with the exercise of their independent
judgment in carrying out the responsibilities of a director.

The Board has determined that all directors are independent
with the exception of Messrs. Djokovic and Tai.

The Board has established the following Committees comprised of
the members and chaired by the individuals set forth in the following table and
also described further in Item 10  Directors, Executive Officers and
Corporate Governance:

|Committee                                             | Members                                        | Independent                      
|----------------------------------------------------- | ---------------------------------------------- | ---------------------------------
|Audit Committee                                       | Donald Hyde, Donald Moore and Andrew Gertler   | All members are independent      
|Corporate
      Governance and Compensation Committee | Robert Stefanski and Donald Hyde               | All members are independent      
|Strategic
      Committee                             | Andrew
      Gertler and Donald Moore          | All
      members are independent
|Special Committee                                     | Robert
      Stefanski, Andrew Gertler, Donald | All members are independent      
|                                                      | Hyde
      and Donald Moore                    |                                  

All members of the Boards Audit Committee, Special Committee
and Corporate Governance and Compensation Committee are independent directors in
accordance with the NASDAQ Listing Standards. The Corporate Governance and
Compensation Committee recommends governance policies for adoption by the
Company and nominates new directors for election to the Board.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The following table presents the fees for professional audit
services rendered by Ernst & Young LLP for the audit of the Zis
consolidated financial statements for the fiscal years ended December 31, 2008
and 2007, and fees billed for other services rendered by Ernst & Young LLP
during those periods. Unless otherwise indicated, the Company paid all amounts
in the following table to Ernst & Young LLP. All services reflected in the
following table for 2008 and 2007 were pre-approved in accordance with the
policy of the Audit Committee of the Board.

|Year Ended
      December 31, |   | 2008    |  |   | 2007    | 
|----------------------------- | - | ------- |  | - | ------- | 
|Audit Fees (1)                | $ | 426,444 |  | $ | 153,002 | 
|Audit Related Fees
      (2)  |   | 36,274  |  |   | 20,925  | 
|Tax Fees (3)                  |   | 50,888  |  |   | 12,587  | 
|All Other Fees                |   |        |  |   |        | 
|Total                         | $ | 513,606 |  | $ | 186,514 | 

(1) Audit fees consist of audit and review services,
report on internal control over financial reporting and review of documents
filed with the SEC.

(2) Audit-related fees consist of pre-approved
consultation concerning financial accounting and reporting standards, and the
accounting for acquisitions and dispositions carried out by the Company.

(3) Tax fees consist of preparation of federal and
state income tax returns and consultation regarding tax compliance issues.

The Audit Committee has determined that the provision by Ernst
& Young LLP of the non-audit services referred to above is compatible with
the maintenance of that firms independence.

The Companys Audit Committee has adopted a policy and
procedures for the approval of audit and non-audit services rendered by Zis
independent registered chartered accountants, Ernst & Young LLP, other than
any de minimus non-audit services allowed by applicable law or regulation. The
policy generally requires the Audit Committees approval of the scope of the
engagement of the independent registered chartered accountants to perform the
prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the Rules of the SEC, and also considers
whether proposed services are compatible with the independence of the registered
chartered accountants. The Audit Committee has approved all of the audit fees,
audit related fees and tax fees during 2007 and 2008.

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PART IV

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 %             | 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)                                                                                                                                                                                 
|                     |                                                                                                                                                                                                                                                                                                                          
|10.12(2)             | Employment Agreement effective January
    1, 2007 between Zi Corporation of Canada, Inc. and Jason Paul                                                                                                                                                                                                                 

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|21   | List of Subsidiaries.                                                                         
|---- | ----------------------------------------------------------------------------------------------
|     |                                                                                               
|31.1 | Section 302 Certification
    by Milos Djokovic, Chief Executive Officer dated March 27, 2009.
|     |                                                                                               
|31.2 | Section 302 Certification
    by Blair Mullin, Chief Financial Officer dated March 27, 2009.  
|     |                                                                                               
|32.1 | Section 906 Certification
    by Milos Djokovic, Chief Executive Officer dated March 27, 2009.
|     |                                                                                               
|32.2 | Section 906 Certification
    by Blair Mullin, Chief Financial Officer, dated March 27, 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.                                      
|     |                                                                                               
|%    | Indicates management
    contract or compensatory plan                                        
|     |                                                                                               

- 93 -

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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: March 27, 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: March 27, 2009
|-------------------------------------------- |  | --------------------
|Milos Djokovic, President and                |  |                     
|Chief Executive Officer                      |  |                     
|(principal executive officer)                |  |                     
|                                             |  |                     
|                                             |  |                     
|/s/ Blair Mullin                             |  | Date: March 27, 2009
|Blair Mullin,                                |  |                     
|Chief Financial Officer                      |  |                     
|(principal financial and accounting officer) |  |                     
|                                             |  |                     
|                                             |  |                     
|/s/ George C. Tai,                           |  | Date: March 27, 2009
|George C. Tai, Chairman of the Board         |  |                     
|                                             |  |                     
|                                             |  |                     
|/s/ H. Donald Hyde                           |  | Date: March 27, 2009
|H. Donald Hyde                               |  |                     
|                                             |  |                     
|                                             |  |                     
|/s/ Donald Moore                             |  | Date: March 27, 2009
|Donald Moore                                 |  |                     
|                                             |  |                     
|                                             |  |                     
|/s/ Robert P. Stefanski                      |  | Date: March 27, 2009
|Robert P. Stefanski                          |  |                     
|                                             |  |                     
|                                             |  |                     
|/s/ Andrew Gertler                           |  | Date: March 27, 2009
|Andrew Gertler                               |  |                     

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