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EXHIBIT 4.3  

 
 

SYSTEMS XCELLENCE INC.
  
    ANNUAL INFORMATION FORM
  
    In respect of the twelve month period ended
  
    December 31, 2005

    
    
    March 21, 2006    
    

 
 

TABLE OF CONTENTS    
    

	 
	 	Page

	THE CORPORATION	 	1
	INTERCORPORATE RELATIONSHIPS	 	1
	GENERAL DEVELOPMENT OF THE BUSINESS OF THE CORPORATION	 	2
	 	GENERAL	 	2
	 	ACQUISITIONS AND DISPOSITIONS	 	3
	 	 	Purchase of Assets from Pharmaceutical Horizons, Inc.	 	3
	 	 	Acquisition of Health Business Systems, Inc.	 	4
	 	 	Acquisition of ComCoTec, Inc.	 	4
	BUSINESS OF THE CORPORATION	 	5
	 	OVERVIEW	 	5
	 	OVERVIEW OF THE PHARMACEUTICAL BENEFITS INDUSTRY	 	5
	 	 	Diagnosis and Prescription Writing	 	6
	 	 	Dispensing and Claim Generation	 	6
	 	 	Receiving and Forwarding of the Claim	 	7
	 	 	Benefit Evaluation and Claims Processing	 	7
	 	 	Benefit Management, Drug Cost Evaluation and Clinical Outcomes Management	 	7
	 	 	Formulary Management and Contracting	 	8
	 	TARGET CUSTOMERS	 	8
	 	 	Pharmacy Benefit Managers, Health Plans and Managed Care Organizations	 	8
	 	 	Retail and Mail Order Pharmacies	 	8
	 	 	Market Opportunity	 	9
	 	 	Increasing Number of Prescriptions	 	9
	 	 	Direct- to-Consumer Pharmaceutical Advertising	 	9
	 	 	Increasing Cost of Drug Benefits	 	9
	 	 	Aging Population	 	9
	 	 	Increasingly Complex Formularies	 	9
	 	 	Critical Shortage of Pharmacists	 	10
	 	 	United States Federal Regulation Health Insurance Portability and Accountability Act	 	10
	 	 	Medicare Prescription Drug, Improvement and Modernization Act of 2003	 	10
	 	PRODUCTS, SOLUTIONS AND SERVICES	 	11
	 	 	Pharmacy Benefit Management and Real-Time Claims Adjudication Systems	 	11
	 	 	Pharmacy Benefit Administrative Services	 	12
	 	 	Data Warehouse, Decision Support and Reporting System	 	12
	 	 	Rebate Management System	 	12
	 	 	Connectivity and Central Host Solutions Systems	 	13
	 	 	Pharmacy Practice Management Solutions	 	13
	 	MAJOR CUSTOMERS	 	15
	 	 	Software Solutions Customers	 	15
	 	 	ASP Processing Customers	 	17
	 	COMPETITION	 	20
	 	THE CORPORATION'S STRATEGY	 	23
	 	 	Growth Strategies	 	23
	 	OTHER CORPORATE INFORMATION	 	23
	 	 	Employees	 	23
	 	 	Facilities	 	23
	 	 	Intellectual Property Rights	 	24
	DIVIDEND RECORD AND POLICY	 	24
	CAPITAL STRUCTURE	 	25
	MARKET FOR SECURITIES	 	25
	DIRECTORS AND SENIOR OFFICERS	 	26
	AUDIT COMMITTEE	 	29
	 	COMPOSITION, RELEVANT EDUCATION AND EXPERIENCE	 	29
	 	PRE-APPROVAL POLICIES AND PROCEDURES	 	30
	 	EXTERNAL AUDITOR SERVICE FEES	 	30
	LEGAL PROCEEDINGS	 	30
	INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS	 	30
	TRANSFER AGENT AND REGISTRAR	 	30
	MATERIAL CONTRACTS	 	31
	 	AMENDED AND RESTATED CREDIT FACILITY AGREEMENT	 	31
	RISK FACTORS	 	32
	 	RISKS ASSOCIATED WITH ACQUISITIONS	 	32
	 	DEPENDENCE ON KEY CUSTOMERS	 	32
	 	DEPENDENCE ON KEY PERSONNEL	 	33
	 	COMPETITION	 	33
	 	EXPANDED SERVICE OFFERINGS	 	33
	 	TECHNOLOGICAL CHANGE	 	33
	 	POTENTIAL FLUCTUATIONS IN RESULTS	 	33
	 	LIQUIDITY AND CAPITAL NEEDS	 	34
	 	INDEBTEDNESS OF THE CORPORATION	 	34
	 	VOLATILITY OF SHARE PRICE	 	34
	 	LIMITED HISTORY OF PROFITABILITY	 	35
	 	PROPRIETARY TECHNOLOGY	 	35
	 	PRODUCT LIABILITY AND INSURANCE	 	35
	 	RELIANCE ON SUPPLIERS	 	35
	 	CONFIDENCE IN E-COMMERCE	 	36
	 	GOVERNMENT REGULATION	 	36
	ADDITIONAL INFORMATION	 	37
	SCHEDULE A	 	38

   Comments Regarding Figures Contained in this Document  

        In this Annual Information Form, all references to specific years are references to the fiscal years ended December 31, 2005, 2004 and 2003, respectively.
All references to "$" or "dollars" are references to US dollars unless otherwise specified. Canadian dollars are referenced as "C$". 

Information Obtained from Public Sources  

        Certain of the information contained in this Annual Information Form has been obtained from publicly available information from third party sources. The
Corporation has not verified the accuracy or completeness of any information contained in such publicly available information. In addition, the Corporation has not determined if there has been any
omission by any such third party to disclose any facts, information or events which may have occurred prior to or subsequent to the date as of which any such information contained in such publicly
available information has been furnished or which may affect the significance or accuracy of any information contained in any such information and summarized herein. 

Special Note Regarding Forward-Looking Statements  

        This Annual Information Form contains "forward-looking statements" about our expectations, beliefs, plans, objectives, assumptions or future events or
performance. These statements include, among others, statements regarding our future financial position, strategy, market opportunities, projected costs and estimated expenditures. These statements
are often, but not always, made through the use of words or phrases such as "will likely result", "are expected to", "will continue", "anticipate", "believe", "estimate", "intend", "plan", "project",
"would" and "outlook". These forward looking statements are not historical facts, and are subject to a number of risks and uncertainties. Certain of these risks and uncertainties are beyond the
Corporation's control. Accordingly, the Corporation's actual results could differ materially from those suggested by these forward-looking statements for various reasons discussed throughout this
Annual Information Form, and particularly in the section entitled "Risk Factors". 

        Some
of the key factors that have a direct bearing on the Corporation's results of operations are: 

	(a)
	our
ability to manage our growth from acquisitions;

	(b)
	our
ability to penetrate new markets;

	(c)
	our
relationships with key customers;

	(d)
	the
expertise of our key personnel;

	(e)
	the
success of our competition;

	(f)
	our
ability to expand our InformedRx pharmacy benefit service offerings;

	(g)
	our
ability to develop and introduce new systems and products and enhance existing systems and products;

	(h)
	successfully
completing fixed price contracts within the price quoted by the Corporation;

	(i)
	prevailing
industry conditions;

	(j)
	existence
of class action lawsuits or other litigation including product liability claims; 

i

 

	(k)
	our
future capital needs;

	(l)
	our
ability to maintain intellectual property rights;

	(m)
	availability
of software and other products from our suppliers;

	(n)
	our
customers confidence in the security of on-line transactions; and

	(o)
	changes
in government regulations of the healthcare industry. 

        The
factors described above and the risk factors referred to in "Risk Factors" could cause actual results or outcomes to differ materially from those expressed in any forward-looking
statements. Therefore, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and the
Corporation does not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the forward-looking statement is made or
to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Corporation to predict all of such factors. Further, the Corporation cannot
assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-
looking statements. 

        For
a discussion of important risks of an investment in our securities, including factors that could cause actual results to differ materially from results suggested in the
forward-looking statements, you should carefully consider the information set forth under the caption "Risk Factors". In light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this Annual Information Form might not occur. 

ii

 
 

THE CORPORATION    
    

        Systems Xcellence, Ltd. ("SXL") was a private company incorporated under the Business Corporations
Act (Ontario) by Articles of Incorporation dated March 19, 1993. Pursuant to an acquisition agreement dated October 19, 1994 (the "Acquisition Agreement"),
BMB Compuscience Canada Ltd. ("BMB"), a corporation existing under the Canada Business Corporations Act (the "CBCA"), acquired all of the
outstanding shares and options to acquire common shares of SXL (the "Common Shares") on January 9, 1995. Under the terms of the Acquisition Agreement, the shareholders of SXL received
one common share of BMB for each share of SXL tendered with the result that the former shareholders of SXL acquired 64.22% of the outstanding common shares of BMB. By articles of amendment dated
January 9, 1995, BMB Compuscience Canada Ltd. changed its name to "Systems Xcellence Inc." (the "Corporation" or "SXC"). By Articles of Amalgamation under the CBCA dated
August 1, 1995, the Corporation amalgamated with SXL under the name "Systems Xcellence Inc." 

        The
registered and executive office of the Corporation is located at 555 Industrial Drive, Milton, Ontario, L9T 5E1. 

 
 

INTERCORPORATE RELATIONSHIPS    
    

        The following chart sets forth the names of the material subsidiaries of the Corporation, their respective jurisdictions of incorporation and the Corporation's
percentage of voting and equity interest therein. Unless otherwise indicated herein, the term the "Corporation" means collectively the Corporation and its subsidiaries. 

  

 
 
 

GENERAL DEVELOPMENT OF THE BUSINESS OF THE CORPORATION    
    

General  

        SXC is a leading provider of pharmacy dispensing and benefits processing solutions to the North American pharmaceutical benefits industry. By combining
web-enabled, real-time transaction processing technology with business consulting expertise and technical services, SXC provides advanced on-line transaction
processing ("OLTP") solutions for the provision of drug benefits from the providers through to the payer organizations. The Corporation develops, markets and supports proprietary electronic
transaction processing and related systems. The Corporation's product offerings and solutions combine a wide range of software applications and professional services which are designed for health
benefit management organizations including pharmacy benefit management organizations ("PBMs"), managed care organizations ("MCOs"), eHealth companies, independent and mail-order
pharmacies, and retail pharmacy chains. The Corporation deploys OLTP technology to deliver real-time, paperless information technology solutions to many of the largest companies in the
United States' pharmaceutical benefits industry. 

        The
business now carried on by the Corporation was commenced by SXL in 1993 in Ontario, Canada. SXL originally developed OLTP solutions for the banking and retail sectors in Canada. The
Corporation first entered the health care sector in 1995 when it developed the "PharmaNet" system as a sub-contractor to IBM Canada for the British Columbia Ministry of Health ("BCMOH").
The PharmaNet system is designed to process every pharmaceutical prescription dispensed in the Province of British Columbia and to provide the BCMOH with the ability to alert pharmacists of potential
drug contra-indications and to substitute generic drugs for brand name drugs for the province's drug plan recipients. The Corporation continues to support the PharmaNet system with maintenance
services provided by a team based in Victoria, British Columbia. 

        The
Corporation entered the United States market in 1996 with a contract for Revco's RxConnections pharmacy benefit management subsidiary and over the next four years continued to
develop its products for the pharmaceutical benefits industry. The Corporation has secured significant software license development and maintenance contracts with several leading pharmaceutical
benefits companies, including PCS Health Systems (now, Caremark) in 1997, Walgreen Co. and CVS Corporation in 1999, two of the largest retail pharmacy operators in the United States, and
First Health Group, a significant preferred provider organization (a "PPO") in the United States, in 2000 and again in 2002 (First Health Group was acquired by Coventry Health in 2005.) 

        In
calendar 2000, the Corporation established its application service provider ("ASP") offering in Scottsdale, Arizona to provide its proprietary software to customers as a service on a
fee per transaction basis. The ASP offering was significantly enhanced with the 2001 acquisition of ComCoTec, Inc. (see "Acquisitions and Dispositions"). ComCoTec was a leading developer
of software solutions and ASP services for the U.S. pharmaceutical benefits and managed care industries. ComCoTec had been in the pharmacy systems business since 1981 and was processing over
60 million transactions per year for customers such as PharmaCare (the PBM subsidiary of CVS Corporation), Sierra Health Systems and BlueCross BlueShield of Arizona. 

        In
fiscal 2002, the Corporation focused primarily on integrating the operations of ComCoTec with those of the Corporation. This integration consisted of addressing the needs of key
ComCoTec customer accounts following the acquisition, transitioning certain customer accounts from the Corporation's Scottsdale ASP operation to its more established Lombard, Illinois ASP operation,
implementing a restructuring that affected approximately 30% of the Corporation's combined staffing, developing incentive compensation plans for key employees and staff, and subleasing certain
underutilized space resulting from the restructuring. 

2

 

        On
June 27, 2003, the Corporation completed an underwritten private placement of 3,846,154 Common Shares at a price of C$1.30 per share for gross proceeds of
C$5.0 million. Proceeds of the private placement were used for working capital purposes. 

        On
December 17, 2004, the Corporation completed a private placement of 11,111,200 special warrants at a price of C$1.35 per special warrant for gross proceeds of
C$15.0 million. Proceeds of the private placement were used for the acquisition of HBS (see "Acquisitions and Dispositions"), a leading provider of retail pharmacy management systems and
workflow technology. Each special warrant was exercised for one common share of the Corporation, without the payment of any additional consideration, on December 22, 2004. 

        Also
in connection with the acquisition, the Corporation amended and increased its senior secured credit facility by $6.0 million to $13.6 million. The amended terms of its
credit facility included a new six-year term with quarterly principal payments commencing on December 31, 2005 and maturing on December 31, 2010, up to a 200 basis-
point interest rate reduction compared to the Corporation's existing credit facility, dissolution of the $1.0 million revolving credit facility, and a prepayment penalty on the outstanding
principal balance of 2.5% during the first year and 1.5% during the second year. 

        On
May 9, 2005, Systems Xcellence International LLC, a wholly-owned indirect subsidiary of the Corporation, was dissolved. 

        On
May 31, 2005, the Corporation completed the sale and leaseback of its Milton, Ontario headquarters facility for approximately $2,343,000. The net proceeds after repayment of
the mortgage on the building were approximately $1,585,000. The Corporation recorded a gain of $626,000 on the sale. The Corporation agreed to lease back 8,100 square feet of the
facility (which represents a minor portion of the property sold) for a three-year term with one three-year renewal period option. 

        On
November 29, 2005, the Corporation completed an underwritten public offering of 9,000,000 common shares at a price of C$2.50 per common share for total gross proceeds of
C$22,500,000 ($19,230,769). All figures are in Canadian dollars. Proceeds from the offering were used for general corporate purposes and to support the Corporation's growth initiatives. 

Acquisitions and Dispositions  

        The Corporation continually seeks to expand its offerings and further its strategic goals. Acquisitions, including those described below, are one of the ways
undertaken to achieve these objectives. 

Purchase of Assets from Pharmaceutical Horizons, Inc.  

        Effective September 30, 2005, the Corporation, through its wholly-owned subsidiary, SXC Health Solutions, Inc., acquired certain assets of
Ohio-based Pharmaceutical Horizons, Inc. ("PHI") in a cash transaction. The Corporation acquired the intellectual property and selected personnel that support PHI's pharmaceutical
manufacturer contracts and rebate processing services. 

3

 

Acquisition of Health Business Systems, Inc.  

        On December 17, 2004 (the "Closing Date"), SXC Health Solutions, Inc. ("SXC Health") (formerly Systems Xcellence USA, Inc.), a
wholly-owned subsidiary of the Corporation, purchased all the outstanding shares of Health Business Systems, Inc. ("HBS"), a leading provider of retail pharmacy management systems and workflow
technology. The transaction increased SXC's revenue earned from the pharmacy market, enhanced the functionality of the Corporation's pharmacy offerings and added to the Corporation's recurring revenue
base. The transaction was financed through a combination of working capital, an increased credit facility secured by the Corporation and cash raised via a private placement equity offering. 

        Under
terms of the purchase agreement (the "Agreement"), SXC Health will pay up to $24.0 million in cash for HBS, with the final purchase price subject to working capital
adjustments at closing and HBS achieving certain financial ("Earn-out") targets. On the Closing Date, SXC Health paid $2.0 million, which was being held in an interest-bearing
escrow account pursuant to the terms of the Agreement and issued notes of $18.0 million for total consideration of $20.0 million to the shareholders of HBS. On January 3, 2005,
SXC Health paid $18.0 million in cash in settlement of the notes. The $2.0 million was held in the escrow account for one year from the Closing Date as security against certain
indemnities arising under the Agreement. As at December 31, 2005, the indemnity amount had not been finalized as the Company had filed a claim against the escrow. 

        On
May 31, 2005, SXC Health paid $2.4 million to the former shareholder of HBS of which $2.0 million was the initial Earn-Out payment and
$0.4 million was the working capital payment. On June 1, 2005, SXC Health paid the remaining Earn-Out payment of $2.0 million to an interest-bearing escrow account
pursuant to the terms of the Agreement, which will be paid to the former HBS shareholders on December 31, 2006, subject to specified Earn-Out targets being met. This
$2.0 million contingent consideration has been recorded as a long-term asset and will be recorded as additional purchase price consideration when the contingency is resolved. 

Acquisition of ComCoTec, Inc.  

        Effective March 1, 2001, SXC Health acquired substantially all of the business and assets and assumed certain liabilities (the "ComCoTec
Acquisition") of ComCoTec, Inc. ("ComCoTec") of Lombard, Illinois, pursuant to an asset purchase agreement dated as of March 8, 2001 among the Corporation, SXC Health, ComCoTec and The
Potomac Group Inc. (the "ComCoTec Acquisition Agreement"). At the time of the ComCoTec Acquisition, ComCoTec was a leading developer of software solutions and Application Server Provider
("ASP") services for the United States pharmaceutical benefits industry. The consideration paid by SXC Health for the ComCoTec business and assets was $15.5 million in cash on closing,
subject to adjustment for any surplus or deficiency between net assets purchased over the liabilities assumed and $1.9 million, plus the assumption of the agreed liabilities. Pursuant to the
ComCoTec Acquisition Agreement, on June 27, 2001, the Corporation paid $155,118 to the Potomac Group, Inc., which reflected a resulting surplus in the net assets purchased over the
liabilities assumed and $1.9 million. 

4

 
 
 

BUSINESS OF THE CORPORATION    
    

Overview  

        The Corporation is a leading provider of healthcare information technology solutions and pharmacy dispensing and benefits processing services to the
pharmaceutical benefits industry. The Corporation's product offerings and solutions combine a wide range of software applications, ASP processing services and professional services designed to address
the needs of virtually every participant within today's pharmacy benefit delivery system. The Corporation's customers include many of the foremost organizations in the pharmaceutical supply chain,
such as PBMs, MCOs, federal and state government agencies, independent and mail order pharmacies and retail pharmacy chains. 

        The
Corporation's products and services offer its customers comprehensive pharmacy benefits management claims switching and processing, drug dispensing, drug warehousing and analysis,
rebate contract management, and pharmacy network management solutions. The Corporation delivers these solutions to its customers as software products bundled with systems implementation and consulting
services or on an ASP basis from its data centres in Scottsdale, Arizona and Lombard, Illinois. The Corporation also uses its proprietary off-the-shelf technology coupled with
in-depth technical and domain expertise to develop new proprietary applications for customers. 

        For
the twelve-month period ended December 31, 2005 ("calendar 2005"), the Corporation's revenue consisted primarily of ASP processing and switching services, professional
services, maintenance, and licensed software and hardware sales. The Corporation considers its ASP processing and maintenance revenue as recurring, due to the generally longer-term nature
and auto-renewal features of the underlying contracts. The Corporation's recurring revenue base continues to represent a significant proportion of consolidated revenue and increasing its
base of recurring revenue continues to be an important strategic goal of the Corporation. For calendar 2005, recurring revenue as measured by the Corporation accounted for 64% of total revenue
compared to 62% in the prior year. 

Overview of the Pharmaceutical Benefits Industry  

        The pharmaceutical benefits supply chain can be broken down into the following five different stages (see diagram below): 

	•
	diagnosis
and prescription writing (Patient and Medical Doctor);

	•
	dispensing
and claim generation ("Provider" — Retail Pharmacy, Mail Order/Internet Pharmacy);

	•
	receiving
and forwarding of the claim (Claims Routing Switch/Value Added Network ("VAN"));

	•
	benefit
evaluation and claims processing, including benefit management, drug cost evaluation and clinical outcomes management and reporting and information analysis
("Payer" — PBMs, MCOs, government agencies and other intermediaries supported by InformedRx); and

	•
	formulary
management and contracting (Pharmaceutical Manufacturers). 

5

 

Each
of these stages is described below: 

  

Diagnosis and Prescription Writing  

        The drug therapy process is initiated when a physician writes a prescription for a patient. The vast majority of prescriptions are still written on paper by
physicians. However, several companies are developing electronic prescribing applications for use by physicians. These applications, which are designed for use on personal digital assistant
hand-held computers, are designed to deliver point of prescribing real-time formulary look-up and contra-indication checking with the goal of improving safety and
reducing the cost of drug therapy delivery. Physicians have recently begun to adopt e-prescribing technology in a more significant way and there continues to be a number of competing
industry initiatives underway to accelerate this outcome, including regulations under the Medicare Part D drug benefit program and connectivity offerings from companies including RxHub and
SureScripts. The Corporation has been monitoring the development and adoption trends of this technology and will be supporting them primarily through client initiatives. 

Dispensing and Claim Generation  

        Prescriptions written by physicians can reach the dispensing facility by electronic data interchange ("EDI"), fax, mail or, most commonly, by direct delivery by
the patient at a retail pharmacy or submission via mail to a mail order pharmacy. Dispensing facilities include retail pharmacies, mail order pharmacies, Internet pharmacies, skilled nursing
facilities and outpatient hospital pharmacies. In each case, the dispensing pharmacist evaluates the prescription for appropriateness of the therapy based on the drug type, dose amount and frequency,
prior prescription history and disease and health conditions. The approved pharmaceutical is then dispensed and a claim for payment is generated. Payment of the claim can be made by the patient, an
insurance company or some combination of the two. Over 90% of the prescriptions written in the U.S. are adjudicated electronically in real-time. The Corporation's
RxSERVER® and RxEXPRESS® software and most recently, HBS software applications, offer services and tools to manage the entire workflow process involved in dispensing drugs and
submission of claims in retail, mail order and managed care central fill pharmacies. 

6

 

Receiving and Forwarding of the Claim  

        Based on data published in the 2004 National Association of Chain Drug Stores ("NACDS") Industry Profile, the Corporation has concluded that there are over
55,000 drug dispensing facilities in the United States which need to interface with nearly 100 PBMs and over 1,000 claim payers, including health management
organizations, PPOs and other MCOs (collectively, known as "payers"). Specialized EDI connectivity solution providers, called "switches" or VANs, provide connectivity solutions between dispensing
facilities and payers. The VANs route incoming claims from the providers using imbedded processor identifiers in the standardized EDI claim format to the correct payer. The claim is then evaluated by
the payer and sent back via the VAN to the dispensing pharmacist with an appropriate response, indicating whether the claim is rejected or paid along with payment and clinical information. The
Corporation's RxSERVER® applications provide claims switching services via direct EDI link, satellite, Internet and dial-up modem to its pharmacy customers. 

Benefit Evaluation and Claims Processing  

        The goal of benefit evaluation is to address four basic questions out of over 200 specific processes: 

	1.
	Is
the patient an active member of a valid drug benefit plan?

	2.
	Is
the provider an approved member of the pharmacy network?

	3.
	Is
the pharmaceutical to be dispensed an approved drug in the benefit definition for the member and is the quantity to be dispensed appropriate?

	4.
	Is
the dispensed drug appropriate (when checked against the member's prescription history, reported allergies and other health conditions)? 

        The
answers to these questions can be obtained in an on-line, real-time environment. If the claim forwarded by a provider to a processor produces a "yes" answer
to each of the above four questions, then the claim is priced for payment using the negotiated payment terms between the provider and the payer. The pricing can also be
conducted in an on-line, real-time environment. The response can then be forwarded through the VAN to the provider. The Corporation provides sophisticated OLTP solutions such
as RxCLAIM® to manage this entire benefit evaluation and claims processing function. 

Benefit Management, Drug Cost Evaluation and Clinical Outcomes Management  

        This stage consists of a host of activities that may include employers, payers, providers and processors. The activities involve eligibility determination and
enrolment, risk management, premium collection, benefit design, cost control measures, disease and clinical outcomes management, and payment of pharmaceuticals and administrative services. The
Corporation's solutions enable drug benefit plan administrators to manage all of these functions. The Corporation's health plan/insurance company clients use the various tools included in the
RxCLAIM® product to implement cost reduction protocols to attempt to reduce drug benefit plan costs. For example, the implementation of a "three tier co-payment process"
encourages patients to request lower cost generic drugs because it requires the lowest out-of-pocket payment from the patients, the second tier requires a higher
co-payment from a patient for a preferred brand name drug, while the third tier can require an even higher co-payment from a patient for non-preferred brand name
drugs. A "prescription step therapy protocol" requires a patient to try a less expensive drug alternative prior to resorting to a more expensive drug. Implementation of such protocols and data
analysis using the Corporation's software tools and services enables the Corporation's clients to actively manage and reduce their drug benefit costs. 

7

 

        The
Corporation's InformedRx service offering provides payers with an á la carte suite of claims processing, pharmacy and manufacturer contracting and clinical services to
build and manage flexible and cost effective prescription drug plans, while enjoying full price transparency. The Corporation offers a nationally contracted network of retail pharmacies and contracts
and manages custom local pharmacy networks for a number of its clients. The Corporation more recently began adding clinical services to its InformedRx offering. These clinical programs include, but
are not limited to, benefit design with coverage and formulary considerations, contingent therapy protocols, dose optimization, therapeutic interchange programs, generic utilization initiatives,
disease management, and predictive modeling for high-cost users. 

        The
data generated from drug claim processing can be valuable to the various participants in the drug therapy process. The analyzed data and drug utilization reports are used by
pharmaceutical manufacturers, managed care organizations, payers, employers and processors to manage risk, understand and control drug benefit costs, understand and influence disease and clinical
outcomes, monitor and influence physician prescribing, target physician detailing, establish pharmaceutical formularies and rebates, reduce fraud and abuse and improve operational efficiencies. The
Corporation's RxTRACK® and RxMAX® applications provide its customers with decision support tools and services to help them to understand and control their escalating drug
benefit costs and to maximize their manufacturer rebates, respectively. 

        In
2004, the Corporation launched and sold its RxPORTAL offering on a transaction processing basis to a number of its customers and continued to add to its installed base in 2005. The
Corporation receives an additional fee per transaction for this service. RxPORTAL allows healthcare organizations to extend the services they provide to their plan members by establishing a web
presence for plan members to view program details and maximize the utility of their prescription benefits. RxPORTAL enables plan members to review complete information of their group and prescription
benefit plan; access their medication history, search a drug database for detailed pharmaceutical information; identify which drugs are covered under their plans; determine what their
co-payment will be for a particular prescription; and, locate the nearest pharmacy that is part of the member's network. 

Formulary Management and Contracting  

        In late 2004, the Corporation engaged Script Strategies to establish performance-based pharmaceutical manufacturer contracts for SXC's customers that seek a
balanced portfolio of "best-in-class" drug therapies. This arrangement is consistent with SXC's strategy to address government payer opportunities in Medicare and Medicaid,
continue the development of its InformedRx suite of services for its private label PBM customers, as well as offer an alternative solution to the full service PBM offering in the MCO and employer
group markets. 

Target Customers  

Pharmacy Benefit Managers, Health Plans and Managed Care Organizations  

        PBMs, health plans and MCOs are targeted for both product license sales as well as the Corporation's ASP solutions. There are approximately
100 PBMs and over 1,000 health plans and MCOs in the United States processing approximately 3.6 billion prescription transactions ("scripts") per year. 

Retail and Mail Order Pharmacies  

        Pharmacy practice management solutions are aimed at retail, mail and institutional pharmacies and other dispensing facilities. The retail units can be further
subdivided as chains, independents and mail order pharmacies. According to the NACDS, there are over 55,000 retail pharmacies, including approximately 17,900 independent,
20,800 chain, 9,800 supermarket, 6,700 mass merchant, and 200 mail-order pharmacies in the United States processing approximately 3.6 billion
transactions in 2005. 

8

 

Market Opportunity  

        The 3.6 billion pharmacy scripts written and filled each year in the U.S. alone equates to a retail value in excess of $250.0 billion. The
drug utilization rate is rising by 5-10% annually due to the aging population, the release of new blockbuster and life-style drugs, direct-to-consumer
advertising by pharmaceutical manufacturers and the expansion of drug benefits to seniors (Medicare) which began in 2006. SXC estimates that, based on a variety of transaction fees on the dispensing
of pharmaceuticals, switching of third-party claims, and management of drug benefits, the current market opportunity for information technology solutions and services in this industry approximates
$4.5 billion annually. 

        Management
of the Corporation estimates that demand for technology solutions and services within the pharmaceutical benefits industry in the United States is growing at a rate in
excess of the drug utilization rate alone due to the factors outlined below: 

Increasing Number of Prescriptions  

        The number of retail prescriptions filled in the United States increased from 2.0 billion in 1992 to approximately 3.6 billion in 2005. The
NACDS estimates that this number will reach over 4.5 billion by 2010. The Corporation believes that the funded Medicare Part D drug benefits made available to senior citizens in the
United States in 2006 could further drive prescription volume to over 5.0 billion prescriptions by 2010. 

Direct- to-Consumer Pharmaceutical Advertising  

        Direct advertising by pharmaceutical companies to consumers through print, radio and television is increasing the demand for pharmaceuticals, especially for
"lifestyle" drugs, including selective seritonin receptivity inhibitors such as Prozac and sexual dysfunction drugs such as Viagra. 

Increasing Cost of Drug Benefits  

        According to IMS Health, the collective retail value of prescriptions filled in 2005 increased 5.4% to $252 billion in 2005. This upward trend in
prescription drug spending is expected to continue. According to NACDS, the average retail cost of a prescription was $63.59 in 2004 versus $59.52 in 2003. 

Aging Population  

        The U.S. population is aging. An older population on average utilizes more pharmaceuticals than a younger one. With the progression of age, the
presentation of various and multiple chronic conditions contributes to this increased pharmaceutical utilization. 

Increasingly Complex Formularies  

        In order to control escalating drug costs, payers are implementing increasingly complex lists of approved drugs and dispensing rules ("formularies"). Complex
formularies enforce tiered pricing and co-payments that require increased patient payments for non-generic and off-formulary drugs. Step therapy protocols require
the dispensing of less expensive clinically equivalent drugs before a more expensive drug can be dispensed. 

9

 

Critical Shortage of Pharmacists  

        NACDS reported that the United States labour pool for degreed pharmacists has failed to keep pace with the growth of prescription drug use. As of
July 2004, NACDS reported that chain pharmacies had over 4,000 vacancies in their pharmacies. NACDS projections indicate that between 2004 and 2010 the supply of all community
pharmacists is expected to increase only 7.8% versus an estimated 27% increase in number of prescriptions dispensed. The Corporation believes that this shortage of pharmacists will continue to fuel
demand for information technology solutions that improve workflow and promote efficient pharmacy operation. 

United States Federal Regulation Health Insurance Portability and Accountability Act  

        The Health Insurance Portability and Accountability Act ("HIPAA") is a United States federal law requiring
healthcare organizations to meet certain standards for electronic transactions, health information privacy and security and unique identifiers for health care providers, health plans, employers and
individual members. Following the federal government's one year extension of HIPAA announced in December, 2001, effective October 16, 2003, all healthcare organizations are now required to
adhere to the electronic transaction standards privacy rule for protected health information set by HIPAA. Effective April 21, 2005, most covered entities (health plans, health care
clearinghouses, and health care providers) were required to be in compliance with the rule, which requires covered entities to comply with a series of security best practices and principles related to
securing such information. SXC, as a business associate to many covered entities, has taken the necessary steps to ensure compliance with the rule. 

Medicare Prescription Drug, Improvement and Modernization Act of 2003  

        Title I of the Medicare Prescription Drug, Improvement, and Modernization Act ("MMA") that was passed into U.S law
in 2003, establishes a new voluntary outpatient prescription drug benefit for approximately 40 million US citizens, (primarily senior citizens) under Part D of title XVIII of the  Social Security Act (the "SSA"). Pursuant thereto, the prescription drug benefit and an employer subsidy for qualified retiree health plans began
on January 1, 2006. Coverage for the drug benefit is provided through private prescription drug plans, including a number that are SXC clients, that offer drug-only coverage, or
through Medicare Advantage plans that offer both prescription drug and health care coverage. It may also be offered by managed care plans with cost-reimbursement contracts under the SSA.
These plans must offer a standard drug benefit, but have the flexibility to vary the drug benefit within certain parameters. While the Centers for Medicare and Medicaid Services ("CMS") is utilizing
technical standards and processes in common use in the pharmacy claims industry, significant new functionality is needed to meet their demands. 

        The
Corporation believes it may benefit by both supporting its managed care customers in the initial preparation for MMA adoption through its professional service efforts, as well as
through the anticipated increased transactional volumes associated with MMA plan membership beginning in 2006. 

10

 

Products, Solutions and Services  

        The Corporation's payer product suite is built on a technical architecture using client server design, an open system platform, industry standard products and
interface independent applications. The middle-ware components include services for on-line transaction processing, message routing and switching, translation, licensing,
security and data access. The Corporation's software products are tailored for widely accepted technology platforms such as the IBM RS/6000 (pSeries) and AS/400 (iSeries), Oracle 8i, PowerBuilder,
C/C++, Windows® 2000/XP, Java and WebSphere for Internet enabled applications. With the acquisition of HBS, the Corporation's provider product suite now offers support for Microsoft
operating systems including DOS / Windows and LINUX. 

        The
Corporation provides comprehensive pharmacy benefits management, drug dispensing, pharmacy workflow, drug data warehouse and analysis and drug rebate contract management systems. The
Corporation also offers the pharmaceutical benefits industry information technology solutions and services aimed at supporting the different stages in the life cycle of a drug benefit claim. The
Corporation believes it is unique in that it can deploy any of its payer solutions as: 

	•
	ASP
Processing — solutions "rented" on a transaction or subscription basis from its data center in Lombard, Illinois;

	•
	Software
Solutions — licensed software products bundled with systems implementation and consulting services and maintenance; and/or

	•
	Custom
Applications — base technology coupled with software development and systems integration services. 

        SXC's
ASP processing centers processed over 140 million pharmacy transactions in 2005, which equates to approximately 3.5% of all pharmacy benefit transactions processed in the
United States. Together with the Corporation's Software Solutions under customer license, the Corporation believes that 15-20% of all pharmacy benefit transactions are processed on
the Corporation's systems. 

Pharmacy Benefit Management and Real-Time Claims Adjudication Systems  

 RxCLAIM®i (IBM iSeries — AS/400)  

        The Corporation's RxCLAIM®i on-line transaction processing system, designed to run on the IBM iSeries (AS/400) computer platform, provides
customers with a number of solutions for adjudication of third party prescription drug claims at the point of service. Flexibility and control are considered two of the most advantageous features of
RxCLAIM®i. RxCLAIM®i gives customers access to a wide range of important services, including claims processing, eligibility processing, payment processing, drug utilization
review ("DUR") flexible benefit design, formulary management and rebate management. The target market for RxCLAIM®i is large to mid-sized PBMs, MCOs, federal and state
government agencies and health insurance companies, who wish to license the software or outsource it through the Corporation's ASP. RxCLAIM®i is the Corporation's primary source of revenue
and the platform upon which its InformedRx initiative is built. 

 RxCLAIM®p (IBM pSeries — RS/6000)  

        The Corporation's RxCLAIM®p Pharmacy Benefits System (formerly called HX-PBS), designed to run on the IBM pSeries (RS/6000) computer
platform under Oracle®, is a performance-oriented suite of applications that supports advanced and effective management of drug benefits. RxCLAIM®p is designed to provide
instant on-line adjudication of point-of-service prescription drug claims, trouble-free claims management, and cost effective review, payment and
billing support. RxCLAIM®p facilitates the real-time processing of pharmacy claims and payments against eligibility plan benefits, formularies, price, DUR and drug utilization
evaluation, prior-authorization and rebates. The Corporation believes that the use of RxCLAIM®p by customers can result in significant automation efficiencies, the ability to initiate an
expanded range of revenue generating services and enhanced adaptability for future changes in service demands. The target market for RxCLAIM®p is large PBMs, MCOs and health insurance
companies interested in open systems architecture who wish to license the software. 

11

 

Pharmacy Benefit Administrative Services  

 InformedRx®  

        The Corporation's InformedRx offering is a broad suite of á la carte pharmacy benefit administrative services that provide a flexible and
cost-effective alternative to traditional PBM offerings typically employed by MCOs. The InformedRx suite provides healthcare benefit plan design, prescription drug claims adjudication,
retail pharmacy network reimbursement contracts, drug utilization review, pharmaceutical manufacturer contracting and rebate management, and web portals for members as value-added services, all built
around the Corporation's industry leading pharmacy claims processing system, RxCLAIM®. 

Data Warehouse, Decision Support and Reporting System  

RxTRACK® 

        RxTRACK®
is a data warehouse and analysis system that delivers information to the desktop of health benefit plan providers, facilitating on-line analytical
processing. In conjunction with
RxCLAIM®i, this system provides a highly versatile reporting mechanism. Utilizing the IBM iSeries as the database, RxTRACK® provides customers with the ability to analyze
distinct variables and produce comparisons or process a report from the library of pre-built queries running against the RxTRACK® data warehouse. RxTRACK® provides
clients with access to a wide range of important services, including business intelligence, multi-dimensional data access, query drill-downs and support of retrospective DUR. 

Rebate Management System  

RxMAX® 

        RxMAX®
is a system that is designed to assist health plans in managing their relationships with pharmaceutical manufacturers through contract management, notes facilities,
calculating market share, and creating billing details and summaries. Utilizing the National Council for Prescription Drug Programs rebate standards as its foundation, the flexible table-driven system
allows users to create market share reports, rebatable item lists, contract and pricing terms, managed performance schedules and administration fee schedules. RxMAX® has the ability to
allocate the monies received from these arrangements so they can easily be allocated back to employers, physician groups or other defined entities. In conjunction with certain of the Corporation's
other systems, RxMAX® assists customers in managing complex relationships with pharmaceutical manufacturers, adjudicating complex contracts, allocating monies to defined entities and
managing overall patient costs. RxMAX® runs on the IBM iSeries, pSeries and under Windows®. 

12

 

Connectivity and Central Host Solutions Systems  

RxSERVER® 

        RxSERVER®
functions as the catalyst for the collection, control and sharing of prescription information between pharmacies within a participating group. Developed with the
latest in client/server technology, RxSERVER® is designed to enable pharmacies to communicate on-line real-time with a central host. RxSERVER® provides
pharmacies with access to a wide range of important services, including central data repository, network-wide DUR, prescription switching and unlimited reporting capabilities. 

 Web Solutions  

        The Corporation provides two Web solutions for pharmacy benefit management — RxPORTALTM and Web Services. Both
allow clients to interact with the RxCLAIM® set up in a secure environment, but in different ways depending on their needs and resources. 

        RxPORTALTM
keeps members informed about their prescription benefit programs through the Internet. The portal can be branded with a client's logo, their organization's name,
links to their organization's Internet home site, and customizable news bulletins about their organization. RxPORTALTM enables plan members
to review complete information about their group and prescription benefit plan, access their medication history, search a drug database for detailed pharmaceutical information, identify which drugs
are covered under their plans, determine what their co-payment will be for a particular prescription, and locate the nearest pharmacy that is part of the member's network. 

        Web
Services provides clients the freedom to build products, tools and reports that utilize the Corporation's data throughout their enterprise. The Corporation's Web Services allows
clients to interact with the RxCLAIM data and functionality using a standardized Web protocol. Web Services provides the flexibility for clients to build Web sites for their members, as well as
customer service tools, plan audit tools, authentication tools and reports, using the same data. These tools provide our clients the freedom to build services that utilize, but do not completely rely
upon, the Corporation's applications. Web Services has many rich functionalities, such as member trial adjudication, eligibility transactions, drug product search with filters, multi-language drug
monographs, member cross-reference, patient history and pharmacy locator. 

Pharmacy Practice Management Solutions  

        Through the purchase of HBS, SXC acquired a feature-rich product suite with a more significant installed customer base, particularly for independent
and small/medium sized chain pharmacies. 

 HBS Retail Pharmacy Management System  

        The Retail Pharmacy Management System ("RPMS") is designed to save time by minimizing keystrokes and eliminating manual calculations for quick response in a fast
paced retail pharmacy environment. RPMS is designed to be functionally rich to include such features as extensive pricing capabilities, wholesaler acquisition cost updates, unlimited patient comments
and instructions, laser label capabilities, family linking, etc. RPMS is also enabled to accept a number of third-party add-ons such as interfacing to most automated dispensing systems
(i.e. Innovation, OptiFillTM, ScriptProTM, S.I. Baker, etc), voice response interface, integrated signature capture, pill imaging, doctor faxing, delivery and workflow
modules, HL7 interface and X12 wholesaler interfacing for purchase order generation. 

13

 

 HBS Common Profile System  

        For commonly owned groups of pharmacies, the HBS Common Profile System (the "Common Profile System") offers all the features of the RPMS in addition to the
ability to centralize the administration of all stores through a single central processing unit ("CPU"). All data files (drug, doctor, signature, etc.) can be shared leaving all remote sites little or
no maintenance functions to perform. When customers shop at an HBS Co-ProTM store, their complete patient profiles will be readily available, in real-time. The
Common Profile System allows each pharmacy to maintain its individuality in areas such as reporting, pricing, and prescription labeling. 

 HBS Chain-Host System  

        The HBS Chain-Host System (the "Chain-Host System") is designed for multi-site pharmacies with a need to share central
database information. The Chain-Host System is ideal for both commonly and individually owned pharmacy structures such as franchises and co-operatives. Many maintenance
functions (third party plan administration, drug file maintenance, etc.) can be performed by the system host (the "Host") and broadcast down to the individual locations. Each individual
pharmacy has its own CPU with on-line nightly communication to a Host System via the Internet. Using the Internet as the communication vehicle gives the Host the ability to administer a
large number of widely dispersed locations. The Host serves as a central data repository of information for the group. Using the Internet as the communication vehicle gives the Host the ability to
administer a large number of widely dispersed locations. 

RxEXPRESS® 

        RxEXPRESS®
is a pharmacy practice management application that provides information processing and workflow solutions supporting primarily, mail service, managed care and high
volume central fill pharmacies. RxEXPRESS® is designed to enable pharmacists to maintain a competitive edge in the marketplace by offering services which include patient refill orders over
the Internet, patient compliance/patient profile applications, electronic prescribing and refill authorizations, pharmacy web-site hosting and interfaces and complete mail service,
out-patient pharmacy management inventory control and pricing management. The system also provides workflow control, clinical analysis, third-party payment and administrative services
support. RxEXPRESS® runs primarily on the Compaq Alpha architecture and is utilized in over 20 mail order pharmacies. 

14

  

Major Customers  

        Following the acquisition of HBS, SXC now provides solutions and services to over 1,300 active customers in the pharmacy benefits, provider and payer
marketplaces. Some of the Corporation's most significant customers are identified below: 

Software Solutions Customers  

Walgreen Co.  

        Walgreen Co. ("Walgreen") is a drugstore retailer that serves customers in 43 states and Puerto Rico through 3,700 retail drugstores and
three mail service facilities. Walgreen's drugstores are engaged in the retail sale of prescription and non-prescription drugs and carry additional product lines such as general
merchandise, cosmetics, toiletries, household items, food and beverages. Customer prescription purchases can be made at the drugstores as well as through the mail, telephone and the Internet. 

        Walgreens
Health Initiatives ("WHI"), part of the Walgreen family, offers pharmacy benefit management, mail service pharmacy, home care and specialty pharmacy services. The Corporation's
RxCLAIM®p application and consulting services provide pharmacy benefit management, billing and payment software solutions to WHI for over 3.0 million lives. 

PharmaCare  

        A wholly owned subsidiary of CVS Pharmacy, PharmaCare is a PBM company with the purchasing power and stability of a Fortune 500 company. With over
6 million pharmacy lives, PharmaCare has proven success in managing pharmaceutical
costs for large employer groups and MCOs. Utilizing RxCLAIM®i hosted at SXC's Chicago processing center, PharmaCare is committed to identifying the trends affecting costs and quality of
care, devising and implementing workable, forward-looking recommendations, custom-tailored to each client's unique circumstance. PharmaCare recently completed the integration of its acquisition of
Eckerd Health Services ("EHS"), an existing SXC client. 

Eckerd Health Services ("EHS",now part of PharmaCare)  

        EHS, located in Pittsburgh, PA, is among the largest pharmacy based PBMs in the United States, with products that include pharmacy based clinical
programs, a network of over 55,000 retail pharmacies and three mail service pharmacies. EHS' clients include employers, insurance companies, MCOs, government agencies and union groups
nationwide. The Corporation provides RxCLAIM®i and RxTRACK® pharmacy benefit management processing and data warehousing software to EHS. 

Prime Therapeutics  

        Prime Therapeutics, Inc. ("Prime Therapeutics") is a pharmacy solutions company that offers a complete line of services including formulary management,
claims processing, pharmacy service operations, drug utilization review, provider networks and leading edge programs in disease state management, physician education, patient education,
pharmacoeconomic analysis and health outcomes research. Headquartered in St. Paul, Minnesota, Prime Therapeutics is jointly owned by various Blue Cross Blue Shield plans. The Corporation's
RxCLAIM®i and RxSERVER® applications provide pharmacy benefit management processing software solutions for Prime Therapeutics' nine million lives. In the fourth quarter of
2003, Prime Therapeutics purchased a software license for SXC's mail order dispensing system, RxEXPRESS® Alpha, in support of their initiative to open their own mail order facility. 

15

 

Prescription Solutions  

        Prescription Solutions is an innovative pharmacy and medical management company managing the prescription drug benefit of commercial, Medicare and governmental
health plans, as well as those of employers and unions representing over $2.1 billion in pharmaceutical purchases. A wholly owned subsidiary of PacifiCare Health Systems, Inc. (NYSE:
PHS), one of the United States' largest health care services companies, Prescription Solutions serves members through a state-of-the-art mail service
pharmacy in Carlsbad, California, as well as through a national network of 53,000 community pharmacies. The Corporation provides the RxEXPRESS® mail order pharmacy practice
management software solution as well as its RxCLAIM®i and RxTRACK® pharmacy benefit management processing and data warehousing software to Prescription Solutions. At the close
of 2003, Prescription Solutions purchased a software license for RxSERVER®, to support their coordination of benefits with PacifiCare's CMS-endorsed Medicare Discount Drug Card
Program, and RxMAX® to support their rebates with pharmaceutical manufacturers. On December 21, 2005, UnitedHealth Group (NYSE: UNH) announced that it had received all necessary
approvals to complete its merger with PacifiCare Health Systems, Inc. To SXC's knowledge, Prescription Solutions is expected to continue to use the Corporation's suite of software products. 

Blue Cross & Blue Shield of Alabama  

        Blue Cross and Blue Shield of Alabama ("BCBS AL") is the largest provider of health care benefits in Alabama and provides coverage for more than
3 million beneficiaries in the state including 2.1 million pharmacy lives. The Corporation's RxCLAIM®i application provides pharmacy benefit management processing software
solutions to BCBS AL and its RxSERVER® application was used to migrate the business from its legacy application. The Corporation successfully completed the implementation of and received
substantive payment for its RxCLAIM®i application in early fiscal 2003. BCBS AL also purchased the Corporation's RxMAX® software in early fiscal 2004. 

Blue Cross & Blue Shield of Mississippi (Advanced Health Systems)  

        Blue Cross & Blue Shield of Mississippi ("BCBS Mississippi") has been serving the needs of Mississippians since 1947. BCBS Mississippi remains the largest
health insurance company in the state. Today it is Mississippi's largest provider of health care coverage, serving nearly one million customers. Based in Jackson with satellite offices in five other
cities throughout Mississippi, the company employs just over 1,000 people. The Corporation's RxCLAIM®i, RxSERVER®, and RxTRACK® applications provide pharmacy
benefit management processing software solutions and data warehousing capabilities to BCBS Mississippi. 

WellPoint/Anthem  

        WellPoint, located in Thousand Oaks, CA, merged with Anthem, Inc. in 2004 and is one of the nation's largest publicly traded health care companies serving
the needs of approximately 28 million medical members. Their offering of PBM services includes more than 60 pharmaceutical manufacturer contracts and approximately 150 million
pharmacy claims representing over $6.0 billion in drug spend annually. The Corporation provides RxMAX®, rebate performance-based contract management software and maintenance
services to WellPoint/Anthem. 

16

 

MAXIMUS, Inc.  

        The Corporation partners with MAXIMUS to deliver a breakthrough pharmacy management system to the BCMOH, which operates B.C. Pharmacare. The
province-wide networked system, PharmaNet, that went live in September 1995, was an instrumental element in B.C. Pharmacare's mission to improve the universal drug-care
system in the province by improving processes, identifying and preventing drug interactions, and highlighting incorrect dosages. 

Health Care Services Corporation and Blue Cross Blue Shield of South Carolina  

        For the above two BCBS plans, the Corporation's Rx-Gateway application connects health care providers, such as physicians, clinics, hospitals and
laboratories, with the BCBS back-end claims processing systems to more efficiently submit claims and eligibility verification requests. 

ASP Processing Customers  

MC-21  

        MC-21 is a mid-sized PBM based in Puerto Rico that manages over 2.0 million lives. As announced by press release in
June 2003, MC-21 is utilizing the Corporation's RxCLAIM®i claims processing system through the Corporation's Chicago processing center.
MC-21 is participating as a PDP (Prescription Drug Plan) provider under Medicare's new Part D drug program in Puerto Rico. 

Sierra Health Services, Inc.  

        Sierra Health Services, Inc. ("Sierra") is a diversified health care company that provides and administers the delivery of managed care benefit plans for
employers, government programs and individuals. Sierra's managed health care services are provided through HMOs, managed indemnity plans, a third-party administrative services program and workers'
compensation medical management programs. The Corporation provides pharmacy benefit management processing ASP solutions, RxCLAIM®i and RxTRACK®, to Sierra's
560,000 members. Sierra is participating as a PDP (Prescription Drug Plan) provider under Medicare's new Part D drug program in ten western states. 

Blue Cross Blue Shield of Arizona  

        As one of the state's largest health insurers, Blue Cross Blue Shield of Arizona ("BCBS AZ") has been dedicated to connecting Arizonans to health care services
for 60 years. The company serves more than 700,000 customers with a wide range of health care plans to serve virtually every market segment. Products range from PPOs and HMOs for
individuals and groups to a corporate health services product that provides large, self-insured employers access to managed care networks for both their health and workers' compensation
programs. The Corporation provides pharmacy benefit management processing ASP solutions (RxCLAIM®i, RxTRACK®, RxMAX® and RxPORTALTM) to BCBS AZ,
adjudicating over 3,000,000 transactions annually. 

Serve You Custom Prescription Management, Inc.  

        Serve You Custom Prescription Management, Inc. ("Serve You") was created in 1987 by a group of provider pharmacies, joined together to form an integrated
system for the delivery of comprehensive pharmacy benefit services. The Corporation provides ASP RxCLAIM®i, RxTRACK® and RxPORTALTM services to Serve You providing
pharmacy benefit management, claims processing and data warehousing for their 250,000 lives. 

17

 

MemberHealth, Inc.  

        MemberHealth, Inc. ("MemberHealth") is an Ohio corporation that operates a prescription benefit management organization and administers the operation of
packaged health benefit discount programs. The marketing for these programs is conducted principally through three distribution channels: insurance and brokerage agencies, consumer direct marketing,
and through retail pharmacies. As a pharmacy administrator, MemberHealth administers the prescription part of employee medical benefits for hundreds of plan sponsors and has created innovative new
prescription programs for traditional insurance, managed care and uninsured participants and is one of the original 28 CMS-approved Medicare Discount Drug Card sponsors. The
Corporation provides ASP RxCLAIM®i and RxTRACK® services to MemberHealth for their 3.4 million lives. MemberHealth is participating as a PDP (Prescription Drug Plan)
provider under Medicare's new Part D drug program on a national level. 

CIGNA HealthCare  

        The CIGNA HealthCare companies comprise one of the leading providers of health-benefit programs in the United States with products marketed in all
50 states and managed care networks serving 45 states, the District of Columbia and Puerto Rico. CIGNA HealthCare currently provides medical coverage through managed care and indemnity
programs to approximately 14.4 million people, dental care and mental health coverage to approximately 27.0 million, vision care coverage to approximately 4.0 million and health
care and disability management services to approximately 25 million people. The Corporation provides ASP RxEXPRESS® pharmacy management software to CIGNA's 17 Arizona based
clinic pharmacies, which fill approximately 2.0 million prescriptions annually. 

Horizon NJ Health  

        Horizon NJ Health (formerly Horizon/Mercy) is New Jersey's largest health care management company serving publicly insured individuals in the Medicaid and
NJ FamilyCare programs since 1993. During this time, membership administered by Horizon NJ Health has grown to more than 278,000 members. Horizon NJ Health is wholly owned by Horizon Blue Cross
Blue Shield of New Jersey. The Corporation provides pharmacy benefit management processing ASP solutions (RxCLAIM®i, RxTRACK® and RxMAX®) to Horizon/Mercy,
adjudicating over 4,000,000 transactions annually. 

Navitus Health Solutions, LLC  

        Navitus Health Solutions, LLC ("Navitus"), located in Appleton, Wisconsin, provides healthcare products and services, including pharmacy benefit management
services. Navitus ensures that formulary development and quality improvement decisions are made by Wisconsin physicians and pharmacists committed to providing high quality pharmaceutical care at a
reasonable cost to its members. The Corporation provides pharmacy benefit management processing ASP solutions (RxCLAIM®i, RxTRACK® and RxMAX®) to Navitus. Navitus
is participating as a PDP (Prescription Drug Plan) provider under Medicare's new Part D drug program on a regional level. 

HealthExtras / CatalystRx  

        HealthExtras, through its CatalystRx subsidiary, is a full-service pharmacy benefit management company providing benefits to more than three million
members. HealthExtras' clients include MCOs, large employer groups, unions, government agencies and individual consumers. The Corporation provides pharmacy benefit claims processing
(RxCLAIM®i) and web services to HealthExtras. 

18

 

University of Michigan  

        Founded in 1817, the University of Michigan ("U-M") has stood as the national model for the large public university for more than a century.
Recognized as one of the world's premiere research universities, U-M is a leader in undergraduate and graduate education, offering challenging academic programs. As of January 1,
2006, U-M in-sourced the administration of its prescription drug plan with the Corporation. U-M uses the Corporation's InformedRx services, including: prescription
drug benefit design and maintenance, claims adjudication, custom retail pharmacy network, drug utilization review, web-based member portal, member and pharmacy help desk, prior
authorization services and rebate management. 

Presbyterian Health Plan  

        Presbyterian is New Mexico's only private, nonprofit statewide healthcare system. With a single purpose of improving the health of individuals, families
and communities, Presbyterian serves over 520,000 customers throughout New Mexico. Governed by an independent volunteer board of directors, Presbyterian offers a broad range of
healthcare services, including the state's leading health plan, comprehensive hospital services, and primary care and specialty care from more than 27 clinics in eight New Mexico
communities. Presbyterian is participating as a PDP (Prescription Drug Plan) provider under Medicare's new Part D drug program on a regional level. The Corporation provides processing of
prescription drug claims, data warehouse/informational analysis, rebate administration and web-based member portal. 

Client Network Services, Inc. ("CNSI")  

        Founded in April 1994, CNSI is an employee owned, 8(a) certified company based in Maryland, U.S. that offers IT business solutions to meet customer
requirements worldwide. CNSI serves a diverse range of government and commercial clients, and offers the technology and resource expertise to reduce costs and improve the productivity of client IT
systems. CNSI's corporate mission is to be a premier provider of the highest quality networking and system solutions, and to address and support the technological business concerns of its customers.
As a subcontractor to CNSI, the Corporation provides facilities management services to support prescription drug claims and rebate contract management services on behalf of the State of Washington
Medicaid program. 

MedMetrics Health Partners, Inc.  

        MedMetrics Health Partners, Inc. ("MedMetrics") is a non-profit, full-service PBM located in Worcester, Massachusetts, and is
affiliated with the University of Massachusetts Medical School. As one of the nation's only non-profit PBMs, MedMetrics features a business model which differs from that of the traditional
PBM by providing true net cost drug management with full transparency in all financial transactions and data reporting. Unique among PBMs is MedMetrics' association with a major medical school
which affords direct access to expert formulary and clinical guidance and academically rigorous, evidence-based clinical programming support. MedMetrics assumed responsibility for the State of
Vermont's drug benefits program from the incumbent PBM effective January 1, 2006, and the Corporation has commenced processing the claims for these prescription drug transactions. Services
provided by the Corporation include implementation, claims processing, data warehouse, web-based member portal and development support. 

19

 

Competition  

        The Corporation has four primary competitors in the commercial payer marketplace, namely McKesson's Prospective Health division ("PHP"), Argus Health
Systems, Inc. ("Argus") and HealthTrans and MedImpact Health Care Systems, Inc. ("MedImpact"). In the government marketplace, the Corporation competes with (and occasionally
partners with) a number of organizations in the U.S. and Canada including Electronic Data Systems, Inc. ("EDS"), Affiliated Computer Services, Inc. ("ACS"), First Health
Group, Inc. ("FHG", now a division of Coventry Health) and Unisys Corporation ("Unisys"). 

        The
Corporation also has three main competitors in the provider market space, namely the QS/1 Data Systems ("QS/1") division of J.M. Smith Corporation, PDX, Inc. ("PDX"),
and Per Se Technologies ("Per Se"). 

PAYER — Commercial  

McKesson/PHP  

        PHP provides software solutions for the healthcare industry through the design, development and installation of software solutions and also provides consulting
services. Based in Palos Heights, Illinois, PHP has nearly 30 employees in Palos Heights, Illinois and Scottsdale, Arizona with sales teams in Irvine and San Diego, California. PHP has several
products including ProPBM, ProINTERCEPT, ProHEALTH and ProDENTAL, which provide centralized claim editing, adjudication and data control for pharmacy, medical and dental transactions. PHP's products
are currently available in both a license or service bureau arrangement. 

MedImpact Healthcare Systems  

        MedImpact is a leading PBM and Internet technology company. Founded in 1989 and based in San Diego, California, MedImpact develops e-health tools to
improve efficiency and enhance quality of care. In addition to providing traditional PBM services, such as claims processing, network management, and clinical support, MedImpact cultivates progressive
information technology for a nationwide client base. 

Argus Health Systems  

        Argus, located in Kansas City, Missouri is a joint venture of DST Systems, Inc. and Financial Holding Company, a privately held company. Argus' systems
permit its customers to create and administer customized benefit programs. Argus has also developed claims processing capabilities, administrative and reporting systems and network and rebate
administration systems that allow customers to control their own pharmacy benefits systems. In addition, Argus has an analytical tool (RxFocus) that allows for just-in-time
custom reporting. 

PAYER — Government  

Electronic Data Systems  

        EDS is a leading global technology services company delivering business solutions to its clients. EDS founded the information technology outsourcing industry more
than 40 years ago. Today, EDS delivers a broad portfolio of information technology and business process outsourcing services to clients in the manufacturing, financial services, healthcare,
communications, energy, transportation, and consumer and retail industries and to governments around the world. 

20

 

        EDS
helps state government healthcare agencies drive drown administrative costs while innovating customer service and improving the quality of healthcare. EDS is also the largest
provider of Medicaid management services to state governments in the United States, administering $100 billion in Medicaid benefits for more than 19 million recipients annually. 

Affiliated Computer Services  

        Affiliated Computer Services, Inc. (NYSE: ACS) is a premier provider of diversified business process outsourcing (BPO) and information technology
outsourcing (ITO) solutions to commercial and government clients worldwide. Based in Dallas, ACS is a FORTUNE 500 company of more than 55,000 people supporting client operations reaching
nearly 100 countries. ACS provides BPO services including administration; finance and accounting; human resources; payment services; sales, marketing, and customer care; and supply chain
management. Its ITO offerings include applications solutions; data center management; disaster recovery; end-user computing; network management; security services; storage solutions;
technology review, assessment, and planning; and transition services for human resources. 

        ACS
Healthcare Solutions helps healthcare organizations embrace the technological and business changes occurring in the market by capitalizing on the strategic nature of Internet and
information management technologies to bring healthcare stakeholders closer together. Through relationships with payer organizations, large healthcare systems, national medical policy groups,
hospitals, and pharmacy benefit management organizations, ACS Healthcare can create a solution that will meets its customers needs. ACS Healthcare Solutions is backed by ACS, one of the world's
leading information technology service providers. 

First Health Group  

        First Health Group (now a division of Coventry Health) is a unique national managed health care company that offers comprehensive services to payers across
the country — including all 50 states, the District of Columbia and Puerto Rico. Serving the group health, workers' compensation and state public program
markets, FHG's core competency is managing total health care costs while educating and empowering consumers. 

        FHG's
total cost management solutions includes national PPO network, claims and member services, bill review and clinical programs. The types of multi-sited, national organizations that
use FHG's solutions include federal employee health benefit plans, self-insured corporations, third-party administrators, workers' compensation payers, and small/mid-sized
group health insurers. 

Unisys Corporation  

        Unisys is a worldwide systems integrator specializing in information technology services and solutions. Unisys delivers value-based solutions led by its
competency in consulting and systems integration, outsourcing, infrastructure services and security, combined with leading enterprise-class server and related technologies. Unisys bring expertise in
the areas of administration and finance, justice and public safety, defense and domestic security, human services, education, and healthcare. 

21

 

PROVIDER  

QS/1 Data Systems  

        QS/1 provides products, services and support to a variety of healthcare providers including community pharmacies, chain pharmacies, long-term
care facilities, institutions, home medical equipment providers and point-of-sale operations. QS/1's network solutions group provides hardware, software, network and cabling
solutions for companies and organizations in North and South Carolina as well as Georgia. 

PDX/NHIN  

        PDX, which was established in 1985, is located in Ft. Worth, Texas. Sixty pharmacy chains, including drug stores, supermarkets, and mass merchants and more than
350 independent pharmacies in the United States representing close to 9,000 stores, use PDX software to fill, bill, and track prescriptions. PDX also serves two major Canadian
pharmacy chains that use the PDX Pharmacy System in over 250 stores. 

        Realizing
pharmacy's need for standardized data, NHIN was started in 1991. NHIN provides its customers with standardized drug file information. NHIN has also become an industry leader in
submission and reconciliation service. Further, NHIN's disease management software, Care Rx, enables pharmacies to increase the level of service they offer, enabling them to provide total care to the
patients they serve. 

Per Se Technologies (formerly, NDCHealth/TechRx)  

        Per Se offers technology that enables drugstore chains, independent pharmacies, wholesalers, mail order services and central processing and central fill
facilities to automate the administrative tasks associated with prescription filling and to free pharmacists' time for enhanced patient care. Previously, NDCHealth/TechRx (which Per Se completed the
acquisition of certain assets of on January 6, 2006) acquired a number of pharmacy systems, including the NDC pharmacy system, CONDOR and the Renlar pharmacy software business from Cardinal
Health Systems, Inc. 

        Per-Se
Technologies helps physicians, hospitals and now retail pharmacies get more
reimbursement — faster — for the services they provide allowing these providers more time to focus on patient care. Per Se
is a publicly traded company and one of the largest healthcare business services and information technology companies in the United States. Per Se is also a leader in Connective
Healthcare — a unique approach to streamlining and simplifying the administrative processes of healthcare in order to increase revenue back to providers. 

22

 

The Corporation's Strategy  

        The Corporation is pursuing a business model that reflects its in-depth understanding of and experience in the North American healthcare marketplace.
The Corporation delivers its information technology solutions to customers as standard license software sales, as customized software license sales coupled with consulting and systems implementation
services or as a processing service provided on a fee per transaction basis. This multi-faceted sales approach recognizes that while many large customers wish to own and operate their own systems,
many mid-size and smaller customers are either not interested in or not capable of operating their own transaction processing systems. 

        The
market for the Corporation's products is divided between a large customer segment that has the sophisticated technology infrastructure and staff required to operate a
24-hour data center and a less sophisticated segment of smaller customers that is not capable of or willing to operate such sophisticated systems. The Corporation's business model allows
customers to either operate the Corporation's systems themselves (with or without significant customization, consulting and systems implementation services) or to rent the systems' capability on a fee
per transaction basis. The Corporation expects to derive an increasing percentage (currently approximately 64%) of its combined revenue from recurring sources, primarily transaction based services. 

Growth Strategies  

        The Corporation's primary strategies are: 

	•
	to
expand revenue/claim and addressable payer markets with new InformedRx pharmacy benefit services offerings;

	•
	to
target sales opportunities in independent, mail and chain pharmacy markets;

	•
	to
introduce new software license and ASP applications to leverage the Corporation's existing customer base; and

	•
	to
grow by expanding its addressable market via strategic alliances, mergers and/or acquisitions. 

Other Corporate Information  

Employees  

        At December 31, 2005, there were approximately 300 employees of the Corporation. None of the Corporation's employees are unionized and the
Corporation considers its relationship with its employees to be good. 

Facilities  

        The Corporation's principal Canadian operations are conducted from a 42,255 square foot facility located at 555 Industrial Drive in Milton,
Ontario. On May 31, 2005, the Corporation completed the sale and leaseback of the Milton, Ontario headquarters facility for approximately $2,343,000. The net proceeds after repayment of the
mortgage on the building were approximately $1,585,000. The Corporation recorded a gain of $626,000 on the sale. The Corporation agreed to lease back 8,100 square feet of the facility
(which represents a minor portion of the property sold) for a three-year term with one three-year renewal period option. The Corporation's basic rental obligation for the
ensuing year is expected to be approximately $77,000. 

23

 

        The
Corporation's United States business operations are primarily conducted from a 41,752 square foot leased office facility located at 2505 South Finley Road
in Lombard, Illinois (outside of Chicago, Illinois). SXC has a ten-year lease expiring on March 31, 2012, with a termination option effective March 31, 2007, for which the
Corporation must provide notice by March 31, 2006. SXC's basic rental obligations for the ensuing year are expected to be approximately $587,000. 

        The
Corporation has a lease in respect of 22,487 square feet of office space at 738 Louis Drive, Warminster, Pennsylvania, which the Corporation assumed from the HBS
acquisition. The lease expires on September 30, 2008. The Corporation's basic rental obligation for the ensuing year is expected to be approximately $294,000 in respect thereof, subject to
annual escalations. 

        The
Corporation has a three-year lease (subject to renewal) expiring on November 30, 2006 in respect of 12,260 square feet of office space located at
7047 East Greenway Parkway in Scottsdale, Arizona, and the Corporation's basic rental obligations for the ensuing year are expected to be approximately $281,000 in respect thereof, subject to
annual escalations. Effective November 2003, the Corporation entered into a sublease arrangement with a third-party for approximately 5,500 square feet expiring on
October 31, 2006. 

        The
Corporation has a one-year lease expiring on March 31, 2006 in respect of 3,272 square feet of office space located at 3960 Quadra Street in
Victoria, British Columbia. The Corporation is currently negotiating a one-year lease renewal effective April 1, 2006 and expiring on March 31, 2007. The Corporation's basic
rental obligations for the ensuing year are expected to be approximately $42,000 in respect thereof. 

Intellectual Property Rights  

        The Corporation protects its proprietary technology through a combination of contractual confidentiality provisions, trade secrets, copyrights and trademarks. The
Corporation has obtained several trademark registrations, including RxSERVER®, RxCLAIM®i, RxMAX®, RxTRACK®, RxEXPRESS® and
InformedRx® in one or both of Canada and the United States. The Corporation enters into non-disclosure agreements with employees and third parties and generally
restricts access to its software product source codes. The Corporation regards its source codes as proprietary information and attempts to protect the source code versions of its products as well as
documentation and other written materials, as trade secrets and unpublished copyright works. 

        The
Corporation also relies on technology and other intellectual property licensed to it by third parties. The Corporation is not the subject of any claim alleging that its products
infringe on the proprietary rights of third parties, but third parties could claim infringement by the Corporation and any such claim, regardless of its merits, could result in costly litigation, the
diversion of management resources, delays in product development and product commercialization or other adverse effects on the Corporation. 

 
 

DIVIDEND RECORD AND POLICY    
    

        The Corporation has not declared any dividends on its Common Shares. The board of directors of the Corporation does not currently anticipate paying any dividends
on the Common Shares in the foreseeable future but intends to retain earnings to finance the growth and development of the business of the Corporation. Any future determination to pay dividends will
be at the discretion of the board of directors of the Corporation and will depend upon the Corporation's financial condition, results of operations, capital requirements and such other factors as the
board of directors of the Corporation deems relevant. 

24

   CAPITAL STRUCTURE  

        The Corporation is authorized to issue an unlimited number of Common Shares without nominal or par value. The holders of Common Shares are entitled to dividends
if, as and when declared by the board of directors and to receive notice of and attend and vote, on the basis of one vote per share, at all meetings of shareholders of the Corporation. In addition,
the holders of Common Shares are entitled upon liquidation, dissolution or winding up of the Corporation to receive the remaining assets of the Corporation. 

        The
Corporation has a stock option plan (the "Option Plan"). Under the terms of the Option Plan, the Corporation may grant options from time to time to its officers, directors,
key employees and service providers, and those of any affiliate or subsidiary of the Corporation, for up to 11,750,000 Common Shares. The exercise price of each option shall be set at the time
the option is granted and shall not be lower than the market price of the Corporation's Common Shares at the time. An option's maximum life under the Corporation's option plan is ten years. 

MARKET FOR SECURITIES  

        The Common Shares are listed and posted for trading on the Toronto Stock Exchange (the "TSX") and trade under the stock symbol "SXC". The following table
describes the high and low trading prices in Canadian dollars and the aggregate trading volumes for the twelve month period ended December 31, 2005. 

	

	Month 
	 	High Price
	 	Low Price
	 	Volume

	

	January	 	$	1.62	 	$	1.41	 	1,868,808
	

	February	 	 	1.80	 	 	1.38	 	6,008,250
	

	March	 	 	1.80	 	 	1.44	 	2,896,717
	

	April	 	 	1.59	 	 	1.40	 	2,821,440
	

	May	 	 	1.56	 	 	1.41	 	4,344,174
	

	June	 	 	1.70	 	 	1.50	 	2,582,832
	

	July	 	 	1.95	 	 	1.45	 	4,202,211
	

	August	 	 	2.43	 	 	1.90	 	2,788,043
	

	September	 	 	2.44	 	 	2.02	 	4,232,985
	

	October	 	 	2.44	 	 	2.20	 	2,023,238
	

	November	 	 	2.79	 	 	2.37	 	7,421,821
	

	December	 	$	2.80	 	$	2.40	 	6,533,913
	

	Total	 	 	 	 	 	 	 	47,729,432
	

25

 
DIRECTORS AND SENIOR OFFICERS  

        The following table sets forth the names and municipalities of residence of the directors and executive officers of the Corporation, their positions held with the
Corporation and their principal occupations: 

	Name and Municipality

of Residence 
	 	Positions Held
	 	Director Since
	 	Principal Occupation for Last 5 Years

	 Kevin R. Brown(5)

Potomac, Maryland	 	Director	 	August 1999	 	President & CEO of Amisys/Synertech Inc. ("Amisys/Synertech"), a leading provider of software and business process outsourcing services to the health insurance industry since 2003; Venture Partner with
Whitney & Co., a private equity investment firm, since 2003 that subsequently acquired Amisys/Synertech; prior to this Mr. Brown was Chief Executive Officer of Anceta, LLC, a healthcare informatics firm; prior thereto
Mr. Brown was Senior Vice President and General Manager of the Payer Solutions Group of HBO & Co., which acquired Amisys Managed Care Systems, Inc. ("Amisys") in 1998. Prior to this acquisition, Mr. Brown was the founder,
President & Chief Executive Officer and Chairman of Amisys for ten years.
	 Terrence C. Burke(3)

Easton, Maryland	 	Director	 	August 1999	 	Independent consultant, with extensive experience in the managed care and indemnity insurance industry in the US, from 1995 to present; prior thereto Mr. Burke was Senior Executive Vice President of Metrahealth
Corporation from 1994 to 1995, Senior Vice President, Field Operations, Specialty Companies & Planning and Development of Aetna Corporation from 1992 to 1994 and Senior Vice President, National Operations of CIGNA Corporation from 1989 to
1992.
	 Michael J. Callaghan(4)

Toronto, Ontario	 	Chairman and Director	 	May 1997	 	Managing Director, Private Equity, of MDS Capital Corp. ("MDS"), a leading North American venture capital firm, since 2003; prior thereto, Mr. Callaghan was Senior Vice President, MDS from 1996 to 2003; prior thereto
Mr. Callaghan was Vice President of MDS since 1992.

26

 

	Name and Municipality

of Residence 
	 	Positions Held
	 	Director Since
	 	Principal Occupation for Last 5 Years

	 Jeffrey Park(1)(8)

Toronto, Ontario	 	Director	 	July 2003	 	Senior Vice President Investment of Covington Capital Corporation since 1998; prior thereto, Mr. Park worked for IBM in several areas of their Global Services Organization including the outsourcing of services,
technology and infrastructure for clients such as Air Canada, Bell Canada and National Bank Financial. Jeff represents Covington on the boards of a number of Covington-backed companies, is a Chartered Accountant and holds a Bachelor of Accounting
(Honours) degree.
	 James A. Ryan(2)

Brampton, Ontario	 	Director	 	June 2000	 	James A. Ryan is currently President and Chief Executive Officer of Excapsa Software Inc. ("Excapsa"), a publicly traded (AIM:XCP) developer of interactive gaming solutions. Prior to joining Excapsa, he was Chief
Financial Officer of CryptoLogic, Inc. and before that was Chief Financial Officer and Secretary of Procuron, Inc.. Mr. Ryan has over twenty years experience in senior financial management and business development roles within the high
technology sector. He was Chief Financial Officer and Secretary of the Corporation, Vice President of Business Development and CFO of Metcan Information Technologies Limited, and Vice President and CFO of Epson Canada Limited. Mr. Ryan has a
B.Admin from Brock University and is a Chartered Accountant.
	 Mark A. Thierer(6)

Barrington, Illinois	 	Director	 	February 2006	 	President of Physicians Interactive, a division of Allscripts, Inc. (NASDAQ: MDRX), the leading provider of electronic health records, ePrescribing and information solutions for physicians. Prior to Allscripts,
Mr. Thierer spent ten years with CaremarkRx (NYSE: CMX), where he was a corporate officer and key executive.
	 Gordon S. Glenn(7)

McKinney, Texas	 	President & Chief Executive Officer, Director	 	August 1999	 	President & Chief Executive Officer of the Corporation from June 1998 to present; prior thereto Mr. Glenn was Chief Executive Officer of Computer Data Systems, Inc. in Rockville, MD from 1988 until
1996.
	 Jeff Jensen, R.Ph.

Oak Brook, Illinois	 	Senior Vice President, Client Services and Chief Operating Officer	 	n/a	 	Senior Vice President, Client Services and COO of the Corporation since March 2001. Previously President of ComCoTec from November 1999 until February 2001. Vice President of Sales, ComCoTec, Inc. from
1992 until October 1999.

27

 

	Name and Municipality

of Residence 
	 	Positions Held
	 	Director Since
	 	Principal Occupation for Last 5 Years

	 Irwin P. Studen

Reston, Virginia	 	Senior Vice President, Finance, Chief Financial Officer and Corporate Secretary	 	n/a	 	Senior Vice President, Finance, Chief Financial Officer and Corporate Secretary of the Corporation since February 2001 to present; prior thereto Mr. Studen was Vice President of C1 Venture Partners,
 LLC from 2000 to 2001, Vice President & Interim Chief Financial Officer of Marketswitch Corporation from 1999 to 2000, Vice President & Chief Operating and Financial Officer of MonoGen, Inc. from 1997 to 1999.
	 Mike Meyer

Naperville, Illinois	 	Senior Vice President, Business Development	 	n/a	 	Senior Vice President, Business Development of the Corporation since April 2004. Prior to joining the Corporation, Mr. Meyer was Vice President, Managed Care Sales at Caremark, one of the three largest
PBMs in the U.S. Prior thereto, Mr. Meyer was with Premier Purchasing Partners from 1997 until 2002 to develop Premier's managed care offering.
	 John Romza

Lombard, Illinois	 	Senior Vice President, Research & Development, Chief Technology Officer	 	n/a	 	Senior Vice President R&D and CTO of the Corporation, March 2001 to present. Previously VP R&D of ComCoTec, Inc. for 20 years.
	 Mike H. Bennof

Lusby, Maryland	 	Senior Vice President, Public Sector and Project Services	 	n/a	 	Senior Vice President, Public Sector and Project Services of the Corporation from October 1998 to present; prior thereto Mr. Bennof was Vice President of Decisions Systems Technologies, Inc. and Vice
President Operations of Computer Data Systems, Inc. for over 8 years.

Notes: 

	(1)
	Chairman
of the Audit Committee and member of the Corporate Governance Committee.

	(2)
	Chairman
of the Corporate Governance Committee and member of the Audit Committee.

	(3)
	Chairman
of the Compensation Committee and member of the Nominating Committee.

	(4)
	Chairman
of the Board; member of the Corporate Governance Committee and the Audit Committee.

	(5)
	Member
of the Compensation Committee.

	(6)
	Chairman
of the Nominating Committee and member of the Compensation Committee.

	(7)
	Member
of the Nominating Committee.

	(8)
	Mr. Park
is an officer of Covington Fund II Inc., which manages or advises various funds and which beneficially own 5,325,622 Common Shares of the Corporation. 

        The term of each of the directors listed in the chart above will continue until the next annual meeting of the Corporation. As at March 21,
2006, to the knowledge of the Corporation, the directors and senior officers of the Corporation, as a group, owned, directly or indirectly, or exercised control or direction over
6,474,092 Common Shares, representing approximately 9.5% of the issued and outstanding Common Shares. To the best of the Corporation's knowledge and belief, no director, officer, 10% security
holder or associate thereof are or has been subject to any cease trade orders, bankruptcies, penalties or sanctions within the last 10 years. 

28

  

 
 

AUDIT COMMITTEE    
    

Composition, Relevant Education and Experience  

        The education and experience of each Audit Committee Member that is relevant to such Member's responsibilities as a Member of the Audit Committee are set out
below. As at the date hereof, the Audit Committee was composed of the following persons: 

	

	Name 
	 	Relevant Education and Experience

	

	Jeffrey Park (Chair)	 	Jeffrey Park is Senior Vice President, Investments of Covington Capital Corporation. He has over 14 years of experience in the financial services industry. Mr. Park is a Chartered Accountant and holds a Bachelor
of Accounting (Honours) degree.
	

	Michael Callaghan	 	Michael Callaghan, B.Comm., M.B.A., C.A., is Managing Director, Private Equity of MDS Capital Corp., a leading North American venture capital firm. He has a B.Comm from McGill University and a M.B.A. from York University
and is a Chartered Accountant.
	

	James Ryan	 	James A. Ryan is currently President and Chief Executive Officer of Excapsa Software Inc. ("Excapsa"), a publicly traded (AIM:XCP) developer of interactive gaming solutions. Prior to joining Excapsa, he was Chief
Financial Officer of CryptoLogic, Inc. and before that was Chief Financial Officer and Secretary of Procuron, Inc. Mr. Ryan has over twenty years experience in senior financial management and business development roles within the high
technology sector. He was Chief Financial Officer and Secretary of the Corporation, Vice President of Business Development and CFO of Metcan Information Technologies Limited, and Vice President and CFO of Epson Canada Limited. Mr. Ryan has a
B.Admin from Brock University and is a Chartered Accountant.
	

        The mandate of the Audit Committee is attached as Schedule "A" hereto. The Board has determined that each of the members of the Audit
Committee is "independent" for the purposes of Multilateral Instrument 52-110 — Audit
Committees and is financially literate. 

29

 

Pre-approval Policies and Procedures  

        Pursuant to the mandate of the Audit Committee, the Audit Committee has established a policy whereby it will review the nature of and fees for any
non-audit services performed for the Corporation by the external auditor and consider whether the nature and extent of such services could detract from the external auditor's independence
in carrying out the audit function. 

External Auditor Service Fees  

        During the years ended December 31, 2005 and December 31, 2004, the Corporation paid the following fees to its external auditors: 

	 
	 	Fees Incurred
	 
	Service 
	 	2005
	 	2004
	 
	Audit-Related Fees	 	C$142,276	 	C$240,333	 
	Tax Fees	 	C$67,632	 	C$112,293	 
	All Other Fees	 	C$126,675	(2)	C$61,217	(1)
	 	 	
	 	
	 
	Total Fees Paid	 	C$336,583	 	C$413,843	 
	 	 	
	 	
	 

	(1)
	Due
diligence relating to the acquisition of Health Business Systems.

	(2)
	Fees
relate primarily to equity financing and certain post-acquisition fees associated with HBS. 

 
 

LEGAL PROCEEDINGS    
    

        From time to time in connection with its operations, the Corporation is named as a defendant in actions for damages and costs allegedly incurred by the
plaintiffs. While it is not possible to estimate the outcome of the various proceedings at this time, management believes that none of such actions are material to the Corporation and that adequate
provisions have been recorded in the accounts where required. 

 
 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS    
    

To
the best of the Corporation's knowledge and belief, no director, officer or 10% security holder nor any associate nor affiliate thereof within the last three financial years has had a material
interest in the Corporation other than as disclosed herein. 

 
 

TRANSFER AGENT AND REGISTRAR    
    

        The Corporation's transfer agent and registrar is CIBC Mellon Trust Corporation at its principal offices in Toronto, Ontario. 

30

 
 
 

MATERIAL CONTRACTS    
    

        The following describes material contracts, other than those entered into in the ordinary course of business, entered into within the most recently completed
financial year, or before the most recently completed financial year but that are still in effect. 

Amended and Restated Credit Facility Agreement  

        On
December 27, 2002, the Corporation (as "Guarantor") and each of its direct and indirect subsidiaries (as "Borrowers") entered into a senior secured credit
facility (the "Credit Facility") with MCG Capital Corporation ("MCG"). The Credit Facility consisted of a $1,000,000 revolving line of credit and a $7,600,000 term loan. The Credit Facility was
to mature on December 27, 2008. The term loan bore interest at a base rate (LIBOR or U.S. Prime rate) plus a rate margin to be determined as of the first date of each interest period,
contingent on the Company's leverage ratio at that time. The base rate was capped for the first three years of the Credit Facility Agreement. For the first two years, the Company made quarterly
interest-only payments, and thereafter, would make quarterly interest and amortized principal payments, beginning on December 31, 2004, of $380,000 until maturity. 

        Effective
December 17, 2004 and in connection with the HBS acquisition, the Corporation entered into an amended and restated credit facility (the "Amended Credit Facility")
with MCG. Under the Amended Credit Facility, the Corporation amended and increased its senior secured credit facility by $6,000,000 to $13,600,000 and terminated the revolving line of credit. The
terms of the Amended Credit Facility include a new six-year term with quarterly principal payments commencing on December 31, 2005 and maturing on December 31, 2010. The
interest rate on the Amended Credit Facility is calculated in the same manner as under the Credit Facility and has been reduced by approximately 200 basis points. The effective interest rate
for the year ended December 31, 2005 was 11.2% (2004 — 10.5%). 

31

  

 
 

RISK FACTORS    
    

        This report contains forward-looking statements. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements.
There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include, but may not be limited to
the ability of the Corporation to adequately address: the risks associated with acquisitions, the Corporation's dependence on key customers and key personnel, competition from both existing and new
sources, expanding its service offerings, the impact of technological change on its product/service offerings, potential fluctuations in financial results, the sufficiency of its liquidity and capital
needs, the indebtedness of the Corporation, the volatility of its share price, the Corporation's limited history of profitability, the continued viability of its proprietary technology, its product
liability and insurance needs, its reliance on key suppliers if any, continued confidence in e-commerce as an on-line delivery mechanism for information and the impact of
government regulation on the business. 

Risks Associated with Acquisitions  

        During calendar 2004, the Corporation completed the acquisition of HBS, a supplier of pharmacy software and workflow systems, and it is the Corporation's second
acquisition in three years. While the Corporation believes it has the experience and know-how to integrate acquisitions, such efforts entail significant risks including, but not limited
to: a diversion of management's attention from other business concerns; failure to effectively assimilate the acquired technology or assets into the business of the Corporation; the potential loss of
key employees from either the Corporation's current business or the business of HBS; and the assumption of significant and/or unknown liabilities of HBS. There can be no assurances that the
Corporation will be able to successfully integrate HBS or future acquisitions into its operations. However, the Corporation continues to believe that its patience in executing this strategy will be
rewarded in the long term. 

        The
Corporation continues to seek acquisitions that are a good fit for its strategic direction, primarily within the Corporation's current market sectors. While the Corporation believes
it has the experience and resources to continue to execute this strategy, the Corporation does not have control over the market conditions prevailing or likely to prevail in the future, which may
impact its ability to execute this strategy. These variations include market valuations of potential targets, stock price volatility of the Corporation, general market valuation issues of public
versus private concerns, all of which may impact the timing of executing this strategy. There can be no assurances that the Corporation will be able to identify suitable acquisition candidates
available for sale at reasonable valuations, consummate any acquisition or successfully integrate any acquired business into its operations. 

Dependence on Key Customers  

        The Corporation generates a significant portion of its revenue from a small number of customers. Although in the year ended December 31, 2005, no customer
accounted for more than 10% of the Corporation's revenue, there can be no guarantee that future revenues would have a similar concentration. Furthermore, the Corporation sells most of its computer
software and services to PBMs, Blue Cross/Blue Shield organizations, MCOs and retail/mail-order pharmacy chains. If the healthcare benefits industry or the Corporation's customers in the
healthcare benefits industry experience problems, the Corporation's business and financial results could be adversely affected. For example, the Corporation may suffer a loss of customers if there is
any significant consolidation among firms in the healthcare benefits industry or if demand for pharmaceutical claims processing services should decline. 

32

 

Dependence on Key Personnel  

        The Corporation's business is dependent upon its ability to retain and attract highly skilled persons. Competition for qualified personnel is considerable and the
Corporation's future success will depend in large part on its continuing ability to attract and retain qualified employees. The Corporation's business is also dependent on the expertise provided by
its Chief Executive Officer and other members of its management team. 

Competition  

        The market for the software and products supplied by the Corporation is highly competitive and subject to rapid change. Many of the Corporation's current and
potential competitors have larger technical staffs, more established and larger sales and marketing organizations and significantly greater financial resources than does the Corporation. Additionally,
there can be no assurance that competitors will not develop systems and products that are superior to the Corporation's systems or products or that achieve greater market acceptance due to pricing,
access to distributors or other factors. Pricing is an important element of competition and is regularly reviewed by the Corporation in response to changes in market conditions. There can be no
assurance that the Corporation's pricing strategy will be successful or that any price changes will not have an adverse effect on the Corporation's gross margins. 

Expanded Service Offerings  

        The Corporation continues to expand its InformedRx pharmacy benefit service offerings by developing and offering health plan sponsors a wide variety of pharmacy
benefit administrative services. These service offerings consist of benefit plan design, management and claims adjudication, retail pharmacy network management, formulary management and clinical
services and rebate management. The Corporation is developing this business by leveraging its existing managed care customer base, industry leading technology and processing infrastructure. Since the
Corporation does not have significant experience with certain aspects of this proposed service offering, there are considerable risks involved in its development and further commercialization. In
addition, the Corporation's InformedRx pharmacy network offering is dependent on customers paying in full before disbursements are made by the pharmacy network. Although the Corporation minimizes
these risks by mandating that before any disbursements are made to the network, the network must first be fully funded by the customer, and by disclaiming liabilities thereof, there remain significant
collection risks. In addition, there remains the risk of continuing to fund the pharmacy network on a recurring basis in a timely and accurate manner following payments by the Corporation's customers. 

Technological Change  

        The Corporation's ability to continue to develop and introduce new systems and products or enhancements of existing systems and products may require significant
additional research and development expenditures. The Corporation's future success in these areas will depend substantially on its ability to develop new or enhanced systems and products which achieve
market acceptance. Technology continues to advance at a rapid pace which requires the timely introduction of new systems and products and technologies. Management has no knowledge of existing or
upcoming technologies which would make obsolete or significantly displace the technologies utilized by the Corporation. However, such a risk exists and, if it materializes, would have an adverse
impact on the future growth of the Corporation. 

Potential Fluctuations in Results  

        The Corporation recognizes revenue from product sales upon execution of a license agreement and shipment of the software, as long as all vendor obligations have
been satisfied and collection of license fees is probable. As the costs associated with product sales are minimal, revenue and income may vary significantly based on the timing of recognition of
revenue. While the Corporation has moved away from the exclusive development, delivery and maintenance of software systems tailored to particular customers to the sale of more standard software
solutions available on an outsourced (transactions processing) basis, the Corporation nonetheless continues to develop systems for individual customers. Given that revenue from these projects is often
recognized using the percentage of completion method, the Corporation's revenue from these projects can vary substantially on a monthly and quarterly basis. Accordingly, the timing and delivery
requirements of customers' orders may have a material effect on the Corporation's operations and financial results during any reporting period. In addition, to the extent that the costs required to
complete a fixed price contract exceed the price quoted by the Corporation, the Corporation's results may be adversely affected. 

33

 

Liquidity and Capital Needs  

        The Corporation's future capital requirements will depend on many factors, including its product development programs. In order to meet such capital requirements,
the Corporation will consider additional public or private financings (including the issuance of additional equity securities) to fund all or part of its requirements. There can be no assurance that
additional funding will be available or, if available, that it will be available on acceptable terms. If adequate funds are not available, the Corporation may have to substantially reduce or eliminate
expenditures for marketing, research and development and testing of its proposed products, or obtain funds through arrangements with partners that require the Corporation to relinquish rights to
certain of its technologies or products. There can be no assurance that the Corporation will be able to raise additional capital if its capital resources are exhausted. 

Indebtedness of the Corporation  

        The Corporation has debt obligations that are subject to various financial operating covenants, including requirements to maintain certain financial ratios. The
Corporation's ability to meet its debt service obligations will depend on the Corporation's future operations which are subject to prevailing industry conditions and other factors, many of which are
beyond the control of the Corporation. Further, the Corporation's indebtedness is secured by substantially all of the Corporation's assets. In the event of a violation by the Corporation of any of its
loan covenants or any other default by the Corporation on its obligations relating to its indebtedness, the lender could declare such indebtedness to be immediately due and payable and, in certain
cases, foreclose on the Corporation's assets. 

Volatility of Share Price  

        The Common Shares currently trade on the TSX. Factors such as announcements of technological innovation or the introduction of new products by the Corporation or
its competitors, actual or anticipated fluctuations in the Corporation's operating results, changes in estimates of the Corporation's future operating results by securities analysts or developments
with respect to proprietary rights may have a significant impact on the market price of the Common Shares. In addition, the stock market has experienced volatility which has particularly affected the
market prices of equity securities of many high technology companies and which often has been unrelated to the operating performance of such companies. These market fluctuations may materially and
adversely affect the market price of the Common Shares. Shareholders of some high technology companies that have seen a significant decline in stock price have recently instituted class action
lawsuits against such companies. A lawsuit against the Corporation could cause the Corporation to incur substantial costs and could divert the time and attention of the Corporation's management and
other resources. 

34

 

Limited History of Profitability  

        The Corporation has only a limited history of achieving profitability following a period of significant losses. Future results of operations may fluctuate
significantly based upon numerous factors including the timing of new product introductions, the timing of delivery of products to customers, activities of competitors and the ability of the
Corporation to penetrate new markets. 

Proprietary Technology  

        The Corporation's success will depend, in part, on its ability to maintain copyright and trademark protection, trade secret protection and operate without
infringing the proprietary rights of third parties. There can be no assurance that the Corporation's intellectual property rights, copyright and/or trademarks will not be challenged by any third
parties, or that the intellectual property rights of others will not have a material adverse effect on the ability of the Corporation to do business. Furthermore, there can be no assurance that others
will not independently develop products similar to those developed by the Corporation or duplicate any of the Corporation's products. The Corporation may be required to obtain licences for proprietary
rights of third parties. No assurance can be given that any licences required will be available on terms acceptable to the Corporation. If the Corporation does not obtain such licences, it could
encounter delays in introducing one or more of its products to the market or could find that the development, manufacture or sale of products requiring such licences could be precluded. In addition,
the Corporation could incur substantial time, effort and/or costs in policing unauthorized use of its intellectual property and/or in defending itself in suits brought against it or in suits in which
the Corporation attempts to enforce its own intellectual property rights against other parties. 

Product Liability and Insurance  

        The sale and use of the Corporation's products or its products under development may entail risk of product liability. A major product liability claim could
materially adversely affect the business of the Corporation because of the costs of defending against these types of lawsuits, diversion of key employees' time and attention from the business and
potential damage to the Corporation's reputation. The Corporation's license agreements with its customers contain provisions designed to limit exposure to potential liability claims. Limitation of
liability provisions contained in the Corporation's license agreements may not be effective under the laws of some jurisdictions if local laws treat them as unenforceable. As a result, the Corporation
may be required to pay substantial amounts of damages in settlement or upon the determination of any of these types of claims. 

        Although
the Corporation considers that it currently has adequate coverage for any product liability claim, as the Corporation expands and introduces new products there can be assurance
that it will be able to obtain appropriate levels of product liability insurance prior to any use of its products. An inability to obtain insurance on commercially reasonable terms or to otherwise
protect against potential product liability claims could inhibit or prevent the commercialization of products developed by the Corporation or expose the Corporation to significant product liability
risks. The obligation to pay any product liability claim or a recall of a product could have a material adverse effect on the business, financial condition, operating results or prospects of the
Corporation. 

Reliance on Suppliers  

        If suppliers of software and other products should, for any reason, adjust the availability of their products, the Corporation's delivery of systems may be
affected. 

35

 

Confidence in E-Commerce  

        Participants in the pharmacy benefits supply chain will not adopt on-line healthcare benefits services if they are not confident that such
transactions over the Internet can be undertaken securely and confidentially. Although there is security technology currently available for on-line transactions, many Internet users do not
use the Internet for commercial transactions because of continued security concerns. These concerns may be heightened by well-publicized security breaches of any Internet-related service,
which could deter potential customers from adopting, directly or indirectly, the Corporation's transaction-based software and services. If potential customers do not gain confidence in the security
for on-line transactions that the current technologies provide, the Corporation's revenue may not increase. 

        Despite
the Corporation's efforts to maintain Internet security, it may not be able to stop unauthorized attempts to gain access to or disrupt transactions between its customers and the
consumers of their services. Specifically, computer viruses, break-ins and other disruptions could lead to interruptions, delays, loss of data or the inability to accept and confirm the
receipt of information. Any of these events could substantially damage the Corporation's reputation. The Corporation relies on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to achieve secure transmission of confidential information. The Corporation cannot guarantee that this technology or future advances in this
technology or other developments will be able to prevent security breaches. The Corporation may need to expend further capital and other resources to protect against the threat of security breaches or
to alleviate problems caused by these breaches. 

Government Regulation  

        The Corporation's products and services are designed for use by healthcare organizations which are subject to government regulation. In particular, many of the
Corporation's clients are subject to federal laws in the United States, including HIPAA, which prescribes certain standards for electronic transactions, healthcare information, privacy and
security. The Corporation's ability to ensure that its products and services are HIPAA compliant or changes in government regulation of the healthcare industry could materially adversely affect the
Corporation's competitive market position. 

36

 
 
 

ADDITIONAL INFORMATION    
    

        Additional information relating to the Corporation may be found on the System for Electronic Disclosure and Analysis at www.sedar.com. The Corporation, upon
request to the Secretary of the Corporation, will provide to any person or company: 

	(a)
	when
the securities of the Corporation are in the course of a distribution under a preliminary short form prospectus or a short form prospectus,

	(i)
	one
copy of the annual information form of the Corporation ("AIF"), together with one copy of any document, or the pertinent pages of any document, incorporated by
reference in the AIF;

	(ii)
	one
copy of the comparative financial statements of the Corporation for its most recently completed financial year for which financial statements have been filed
together with the accompanying report of the auditor and one copy of the most recent interim financial statements of the Corporation that have been filed, if any, for any period after the end of its
most recently completed financial year;

	(iii)
	one
copy of the information circular of the Corporation in respect of its most recent annual meeting of shareholders that involved the election of directors or one
copy of any annual filing prepared instead of that information circular, as appropriate, and

	(iv)
	one
copy of any other documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be
provided under clauses (i), (ii) or (iii); or

	(b)
	at
any other time, one copy of any documents referred to in clauses (a)(i), (ii) and (iii), provided that the Corporation may require the payment of a reasonable
charge if the request is made by a person or company who is not a security holder of the Corporation. 

        Additional
information, including directors' and officers' remuneration and indebtedness, principal holders of the Corporation's securities, options to purchase securities and interests
of insiders in material transactions, where applicable, is contained in the Management Information Circular. Additional financial information is provided in the Corporation's comparative consolidated
financial statements for its most recently completed financial year ended December 31, 2005 and related MD&A. A copy of such documents may be obtained upon request from the Secretary of the
Corporation. 

37

  

 
 

SCHEDULE A
  
    SYSTEMS XCELLENCE INC.
  
    AUDIT COMMITTEE    
    

 
 

Terms of Reference and Mandate  
    

	1.
	General

        The
board of directors (the "Board") of Systems Xcellence Inc. (the "Corporation") has delegated the responsibilities, authorities and duties described below to the
audit committee (the "Audit Committee"). For the purpose of these terms of reference, the term "Corporation" shall include the Corporation and its subsidiaries. 

        The
Audit Committee shall be directly responsible for overseeing the accounting and financial reporting processes of the Corporation and audits of the financial statements of the
Corporation, and the Audit Committee shall be directly responsible for the appointment, compensation, and oversight of the work of any registered external auditor employed by the Corporation
(including resolution of disagreements between management of the Corporation and the external auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related
work. In so doing, the Audit Committee will comply with all applicable Canadian and United States securities laws, rules and guidelines, any applicable stock exchange requirements or guidelines
and any other applicable regulatory rules. 

	2.
	Members

        The
Audit Committee shall be composed of a minimum of three members. Members of the Audit Committee shall be appointed by the Board. Each member shall serve until such member's successor
is appointed, unless that member resigns or is removed by the Board or otherwise ceases to be a director of the Corporation. The Board shall fill any vacancy if the membership of the Committee is less
than three directors. The Chair of the Committee may be designated by the Board or, if it does not do so, the members of the Committee may elect a Chair by vote of a majority of the full Committee
membership. The Chair shall not have a second, or casting, vote. The Chair of the Committee shall be responsible for overseeing the performance by the Committee of its duties, for assessing the
effectiveness of the Committee and individual Committee members and for reporting periodically to the Board. 

        All
members of the Audit Committee must satisfy the independence, financial literacy and experience requirements of applicable Canadian and United States securities laws, rules
and guidelines, any applicable stock exchange requirements or guidelines and any other applicable regulatory rules. In particular each member shall be "independent" and "financially literate" within
the meaning of Multilateral Instrument 52-110 Audit Committees. 

	3.
	Meetings

        The
Audit Committee shall meet at least quarterly at such times and at such locations as the Chair of the Audit Committee shall determine, provided that meetings shall be scheduled so as
to permit the timely review of the Corporation's quarterly and annual financial statements and related management discussion and analysis. Notice of every meeting shall be given to the external
auditor, who shall, at the expense of the Corporation, be entitled to attend and to be heard thereat. The external auditor or any member of the Audit Committee may also request a meeting of the Audit
Committee. 

38

 

        The
Chair of the Audit Committee shall hold in camera sessions of the Audit Committee, without management present, at every meeting. 

        The
external auditor and management employees of the Corporation shall, when required by the Audit Committee, attend any meeting of the Audit Committee. 

        The
Audit Committee shall submit the minutes of all meetings to the Board, and when requested to, shall discuss the matters discussed at each Audit Committee meeting with the Board. 

	4.
	Committee Charter

        The
Committee shall have a written charter that sets out its mandate and responsibilities and the Committee shall review and assess the adequacy of such charter and the effectiveness of
the Committee at least annually or otherwise, as it deems appropriate, and propose recommended changes to the Board for its approval. Unless and until replaced or amended, this mandate constitutes
that charter. 

	5.
	Duties of the Audit Committee:

	(a)
	General

        The
overall duties of the Committee shall be to: 

	(i)
	assist
the Board in the discharge of its duties relating to the Corporation's accounting policies and practices, reporting practices and internal controls;

	(ii)
	establish
and maintain a direct line of communication with the Corporation's external auditor and assess their performance;

	(iii)
	oversee
the work of the external auditor, which shall be responsible to report directly to the Audit Committee, including resolution of disagreements between
management and the external auditor regarding financial reporting;

	(iv)
	ensure
that management has designed, implemented and is maintaining an effective system of internal controls and disclosure controls and procedures;

	(v)
	monitor
the credibility and objectivity of the Corporation's financial reports;

	(vi)
	report
regularly to the Board on the fulfillment of the Audit Committee's duties;

	(vii)
	assist,
with the assistance of the Corporation's legal counsel, the Board in the discharge of its duties relating to the Corporation's compliance with legal and
regulatory requirements; and

	(viii)
	assist
the Board in the discharge of its duties relating to risk assessment and risk management.

	(b)
	External
Auditor 

        The
duties of the Audit Committee as they relate to the external auditor shall be to: 

	(i)
	review
management's recommendations for the appointment of the external auditor, and in particular their qualifications and independence, and to recommend to the Board a
firm of external auditors to be engaged;

	(ii)
	review
the performance of the external auditor and make recommendations to the Board regarding the appointment or termination of the external auditor; 

39

 

	(iii)
	review
and approve, in advance, the engagement letters of the external auditor, for any permissible non-audit services, including the fees to be paid for
such services;

	(iv)
	review,
where there is to be a change of external auditor, all issues related to the change, including the information to be included in the notice of change of auditor
called for under National Instrument 51-102 Continuous Disclosure Obligations or any successor legislation
("NI 51-102"), and the planned steps for an orderly transition;

	(v)
	review
all reportable events, including disagreements, unresolved issues and consultations, as defined in NI 51-102, on a routine basis, whether or
not there is to be a change of external auditor;

	(vi)
	ensure
the rotation of partners on the audit engagement team of the external auditor in accordance with applicable law;

	(vii)
	review
and approve the engagement letters of the external auditor, both for audit and permissible non-audit services, including the fees to be paid for
such services;

	(viii)
	review
the performance, including the fee, scope and timing of the audit and other related services and any non-audit services provided by the external
auditor; and

	(ix)
	review
the nature of and fees for any non-audit services performed for the Corporation by the external auditor and consider whether the nature and extent of
such services could detract from the external auditor's independence in carrying out the audit function.

	(c)
	Audits
and Financial Reporting 

        The
duties of the Audit Committee as they relate to audits and financial reporting shall be to: 

	(i)
	review
the audit plan with the external auditor and management;

	(ii)
	review
with the external auditor and management all critical accounting policies and practices of the Corporation, including any proposed changes in accounting
policies, the presentation of the impact of significant risks and uncertainties, all material alternative accounting treatments that the external auditor has discussed with management, other material
written communications between the external auditor and management, and key estimates and judgments of management that may in any such case be material to financial reporting;

	(iii)
	review
the contents of the audit report;

	(iv)
	question
the external auditor and management regarding significant financial reporting issues discussed during the fiscal period and the method of resolution;

	(v)
	review
the scope and quality of the audit work performed;

	(vi)
	review
the adequacy of the Corporation's financial and auditing personnel;

	(vii)
	review
the co-operation received by the external auditor from the Corporation's personnel during the audit, any problems encountered by the external
auditor and any restrictions on the external auditor's work; 

40

 

	(viii)
	review
the evaluation of internal controls by the persons performing the internal audit function and the external auditor, together with management's response to the
recommendations, including subsequent follow-up of any identified weaknesses;

	(ix)
	review
the appointments of the chief financial officer, persons performing the internal audit function and any key financial executives involved in the financial
reporting process;

	(x)
	review
with management and the external auditor and approve the Corporation's annual audited financial statements in conjunction with the report of the external auditor
thereon, and obtain an explanation from management of all significant variances between comparative reporting periods before release to the public;

	(xi)
	review
with management and the external auditor and approve the Corporation's interim unaudited financial statements, and obtain an explanation from management of all
significant variances between comparative reporting periods before release to the public; and

	(xii)
	review
the terms of reference for an internal auditor or internal audit function.

	(d)
	Accounting
and Disclosure Policies 

        The
duties of the Audit Committee as they relate to accounting and disclosure policies and practices shall be to: 

	(i)
	review
the effect of regulatory and accounting initiatives and changes to accounting principles of the Canadian Institute of Chartered Accountants or, if it should cease
to exist, the entity which is the successor thereto, which would have a significant impact on the Corporation's financial reporting as reported to the Audit Committee by management and the external
auditor;

	(ii)
	review
the appropriateness of the accounting policies used in the preparation of the Corporation's financial statements and consider recommendations for any material
change to such policies;

	(iii)
	review
the status of material contingent liabilities as reported to the Audit Committee by management;

	(iv)
	review
the status of income tax returns and potentially significant tax problems as reported to the Audit Committee by management;

	(v)
	review
any errors or omissions in the current or prior years' financial statements; and

	(vi)
	review
and approve before their release all public disclosure documents containing audited or unaudited financial results, including all press releases, offering
documents, annual reports, annual information forms and management's discussion and analysis containing such results.

	(e)
	Other

        The
other duties of the Audit Committee shall include: 

	(i)
	reviewing
any inquiries, investigations or audits of a financial nature by governmental, regulatory or taxing authorities; 

41

 

	(ii)
	reviewing
annual operating and capital budgets;

	(iii)
	reviewing
and reporting to the Board on difficulties and problems with regulatory agencies which are likely to have a significant financial impact;

	(iv)
	establishing
procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls, or
auditing matters; and the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters;

	(v)
	inquiring
of management and the external auditor as to any activities that may be or may appear to be illegal or unethical; and

	(vi)
	any
other questions or matters referred to it by the Board.

 

	6.
	Authority to engage independent counsel and advisors

        The
Audit Committee has the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties, to set and pay the compensation for any
advisors employed by the audit committee, and to communicate directly with the internal and external auditors. 

        The
Corporation shall provide appropriate funding, as determined by the Audit Committee, in its capacity as a committee of the board of directors, for payment of compensation
(a) to the external auditors employed by the issuer for the purpose of rendering or issuing an audit report, and (b) to any advisers employed by the Audit Committee. 

42

QuickLinks

SYSTEMS XCELLENCE INC. ANNUAL INFORMATION FORM In respect of the twelve month period ended December 31, 2005 March 21, 2006

TABLE OF CONTENTS

THE CORPORATION

INTERCORPORATE RELATIONSHIPS

GENERAL DEVELOPMENT OF THE BUSINESS OF THE CORPORATION

BUSINESS OF THE CORPORATION

DIVIDEND RECORD AND POLICY

AUDIT COMMITTEE

LEGAL PROCEEDINGS

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

TRANSFER AGENT AND REGISTRAR

MATERIAL CONTRACTS

RISK FACTORS

ADDITIONAL INFORMATION

SCHEDULE A SYSTEMS XCELLENCE INC. AUDIT COMMITTEE

Terms of Reference and MandateQuickLinks
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EXHIBIT 4.4  

 
 

SYSTEMS XCELLENCE INC.
  NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS    
    

NOTICE IS HEREBY GIVEN that the Annual and Special Meeting (the "Meeting") of shareholders of Systems Xcellence Inc.
(the "Corporation") will be held at TSX Conference Centre, Gallery Room, Toronto, Ontario, Canada, on Wednesday, the 17th day of May, 2006 at 4:30 p.m. in the afternoon (Toronto time)
for the following purposes: 

	(a)
	to
receive the Annual Report of the Corporation which contains the financial statements of the Corporation for the fiscal year ended December 31, 2005 and the report of the
auditors thereon;

	(b)
	to
elect directors;

	(c)
	to
appoint auditors and to authorize the directors to fix their remuneration;

	(d)
	to
consider and, if deemed appropriate, adopt, with or without variation, a special resolution (the full text of which is reproduced as Schedule "A" to the
accompanying management information circular) approving an amendment to the Corporation's articles of incorporation, as amended, to consolidate its issued and outstanding common shares on the basis of
a ratio within the range of one post-consolidation common share for every three pre-consolidation common shares to one post-consolidation common share for every
five pre-consolidation common shares, with the ratio to be selected and implemented by the Corporation's board of directors in its sole discretion, if at all, at any time prior to
May 17, 2007 (the "Share Consolidation Resolution"); and

	(e)
	to
transact such other business as may properly come before the Meeting or any adjournment thereof. 

The
directors of the Corporation have fixed the close of business on March 20, 2006 as the record date for the determination of the shareholders of the Corporation entitled to receive notice of
the Meeting. 

        DATED at Milton, Ontario, as of the 17th day of March, 2006. 

	 	 	BY ORDER OF THE BOARD
	
 	
 	

 
	 	 	

 
	 	 	Irwin P. Studen,

Senior Vice President, Finance & Administration,

Chief Financial Officer and Corporate Secretary

Shareholders who are unable to attend the Meeting in person and who wish to ensure that their shares are voted at the Meeting, are requested to date, sign and return in the
envelope provided for that purpose, the enclosed form of proxy.

All
instruments appointing proxies to be used at the Meeting or at any adjournment thereof must be deposited with the Corporation's registrar and transfer agent, CIBC Mellon Trust Company, at
least 48 hours prior to the commencement of the Meeting or any adjournment thereof or with the Chairman of the Meeting prior to the commencement of the Meeting or any adjournment thereof. 

 
 

SYSTEMS XCELLENCE INC.
  
    MANAGEMENT INFORMATION CIRCULAR
  
    SOLICITATION OF PROXIES    
    

        This Management Information Circular is furnished in connection with the solicitation of proxies by management (the "Management")
of Systems Xcellence Inc. (the "Corporation" or "SXC") for use at the Annual Meeting of Shareholders (the "Meeting") of the Corporation to be held on Wednesday, May 17,
2006 at the time and place and for the purposes set forth in the accompanying Notice of Meeting. The information contained herein is given as of the date hereof, except as
otherwise noted herein. It is expected that the solicitation of proxies will be primarily by mail. However, proxies may also be solicited by telephone, facsimile or in person by employees of the
Corporation. The total cost of the solicitation will be borne by the Corporation. 

        The
Corporation will pay the reasonable costs incurred by persons who are the registered but not beneficial owners of shares (such as brokers, dealers and other registrants under
applicable securities law and nominees and custodians) in sending or delivering copies of the Notice of Meeting, Management Information Circular and form of proxy to the beneficial owners of shares
which are registered in the names of such persons. Payments will be made upon receipt of an appropriate invoice. The Corporation will furnish to such persons, upon request to the Secretary of the
Corporation, 555 Industrial Drive, Milton, Ontario, L9T 5C2 (Tel. (905) 876-4741) and without additional cost, additional copies of the Notice of Meeting, Management
Information Circular, form of proxy and financial statement request form required for this purpose. 

 
 

PROXIES AND VOTING    
    

        Shareholders who are unable to attend the Meeting in person and who wish to have their shares voted at the Meeting are requested to date,
sign and return, in the envelope provided for that purpose, the enclosed form of proxy. Proxies must be deposited (i) with the Corporation's transfer agent and
registrar, CIBC Mellon Trust Company, at least 48 hours prior to the commencement of the Meeting or any adjournment thereof, or (ii) with the Chairman of the Meeting prior to the
commencement of the Meeting or any adjournment thereof, in order for the shares represented thereby to be voted at the Meeting or any adjournment thereof. 

        The
shares represented by any proxy in favour of the nominees of Management named therein will be voted for, against or withheld from voting with respect to the matters described herein
in accordance with the instructions provided in any such proxy. In the absence of any specification, such proxies will be voted FOR the election of directors, FOR the
appointment of auditors and FOR the Share Consolidation Resolution.

        The enclosed form of proxy confers discretionary authority upon the persons named therein with respect to amendments to matters identified in the Notice of
Meeting or other matters that may properly come before the Meeting. Management knows of no other matters to come before the Meeting other than matters referred to in the Notice of
Meeting. If any matters which are not now known should properly come before the Meeting or if any amendments or variations to the matters referred to in the Notice of Meeting
are presented for consideration at the Meeting, the forms of proxy will be voted on such matters, amendments and variations in accordance with the best judgment of the person voting the proxy. 

        A
shareholder has the right to appoint a person (who need not be a shareholder) as proxy holder to attend and act on his or her behalf at the Meeting other than the
representatives of Management designated in the enclosed form of proxy. The shareholder may exercise this right by inserting the name of the nominee in the space provided in the enclosed form of proxy
or may complete another appropriate form of proxy, and in each case delivering the completed proxy in the manner set forth above. 

 
 
 

NON-REGISTERED HOLDERS    
    

        Only registered holders of common shares of the Corporation or the person(s) they appoint as their proxyholder are permitted to vote at the Meeting. However, in
many cases, shares of the Corporation beneficially owned by a holder (a "Non-Registered Holder") are not registered in the name of the holder but are rather registered either
(a) in the name of an intermediary (an "Intermediary") that the Non-Registered Holder deals with in respect of the shares or (b) in the name of a clearing agency (such
as The Canadian Depository for Securities Limited ("CDS")) of which the Intermediary is a participant (Intermediaries include, among others, banks, trust companies, securities dealers or brokers and
trustees or administrators of self-administered RRSP's, RRIF's, RESP's and similar plans). In accordance with the requirements of National Instrument 54-101 of the
Canadian Securities Administrators, the Corporation has distributed copies of the Notice of Meeting, this Management Information Circular, a form of proxy, the Corporation's Annual Report and a
financial statement request form (collectively the "Meeting Materials") to the clearing agencies and Intermediaries for onward distribution to Non-Registered Holders. 

        Intermediaries
are required to forward the Meeting Materials to Non-Registered Holders unless a Non-Registered Holder has waived the right to receive them. Very
often, Intermediaries will use service companies to forward the Meeting Materials to Non-Registered Holders. Generally Non-Registered Holders who have not waived the right to
receive Meeting Materials will either: 

	(a)
	be
given a form of proxy which is not signed by the Intermediary and which, when properly completed and signed by the Non-Registered Holder and returned to the
Intermediary or its service company, will constitute voting instructions (often called a "voting instruction form" or a "proxy authorization form") which the Intermediary must follow. Typically, the
Non-Registered Holder will also be given a page of instructions which contains a removable label containing a bar code and other information. In order for the form of proxy to be validly
constituted, the Non-Registered Holder must remove the label from the instructions and affix it to the form of proxy, properly complete and sign the form of proxy and submit it to the
Intermediary or its service company in accordance with the instructions of the Intermediary or its service company; or

	(b)
	less
typically, be given a form of proxy which has already been signed by the Intermediary (typically by a facsimile, stamped signature), which is restricted as to the number of
shares beneficially owned by the Non-Registered Holder but which is otherwise not completed. Because the Intermediary has already signed the form of proxy, this form of proxy is not
required to be signed by the Non-Registered Holder when submitting the proxy. In this case, the Non-Registered Holder who wishes to submit a proxy should otherwise properly
complete the form of proxy and deliver it to CIBC Mellon Trust Company as provided under "Proxies and Voting" above. 

        In
either case, the purpose of this procedure is to permit Non-Registered Holders to direct the voting of the shares of the Corporation which they beneficially own. Should a
Non-Registered Holder who receives either form of proxy wish to vote at the Meeting in person (or have another person attend and vote on behalf of the Non-Registered
Holder), the Non-Registered Holder should strike out the names of the persons named in the proxy and insert the Non-Registered Holder's (or such other persons') name in
the blank space provided. In either case, Non-Registered Holders should carefully follow the instructions of their Intermediary, including those regarding when and where the form of proxy
is to be delivered. 

 
 

REVOCATION OF PROXIES    
    

        Any shareholder who has given a proxy may revoke it by depositing an instrument in writing executed by him or her or by his or her attorney authorized in writing
at the principal office of the Corporation, 555 Industrial Drive, Milton, Ontario, L9T 5C2, to the attention of the Secretary, on or before the last business day preceding the day of the
Meeting or any adjournment thereof or, as to any matter upon which a vote has not already been cast pursuant to the authority conferred by such proxy, with the Chairman of the Meeting on the day of
the Meeting or any adjournment thereof, or by any other manner permitted by law. 

2

 
 
 

VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS THEREOF    
    

        As at the close of business on February 28, 2006, SXC had 67,805,830 common shares ("Common Shares") outstanding. Each holder of Common Shares is
entitled to one vote for each Common Share registered in such holder's name as at the close of business on March 20, 2006 (the "record date"). 

        The
directors and senior officers of SXC do not know of any person or company who at the date hereof beneficially owns, directly or indirectly, or exercises control or direction over,
more than 10% of the outstanding Common Shares of the Corporation. 

 
 

ELECTION OF DIRECTORS    
    

        The Articles of the Corporation provide that the Corporation shall have a minimum of three and a maximum of ten directors. The number of directors is currently
set at seven. The directors elected at the Meeting will hold office until the close of the next annual meeting or until their successors are elected or appointed, whichever occurs first. The persons
named in the form of proxy for use by the shareholders intend to vote for the election of the persons indicated below as directors. Management does not contemplate that any of the proposed nominees
will be unable to serve as a director but, if that should occur for any reason prior to the Meeting, the persons named in the enclosed form of proxy will vote for the election of another person or
persons in their discretion. 

        The
following table, the notes thereto and the professional biographies immediately following such table set forth the names and respective municipalities of residence of the persons
proposed to be nominated by Management for election as directors, their principal occupations, all positions and offices with the Corporation presently held by them, the date on which they were first
elected or appointed as directors (if applicable) and the number of Common Shares of the Corporation beneficially owned or controlled by them: 

	Name and Municipality of Residence 
	 	Principal Occupation 
	 	Date First Became a Director
	 	Number of

Common Shares beneficially

owned or controlled(9)

	 Kevin R. Brown(5)

Potomac, MD	 	President and CEO, Amisys Synertech Inc.	 	August 24, 1999	 	40,000
	 Terrence C. Burke(3)

Easton, MD	 	Independent Consultant	 	August 24, 1999	 	Nil
	 Michael J. Callaghan(4)

Toronto, Ontario

Chairman	 	Managing Director, Private Equity,

MDS Capital Corp.	 	May 27, 1997	 	Nil
	 Gordon S. Glenn(7)

McKinney, TX	 	President and Chief Executive Officer of the Corporation	 	August 24, 1999	 	641,051
	 Philip Reddon(1)(8)

Burlington, Ontario	 	Senior Vice President, Investments,

Covington Capital Corporation	 	N/A	 	Nil
	 James A. Ryan(2)

Caledon East, Ontario	 	President and CEO, Excapsa Software Inc.	 	June 21, 2000	 	24,500
	 Mark A. Thierer(6)

Barrington, IL	 	President, Physicians Interactive, a division of Allscripts, Inc.	 	February 14, 2006	 	Nil

Notes 

	(1)
	To
be appointed Chairman of the Audit Committee and member of the Corporate Governance Committee.

	(2)
	Chairman
of the Corporate Governance Committee and member of the Audit Committee.

	(3)
	Chairman
of the Compensation Committee and member of the Nominating Committee.

	(4)
	Chairman
of the Board; member of the Corporate Governance Committee and the Audit Committee.

	(5)
	Member
of the Compensation Committee.

	(6)
	Chairman
of the Nominating Committee and member of the Compensation Committee

	(7)
	Member
of the Nominating Committee

	(8)
	Mr. Reddon
is an officer of Covington Fund II Inc., which manages or advises various funds and which beneficially own 5,325,622 Common Shares of the Corporation.

	(9)
	Information
with respect to the number of Common Shares held by the directors has been provided by such directors. 

3

 

Kevin R. Brown:  

        Mr. Brown has over 25 years of experience in the health care business with a concentration of experience in managed health care. He is currently the
President and CEO of Amisys Synertech Inc. ("ASI") a leading provider of software and business process outsourcing services to the health insurance industry. In 2003 Mr. Brown lead the
effort to raise venture capital and purchase the two companies that now comprise ASI. Prior to joining ASI, Mr. Brown served as the CEO of Anceta, LLC, a health care data warehouse
initiative sponsored by the American Medical Group Association and its large medical group members. Mr. Brown also serves as a director on the board of the Care Source Management Company, an
affiliated company of Care Source HMO, the largest Medicaid HMO in Ohio. 

        From
1989 to 1999 Mr. Brown served as Chairman, CEO and President of AMISYS Managed Care Systems, Inc. ("AMISYS"). AMISYS is a leading provider of managed health care
information systems with a customer base of 110 HMO's and health insurance companies. Mr. Brown grew the business from $1.0 million to $68.0 million in annual revenues,
managed the company through a venture capital financed buy out from the parent company in 1994, successfully completed a public offering and a subsequent second offering and then guided the company
through a successful acquisition in late 1997. Mr. Brown continued to manage the AMISYS business for a year and a half after the acquisition. Prior to managing AMISYS, Mr. Brown held
several management positions in the health care industry including: 4 years as Vice President of the HMO Systems Business for Compucare Inc., 4 years as IS Director at Kaiser
Permanente — Mid-Atlantic Region and 3 years as Manager of Membership and Billing at the Harvard Community Health Plan. Prior to entering the
health care industry, Mr. Brown served 9 years in administrative and direct service positions in the Child Protective Services Division of the Massachusetts Department of Social
Services. Mr. Brown holds a Bachelor of Science degree from City College of New York, class of 1970. Mr Brown has been on the Board of SXC since 1999. 

Terrence C. Burke:  

        Mr. Burke has extensive experience in the managed care and indemnity insurance industry in the U.S. and for the past several years has been an industry
consultant. He was a pioneer in managed care with a long track record of strategically introducing and managing new, innovative and profitable products for the employee benefits and group health
industry. He has held executive positions with a number of leading managed care companies, which positions include Senior Executive Vice-President of Metrahealth Corporation, Senior
Vice-President, Field Operations, Specialty Companies (including pharmacy management) & Planning and Development of Aetna Corporation and President of CIGNA Health Plans as well as
Senior Vice-President, National Operations of Cigna Corporation. Mr. Burke has a B.A. in History from the University of Washington. 

        Mr. Burke
is a Director of Chinook Wind Development, which serves as a consultant to emerging healthcare companies and a strategic advisor to healthcare organizations. He
currently holds directorships with two healthcare-related technology companies. Mr. Burke has served on the boards of several healthcare industry associations, including Federation of American
Health Care Systems, Group Health Association of America and the National Association of Employers on Health Care. Mr. Burke brings to the Corporation a wealth of experience and contacts in the
managed care and indemnity insurance industry in the U.S. 

4

 

Michael J. Callaghan:  

        Michael Callaghan, B.Comm., M.B.A., C.A., is Managing Director, Private Equity of MDS Capital Corp. ("MDS Capital"), a leading North American venture
capital firm. Prior to joining MDS Capital in 1992, he was active in a variety of general management roles and began his career with Ernst & Young. He has a B.Comm from McGill University and a
M.B.A. from York University and is a Chartered Accountant. Mr. Callaghan also serves on the boards of Ciphergen Biosystems Inc. and Salu Inc. 

Gordon S. Glenn:  

        Gordon S. "Stonie" Glenn joined the Corporation in June 1998 as President and Chief Operating Officer and was promoted to Chief Executive Officer on
September 1, 1998. 

        Prior
to joining SXC, Mr. Glenn enjoyed a 24-year career with Computer Data Systems Inc. (CDSI) in Rockville, MD. He served as President and CEO for his last
8 years there during which revenues grew from $66 to $250 million. Under his direction, CDSI was chosen by Forbes Magazine as one of the country's "200 Best Managed Small
Companies in the U.S." from 1992 through 1996. Affiliated Computer Services, Inc. of Dallas, Texas subsequently acquired CDSI in 1997 for $373 million. 

        A
graduate of the University of Kentucky, Mr. Glenn earned his Bachelor of Science degree in Mechanical Engineering. He received a full scholarship from the Union Carbide
Corporation and graduated cum laude. 

Philip Reddon:  

        Philip R. Reddon joined Covington Capital Corporation in August 2002, as Vice President Investments with over 14 years of experience in the
financial services industry, the last 12 years of which have been in the private equity field. Mr. Reddon's responsibilities include sourcing and analysis of new investment opportunities
for Covington and assisting in the management and monitoring of Covington's existing investments. Mr. Reddon is a member of the senior management group at Covington which has over
70 investee companies and is responsible for management of over $560 million in assets. 

        Prior
to joining Covington, Mr. Reddon spent six years at Bank of Montreal Capital Corporation as Managing Director for a $400 million private equity fund. He was head of
the Technology Investment team, and sat on the investment committee, which was involved in the investment and approval process for over 60 companies. In his role at BMO Capital, he sat on the
boards of eight investee companies. Prior to BMO Capital, Mr. Reddon spent six years with the Business Development Bank of Canada holding the positions of Senior Account Manager, Manager
Venture Loans and Branch Manager. Mr Reddon represents Covington on the boards of a number of private Covington-backed companies. 

James A. Ryan:  

        James A. Ryan is currently President and Chief Executive Officer of Excapsa Software Inc. ("Excapsa"), a publicly traded (AIM:XCP) developer of interactive
gaming solutions. Prior to joining Excapsa, he was Chief Financial Officer of CryptoLogic, Inc. and before that was Chief Financial Officer and Secretary of Procuron, Inc..
Mr. Ryan has over twenty years experience in senior financial management and business development roles within the high technology sector. He was Chief Financial Officer and Secretary of the
Corporation, Vice President of Business Development and CFO of
Metcan Information Technologies Limited, and Vice President and CFO of Epson Canada Limited. Mr. Ryan has a B.Admin from Brock University and is a Chartered Accountant. 

5

 

Mark A. Thierer:  

        Mark A. Thierer is currently the President of Physicians Interactive, a division of Allscripts, Inc. (NASDAQ: MDRX), the leading provider of Electronic
Health Records, ePrescribing, and information solutions for physicians. Physicians Interactive provides clinical information and education to physicians and patients through on-line,
interactive programs. Their client base includes leading pharmaceutical, biotechnology, and medical device companies worldwide. 

        Prior
to Allscripts, Mr. Thierer spent ten years with CaremarkRx (NYSE: CMX), where he was a corporate officer and key executive in helping to build Caremark into a
$30 billion pharmacy benefits manager and specialty pharmacy company. In his most recent capacity, Mr. Thierer served as the Senior Vice President, New Ventures, responsible for
architecting Caremark's growth strategy. Prior to that role, Mr. Thierer managed Caremark's retail network operations, trade relations, specialty pharmacy, marketing, field operations, and
corporate account functions. Prior to Caremark, Mr. Thierer spent ten years with IBM, managing sales of healthcare information management (HIT) solutions. Mr. Thierer holds a B.S. in
Finance and an M.B.A. in Marketing from Nova Southeastern University in Florida. He also holds the designation of CEBS (Certified Employee Benefits Specialist) from The Wharton School. 

 
 

EXECUTIVE COMPENSATION    
    

        During the fiscal year ended December 31, 2005, the following individuals were executive officers (as defined in applicable securities legislation)
of the Corporation: Gordon S. Glenn, President and Chief Executive Officer, Irwin Studen, Senior Vice President, Finance & Administration, Chief Financial Officer and Corporate Secretary, Mike
H. Bennof, Senior Vice President, Public Sector and Project Services, Jeff Jensen, Senior Vice President, Client Services and Chief Operating Officer, John Romza, Senior Vice President of
Research & Development and Chief Technology Officer and Michael Meyer, Senior Vice-President, Business Development (collectively, the "Named Executive Officers"). 

        The
board of directors of the Corporation (the "Board of Directors") approved a change in the financial year end of the Corporation from February 28 to December 31,
effective December 31, 2003. As such, the disclosure with respect to executive compensation for the financial year ended December 31, 2003 is for the ten month period from
March 1, 2003 to December 31, 2003. 

        The
following table sets forth information concerning the total compensation of the Named Executive Officers during the fiscal years ended December 31, 2005, December 31,
2004, and December 31, 2003: 

6

 

	

	 
	 	 
	 	 
	 	 
	 	 
	 	Long-Term Compensation
	 	 

	 
	 	 
	 	Annual Compensation
	 	Awards
	 	Pay-outs
	 	 

	

Name and Current Position 
	 	 
	 	 

	 	Fiscal Year
	 	Salary

($)(1)
	 	Bonus

($)(1)
	 	Other Annual Compensation

($)(1),(8)
	 	Securities Under Options Granted

(#)
	 	Shares or Units Subject to Resale Restrictions

($)
	 	LTIP Payouts

($)
	 	All Other Compensation ($)

	

	Gordon S. Glenn, President and Chief Executive Officer	 	2005

2004

2003	

(2)	270,500

260,000

207,583	 	300,000

125,000

250,000	(5)
(4)
(3)	50,267

35,620

4,648	(6)
(6)
	500,000

325,000

265,000	 	nil

nil

nil	 	nil

nil

nil	 	nil

nil

nil
	

	Irwin Studen, Senior Vice President, Finance and Chief Financial Officer	 	2005

2004

2003	

(2)	200,000

195,000

158,333	 	124,000

37,000

75,208	(5)
(4)
(3)	4,800

4,800

4,000	 	75,000

75,000

100,000	 	nil

nil

nil	 	nil

nil

nil	 	nil

nil

nil
	

	Mike H. Bennof, Senior Vice President, Public Sector and Project Services	 	2005

2004

2003	

(2)	195,000

188,000

157,666	 	132,000

34,000

73,937	(5)
(4)
(3)	5,885

8,665

4,500	(6)
(6)
	100,000

108,000

100,000	 	nil

nil

nil	 	nil

nil

nil	 	nil

nil

nil
	

	Jeff Jensen, Senior Vice President, Client Services and Chief Operating Officer	 	2005

2004

2003	

(2)	200,000

189,000

151,666	 	118,000

37,000

75,833	(5)
(4)
(3)	4,800

4,800

4,000	 	125,000

110,000

105,000	 	nil

nil

nil	 	nil

nil

nil	 	nil

nil

nil
	

	John Romza, Senior Vice President, Research & Development and Chief Technology Officer	 	2005

2004

2003	

(2)	185,000

175,000

137,500	 	115,000

30,000

67,031	(5)
(4)
(3)	4,800

4,800

4,000	 	135,000

100,000

135,000	 	nil

nil

nil	 	nil

nil

nil	 	nil

nil

nil
	

	Michael Meyer, Senior Vice President, Business Development	 	2005

2004

2003	
(6)
(2)	195,000

119,183

n/a	
(7)
	150,000

25,000

n/a	(5)
(4)
	4,800

3,200

n/a	 	150,000

100,000

n/a	 	nil

nil

n/a	 	nil

nil

n/a	 	nil

nil

n/a
	

	(1)
	Amounts
paid in U.S. dollars.

	(2)
	For
the ten month period beginning from March 1, 2003 through to December 31, 2003.

	(3)
	Subsequent
to December 31, 2003, the Board of Directors approved the payment of cash bonuses to the Named Executive Officers in the aggregate amount of $542,009 in respect of
the year ended December 31, 2003 in the amounts set out above.

	(4)
	Subsequent
to December 31, 2004, the Board of Directors approved the payment of cash bonuses to the Named Executive Officers in the aggregate amount of $288,000 in respect of
the year ended December 31, 2004 in the amounts set out above.

	(5)
	Subsequent
to December 31, 2005, the Board of Directors approved the payment of cash bonuses to the Named Executive Officers in the aggregate amount of $887,000 in respect of
the year ended December 31, 2005 in the amounts set out above Mr. Glenn received an additional amount of $215,000 that will also be accrued and paid in 2006.

	(6)
	Includes
taxable portion of stock options exercised.

	(7)
	Mr. Meyer
commenced employment with the Corporation on April 28, 2004 at an annual salary of $185,000 and was provided an initial grant of 100,000 stock options
in connection with his employment.

	(8)
	Represents
annual car allowance, unless otherwise specified. 

7

  

The Stock Option Plan  

        The Corporation has established an incentive stock option plan (the "Option Plan"). The Option Plan was established for the purpose of encouraging
officers, employees, directors and service providers of the Corporation to participate in the growth and development of the Corporation. The Option Plan currently provides that there will be a maximum
of 11,750,000 Common Shares available for issuance pursuant to the Option Plan and any increase in such maximum number of Common Shares will require approval of the holders of the Common
Shares. The aggregate number of Common Shares reserved for issuance to insiders of the Corporation or of any affiliate or subsidiary of the Corporation is not to exceed 10% of the aggregate number of
Common Shares outstanding. The aggregate number of Common Shares reserved for issuance to any one person under the Option Plan and any other share compensation arrangement is not to exceed 5% of the
aggregate number of the Common Shares outstanding. 

        At
all times at which the Common Shares are listed and posted for trading on the Toronto Stock Exchange (the "TSX"), the exercise price of the Common Shares granted under the
Option Plan will not be less than the market price of the Common Shares on the TSX on the day immediately preceding the date of the grant. Options granted under the Option Plan may not be exercised
until the optionee has been employed by the Corporation, has been an officer or director or has provided services to the Corporation for such minimum period as is specified in the option agreement
relating to such options, which period shall not be less than three months. The exercise price of an option is determined by the Board of Directors provided that such exercise price may not be less
than the closing sale price of the Common Shares on the TSX on the last business day prior to the date of grant. Options granted under the Option Plan will be non-assignable (during the
life of the optionee) and will expire no later than ten years after the date of grant. 

        The
Option Plan is administered by the Compensation Committee of the Board of Directors and, subject to the foregoing limitations, grants under the Option Plan will be at the discretion
of such committee. On March 8, 2006, the Board approved an amendment to the Option Plan adding a cashless exercise feature, whereby an optionee may elect to effect a cashless exercise of any or
all of such optionee's right under an option. In connection with any such cashless exercise, the full number of common shares issuable shall be considered to have been issued for purpose of the
reduction of the number of common shares which may be issued under the Option Plan. 

Options Granted During Year Ended December 31, 2005  

        The following table sets forth the aggregate number of options to purchase or acquire securities of the Corporation granted to the Corporation's Named Executive
Officers during the year ended December 31, 2005: 

	

	Name
 
	 	Date of Option Grants
	 	Number of Shares Subject to Option
	 	% of Total Options Granted in Fiscal Year(3)
	 	Exercise Price Per Option
	 	Market Value of Common Shares on Date of Grant(1)
	 	Expiry Date

	

	Gordon Glenn	 	March 4, 2005	 	500,000	 	25.3%	 	$1.65	 	$1.65	 	Note 2
	

	Irwin Studen	 	March 4, 2005	 	75,000	 	3.8%	 	$1.65	 	$1.65	 	Note 2
	

	Mike Bennof	 	March 4, 2005	 	100,000	 	5.0%	 	$1.65	 	$1.65	 	Note 2
	

	Jeff Jensen	 	March 4, 2005	 	125,000	 	6.3%	 	$1.65	 	$1.65	 	Note 2
	

	John Romza	 	March 4, 2005	 	135,000	 	6.8%	 	$1.65	 	$1.65	 	Note 2
	

	Michael Meyer	 	March 4, 2005	 	150,000	 	7.6%	 	$1.65	 	$1.65	 	Note 2
	

	Total	 	 	 	1,085,000	 	54.8%	 	 	 	 	 	 
	

	(1)
	Market
Value refers to the closing price on the TSX on the trading day immediately preceding the date of grant.

	(2)
	These
options vest as to one-third on each of December 31, 2005, December 31, 2006 and December 31, 2007 and are exercisable for a period of
5 years commencing on the vesting date and ending on December 31, 2010, December 31, 2011 and December 31, 2012, respectively.

	(3)
	There
were an aggregate of 1,980,000 options granted during the year ended December 31, 2005. 

8

 

Options Exercised During Year Ended December 31, 2005  

        The following table sets forth information concerning the exercise of options during the fiscal year ended December 31, 2005, and the value at
December 31, 2005 of unexercised in-the-money options held by the Named Executive Officers: 

	

	Name and Current Position
 
	 	Securities Acquired on Exercise (#)
	 	Aggregate Intrinsic Value Realized ($)
	 	Unexercised Options at Fiscal Year End (#) Exercisable/ Unexercisable
	 	Intrinsic Value of Unexercised in-the-Money Options at Fiscal Year End ($) Exercisable/ Unexercisable(1)

	

	Gordon S. Glenn	 	200,000	 	$284,000	 	1,471,000 / 441,666	 	$2,486,167 / $466,333
	

	Irwin Studen	 	nil	 	nil	 	575,000 / 75,000	 	$1,147,500 / $78,000
	

	Mike H. Bennof	 	8,333	 	$7,500	 	453,668 / 99,999	 	$800,941 / $103,999
	

	Jeff Jensen	 	nil	 	nil	 	520,000 / 120,000	 	$997,200 / $125,400
	

	John Romza	 	nil	 	nil	 	516,667 / 123,333	 	$987,584 / $129,666
	

	Michael Meyer	 	nil	 	nil	 	116,666 / 133,334	 	$126,333 / $145,567
	

	(1)
	Based
on the closing price of the Common Shares on the TSX on December 30, 2005 of $2.75 per share. 

Employment Agreements  

        The Corporation entered into an employment agreement with Gordon S. Glenn, effective as of June 14, 1998 and subsequently
amended on September 1, 1998 upon the assumption of the responsibilities of President and Chief Executive Officer of the Corporation (the "Glenn Employment Agreement"). The term of the
Glenn Employment Agreement was eighteen months commencing on September 1, 1998, with an automatic renewal of the agreement unless otherwise terminated. The Glenn Employment Agreement currently
provides for an annual base salary of $270,500 (subject to annual review). It also provides for the payment of an annual performance bonus as disclosed under "Compensation of the Chief Executive
Officer". The Glenn Employment Agreement further provides for a monthly car allowance and certain other standard health and dental insurance benefits. The Glenn Employment Agreement also provides that
Mr. Glenn will be entitled to compensation of twelve months salary (less applicable withholdings) in the event that his employment is terminated by the Corporation without just cause. The Glenn
Employment Agreement contains standard confidentiality and non-competition covenants in favour of the Corporation. 

        The
Corporation entered into an employment agreement with Irwin Studen (the "Studen Employment Agreement") effective as of February 20, 2001, pursuant to which
Mr. Studen became the Senior Vice President, Finance, Chief Financial Officer and Corporate Secretary of the Corporation. The term of the Studen Employment Agreement is indefinite and it
currently provides for the payment of an annual base salary of $200,000 (subject to annual review), plus a performance bonus in an amount equal to a target bonus of fifty percent of such base salary.
The Studen Employment Agreement further provides for a monthly car allowance and certain other standard health and dental insurance benefits. Mr. Studen will be entitled to receive compensation
in an amount equal to six months salary in the event that his employment is terminated without just cause, or in the event Mr. Studen resigns for cause as defined therein. The Corporation
obtained standard confidentiality/non-disclosure covenants from Mr. Studen as a condition of his employment. 

9

 

        The
Corporation has also entered into an employment agreement with Mike H. Bennof, Senior Vice-President, Public Sector and Project Services, effective as of
October 28, 1998 (the "Bennof Employment Agreement"). The Bennof Employment Agreement has no specified term and currently provides for an annual base salary of $195,000 (subject to
annual review) and provides for the payment of an annual performance bonus in an amount equal to a target bonus of fifty percent of such base salary subject to the fulfillment of certain
pre-determined goals. The Bennof Employment Agreement further provides for a monthly car allowance and certain other standard health and dental insurance benefits. The Bennof Employment
Agreement also provides that Mr. Bennof will be entitled to compensation equal to six-months salary in the event that his employment is terminated by the Corporation without just
cause. The Corporation obtained standard confidentiality/non-disclosure covenants from Mr. Bennof as a condition of his employment. 

        The
Corporation has also entered into an employment agreement with Jeff Jensen, Senior Vice-President, Client Services and Chief Operating Officer, effective as of
March 7, 2001 (the "Jensen Employment Agreement"). The Jensen Employment Agreement has no specified term and currently provides for an annual base salary of $200,000 (subject to annual
review) and provides for the payment of an annual performance bonus in an amount equal to a target bonus of fifty percent of such base salary subject to the fulfillment of certain
pre-determined goals. The Jensen Employment Agreement further provides for a monthly car allowance and certain other standard health and dental insurance benefits. The Jensen Employment
Agreement also provides that Mr. Jensen will be entitled to compensation as set out therein as follows: "Section 5.3 multiple base salary payments: If after the occurrence of an Initial
Change of Control Event or Change in Control of the Corporation, (i) the Corporation terminates the Executive's employment hereunder (a) because of a Discharge Event, or (b) of
any reason other than Cause or a discharge event (other than termination due to death or Disability), or (ii) the Executive resigns his employment for Reason, then the company will pay the
Executive a lump sum termination payment equal to eighteen (18) months of his current base salary and bonus for the previous twelve months." The Corporation obtained standard
confidentiality/non-disclosure covenants from Mr. Jensen as a condition of his employment. 

        The
Corporation has also entered into an employment agreement with John Romza, Senior Vice-President, Research & Development and Chief Technology Officer, effective as
of March 7, 2001 (the "Romza Employment Agreement"). The Romza Employment Agreement has no specified term and currently provides for an annual base salary of $185,000 (subject to annual
review) and provides for the payment of an annual performance bonus in an amount equal to a target bonus of fifty percent of such base salary subject to the fulfillment of certain
pre-determined goals. The Romza Employment Agreement further provides for a monthly car allowance and certain other standard health and dental insurance benefits. The Romza Employment
Agreement also provides that Mr. Romza will be entitled to compensation as set out therein as follows: "Section 5.3 multiple base salary payments: If after the occurrence of an Initial
Change of Control Event or Change in Control of the Corporation, (i) the Corporation terminates the Executive's employment hereunder (a) because of a Discharge Event, or (b) of
any reason other than Cause or a discharge event (other than termination due to death or Disability), or (ii) the Executive resigns his employment for Reason, then the company will pay the
Executive a lump sum termination payment equal to eighteen (18) months of his current base salary and bonus for the previous twelve months." The Corporation obtained standard
confidentiality/non-disclosure covenants from Mr. Romza as a condition of his employment. 

        The
Corporation has also entered into an employment agreement with Michael Meyer, Senior Vice-President, Business Development, effective as of April 28, 2004
(the "Meyer Employment Agreement"). The Meyer Employment Agreement has no specified term and currently provides for an annual base salary of $195,000 (subject to annual review) and provides for
the payment of an annual performance bonus in an amount equal to a target bonus of fifty percent of such base salary subject to the fulfillment of certain pre-determined goals. The Meyer
Employment Agreement further provides for a monthly car allowance and certain other standard health and dental insurance benefits. The Meyer Employment Agreement also provides that Mr. Meyer
will be entitled to compensation equal to six-months salary in the event that his employment is terminated by the Corporation without just cause. The Corporation obtained standard
confidentiality/non-disclosure covenants from Mr. Meyer as a condition of his employment. 

10

 

Composition of the Compensation Committee  

        The Compensation Committee is comprised of the following three directors: Kevin R. Brown, Terrence C. Burke and Mark A. Thierer. None of the members is an officer
of the Corporation. 

Report on Executive Compensation  

        Each executive officer receives a base salary, which constitutes the largest share of the officer's compensation package. Base salary is recognition for
discharging job responsibilities and reflects the officer's performance over time, as well as that individual's particular experience and qualifications. An individual's base salary is reviewed by the
Compensation Committee on an annual basis and may be adjusted to take into account performance contributions for the year and to reflect sustained performance contributions over a number of years. See
the section entitled "Employment Agreements". Executive officers are also eligible to receive discretionary performance bonuses as determined by the Board based on the terms of their employment
contracts, each individual's responsibilities and performance, their achievement of corporate objectives and the Corporation's financial performance and are eligible to receive grants of stock options
under the Option Plan based on their performance. See "Stock Option Plan" above. 

        Long-term
incentives are provided to executive officers through the award of stock options under the Corporation's Option Plan which entitles executive officers to the
appreciation in the market value of the Corporation's Common Shares over a stated period of time. The Option Plan is intended to reinforce commitment to long-term growth in profitability
and shareholder value by including stock options in the compensation program. The size of annual grants of stock options is dependent on an executive officer's level of responsibility, authority and
importance to the Corporation and the degree to which such executive officer's long-term potential and contribution will be key to the long-term success of the Corporation. 

        The
composition and role of the Corporation's Compensation Committee is discussed below in Schedule "B" under the heading "Compensation". 

Compensation of the Chief Executive Officer 

        For
the period ended December 31, 2005, Mr. Glenn's base salary was $270,500 and his incentive bonus compensation was $515,000 which was paid subsequent to the
year-end. The base compensation was consistent with the Compensation Committee's belief in maintaining base salary and incentive payments for the Chief Executive Officer
in-line with the marketplace of comparable companies and consistent with total corporate increases. 

        Factors
contributing to Mr. Glenn's incentive bonus compensation include "quantitative" financial factors (50%) and "qualitative" factors (50%). The quantitative factors were
based on weightings of how the Corporation performed during the most recent financial period with respect to its budget, which was approved by the Board of Directors, and industry comparables. The
specific financial factors, within the budget and industry comparables, and their respective weightings included comparisons to revenue growth (30%), EPS growth (60%) and EBITDA margin (10%). The
industry comparables used were a weighting of healthcare IT companies (90%) and pharmacy benefit managers (10%). 

        The
qualitative factors used were a combination of leadership abilities and communication skills and were weighted equally. 

Submitted
by: 

Kevin
R. Brown

Terrence C. Burke

Mark A. Thierer 

11

 

Performance Graph  

        The following chart illustrates the Corporation's five-year cumulative total shareholder return for a $100 investment in Common Shares of the
Corporation on January 2, 2001, versus the S&P/TSX 300 Composite Index: 

 
 

Performance Graph — SXC versus the S&P/TSX 300
  Composite Total Return Index    
    

  

Compensation of Directors  

        On January 14, 2003, the Board of Directors approved a modified director meeting compensation plan (the "Director Compensation Plan") as proposed by
the Compensation Committee. The Director Compensation Plan was limited to further clarifying compensation for standing and ad-hoc committee meetings. In accordance with the Director
Compensation Plan, Mr. Ryan receives an annual retainer of $12,500, a fee of up to $1,000 for each meeting of the Board of Directors and up to $500 for each meeting of a committee of the Board
of Directors. Messrs. Burke, Brown, and Thierer each receive an annual retainer of U.S. $12,500, a fee of up to U.S. $1,000 for each meeting of the Board of Directors, a fee of up
to U.S. $500 for each meeting of a committee of the Board of Directors and reimbursement of travel expenses incurred in connection with their respective attendances thereat. During calendar
2004, the annual retainer was increased for all directors to $12,500. 

Directors and Officers Insurance  

        The Corporation has agreed to indemnify its directors and officers against liabilities incurred by them as a result of acting as directors and officers of the
Corporation to the extent permitted by the Canada Business Corporations Act. 

        The
Corporation has renewed its insurance effective September 30, 2005 for the protection of its directors and officers in the amount of $5,000,000, at a cost to the Corporation
of $24,500 per year. The policy has a deductible of $50,000 per claim. 

12

  

 
 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER
  EQUITY COMPENSATION PLANS    
    

        As at December 31, 2005, the securities authorized for issuance under the equity compensation plan for the Corporation are as follows: 

	

	Plan Category
 
	 	Number of Securities to be Issued Upon Exercise of Outstanding Options
	 	Weighted Average Exercise Price of Outstanding Options
	 	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(2)

	

	Equity compensation plan approved by securityholders — Stock Option Plan(1)	 	6,810,335	 	$	1.18	 	2,564,759
	

	(1)
	For
a complete description of the Stock Option Plan, see "Executive Compensation — The Stock Option Plan".

	(2)
	There
are no equity compensation plans that have not been approved by securityholders. 

 
 

INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIORS OFFICERS    
    

        None of the directors, executive officers or senior officers of the Corporation, and none of the associates or affiliates of any of the foregoing, is currently
indebted to the Corporation or was indebted to the Corporation at any time since the beginning of the Corporation's most recently completed fiscal year. 

 
 

STATEMENT OF CORPORATE GOVERNANCE PRACTICES    
    

        The Corporation's board of directors and senior management consider good corporate governance to be central to the effective and efficient operation of Canadian
corporations. Through the Corporate Governance Committee, the Board reviews, evaluates and modifies its governance program to ensure it is of the highest standard. The Board is satisfied that the
Corporation's governance plan is consistent with legal and stock exchange requirements. 

        During
the past year, there have been several changes to the corporate governance disclosure requirements applicable to the Corporation. Specifically, the Canadian Securities
Administrators introduced in final form National Instrument 58-101 — Disclosure of Corporate Governance
Practices ("NI 58-101") and National Policy 58-201 — Corporate Governance
Guidelines ("NP 58-201"), both of which came into force on June 30, 2005 and effectively replaced the corporate governance guidelines and disclosure
policies of the Toronto Stock Exchange. Under NI 58-101, the Corporation is required to disclose certain information relating to its corporate governance practices. This information
is set out in Schedule "B" to this Proxy Circular. 

 
 

INTEREST OF MANAGEMENT AND OTHERS
  IN MATERIAL TRANSACTIONS    
    

        Except as otherwise set out herein, there have been no material transactions entered into since the beginning of the Corporation's last completed fiscal year, or
proposed to be entered into by the Corporation that have or will materially affect the Corporation or any of the affiliates of the Corporation involving an officer or director of the Corporation, a
proposed nominee for election as a director of the Corporation, the principal shareholder of the Corporation or any associate or affiliate of any of such persons. 

13

 
 
 

APPOINTMENT OF AUDITORS    
    

        Unless authority to vote has been withheld, the Management nominees named in the enclosed form of proxy intend to vote the Common Shares of the Corporation
represented thereby for the appointment of KPMG LLP, Chartered Accountants, as auditors of the Corporation at a remuneration to be fixed by the directors, to hold office until the next annual
meeting of shareholders. KPMG LLP has been the Corporation's auditors since 1995. 

 
 

SHARE CONSOLIDATION    
    

Reasons for the Share Consolidation  

        Shareholders will be asked at the Meeting to approve a special resolution to consolidate all of the Corporation's issued and outstanding Common Shares on the
basis of a ratio within the range of one post-consolidation Common Share for every three pre-consolidation Common Shares to one post-consolidation Common Share for
every five pre-consolidation Common Shares (the "Consolidation"), with the ratio to be selected and implemented by the Corporation's board of directors, if at all, at any time prior
to May 17, 2007. The number of pre-Consolidation shares in the ratio must be a whole number of Common Shares. The Consolidation remains subject to receipt of all necessary
regulatory approvals, including approval of the TSX. 

        If
the Corporation's board of directors decides to implement the Consolidation, upon completion of the Consolidation the number of Common Shares issued and outstanding will be reduced
from approximately 67,806,000 Common Shares as of March 17, 2006 to between approximately 13,561,200 and 22,602,000 shares, depending on the ratio selected by the Corporation's
board of directors. The following table sets out the approximate percentage reduction in the number of outstanding Common Shares and the approximate number of Common Shares that would be outstanding
as a result of a Consolidation at the ratios indicated: 

	

	Proposed Consolidation Ratio 
	 	Approximate Percentage Reduction in Number of Outstanding Common Shares
	 	Approximate Number of Outstanding Common Shares (Post Consolidation)(1)

	

	1 for 3	 	66.7%	 	22,602,000
	

	1 for 4	 	75.0%	 	16,951,500
	

	1 for 5	 	80.0%	 	13,561,200
	

	(1)
	Based
on the number of common shares outstanding on March 17, 2006. 

        On March 17, 2006, the closing price of the Common Shares on the Toronto Stock Exchange (the "TSX") was $4.04. Management believes
that it is possible that the Common Shares trade at prices that may impact the desirability of purchasing the Common Shares and the ability of the Corporation to complete financings and acquisitions
involving the issuance of Common Shares. Accordingly, management believes that a reduction in the number of outstanding Common Shares and stock options will increase the Corporation's flexibility and
competitiveness in the market place and may make the Corporation's securities more attractive to potential investors. Management believes that a higher trading price for the Common Shares would be
beneficial to the Corporation and its shareholders as it will enable the Corporation to attract interest from a broader range of institutional investors in Canada, the United States and
elsewhere. 

        The
Corporation's board of directors believes that shareholder approval of the range of potential Consolidation ratios (rather than a single Consolidation ratio) provides the board of
directors with maximum flexibility to achieve the desired results of the Consolidation. If the Share Consolidation Resolution is approved, the Consolidation will be implemented, if at all, only upon a
determination by the Corporation's board of directors that the Consolidation is in the best interests of the Corporation and its shareholders at that time. In connection with any determination to
implement a Consolidation, the Corporation's board of directors will set the timing for such a Consolidation and select the specific ratio from within the range of ratios set forth in the Share
Consolidation Resolution. The board of directors' selection of the specific ratio will be based primarily on the price level of the Common Shares at that time and the expected stability of that price
level. No further action on the part of shareholders will be required in order for the board of directors to implement the Consolidation. If the Corporation's board of directors does not implement the
Consolidation before May 17, 2007, the authority granted by the Share Consolidation Resolution to implement the Consolidation on these terms will lapse and be of no further force or effect. The
Share Consolidation Resolution will also authorize the board of directors to elect not to proceed with, and abandon, the Consolidation at any time if it determines, in its sole discretion, to do so.
The board of directors would exercise this right if it determined that the Consolidation was no longer in the best interests of the Corporation and its shareholders. 

14

 

        No
further approval or action by or prior notice to shareholders will be required in order for the board of directors to abandon the Consolidation. 

Certain Risks Associated with the Share Consolidation  

        There can be no assurance that the total market capitalization of the Corporation's Common Shares (the aggregate value of all Common Shares at the then
market price) immediately after the proposed Consolidation will be equal to or greater than the total market capitalization immediately before the proposed Consolidation or that the per share market
price of the Common Shares following the Consolidation will remain higher than the per share market price immediately before the Consolidation or equal or exceed the direct arithmetical result of the
Consolidation. 

        There
can be no assurance that any increase in the market price per Common Share of the Corporation resulting from the Consolidation will be sustainable or that it will equal or exceed
the direct arithmetical result of the Consolidation (that is, from three to five times the pre-Consolidation price, depending on the ratio selected by the Corporation's board of directors)
since there are numerous factors and contingencies which would affect such price, including the status of the market for the Common Shares at the time, the Corporation's reported results of operations
in future periods, and general economic, stock market and industry conditions. For example, based on the closing price of the Common Shares on the Toronto Stock Exchange (the "TSX") on
March 17, 2006 of $4.04 per share, if the Corporation's board of directors decided to implement the Consolidation and select a Consolidation ratio of one post-Consolidation share
for every four pre-Consolidation shares, there can be no assurance that the post-Consolidation market price of the Common Shares would be $16.16 per share or greater. 

        Accordingly,
the total market capitalization of the Common Shares after the proposed Consolidation may be lower than the total market capitalization before the proposed Consolidation
and, in the future, the market price of the Common Shares may not exceed or remain higher than the market price prior to the proposed Consolidation. 

        A decline in the market price of the Common Shares after the Consolidation may result in a greater percentage decline than would occur in the absence of a
Consolidation, and the liquidity of the Common Shares could be adversely affected following such a Consolidation.

        If
the Consolidation is implemented and the market price of the Common Shares declines, the percentage decline may be greater than would occur in the absence of the Consolidation. The
market price of the Common Shares will, however, also be based on the Corporation's performance and other factors, which are unrelated to the number of Common Shares outstanding. Furthermore, the
liquidity of the Common Shares could be adversely affected by the reduced number of Common Shares that would be outstanding after the Consolidation. 

No Fractional Shares to be Issued  

        No fractional shares will be issued in connection with the Consolidation and, in the event that a shareholder would otherwise be entitled to receive a fractional
share upon Consolidation, those shareholders shall have such fractional share cancelled. Except for any variances attributable to fractional shares, the change in the number of issued and outstanding
Common Shares that will result from the Consolidation will cause no change in the capital attributable to the Common Shares and will not materially affect any shareholders' percentage ownership in the
Corporation, even though such ownership will be represented by a smaller number of Common Shares. However, the Consolidation could lead to an increase in the number of shareholders who hold less than
a board lot (100 shares), or board lots plus odd lots, and the cost to shareholders of transferring odd lots may be higher than the cost of transferring board lots. 

15

 

Effect on Stock Options and Other Arrangements  

        The exercise or conversion price and/or the number of Common Shares issuable under any outstanding convertible securities, including under outstanding stock
options, rights and any other similar securities will be proportionately adjusted upon the implementation of the Consolidation, in accordance with the terms of such securities, based on the
Consolidation ratio selected by the Corporation's board of directors. 

Effect on Share Certificates  

        If the proposed Consolidation is approved by shareholders and implemented by the Corporation's board of directors, registered shareholders will be required to
exchange their share certificates representing pre-Consolidation Common Shares for new share certificates representing post-Consolidation Common Shares. Following the
announcement by the Corporation of the Consolidation ratio selected by the board of directors and the effective date of the Consolidation, registered shareholders will be sent a transmittal letter
from the Corporation's transfer agent, CIBC Mellon Trust Corporation, as soon as practicable after the effective date of the Consolidation. The letter of transmittal will contain instructions
on how to surrender certificate(s) representing pre-Consolidation shares to the transfer agent. 

        The
transfer agent will forward to each registered shareholder who has sent the required documents a new share certificate representing the number of post-Consolidation
Common Shares to which the shareholder is entitled. Until surrendered, each share certificate representing pre-Consolidation Common Shares will be deemed for all purposes to represent the
number of whole post-Consolidation Common Shares to which the holder is entitled as a result of the Consolidation. If a registered shareholder would otherwise be entitled to receive a
fractional share, such fractional share shall be deemed to have been cancelled as described above under the heading "No Fractional Shares to be Issued". 

Procedure for Implementing Share Consolidation  

        If the Share Consolidation Resolution is approved by shareholders, and the board of directors of the Corporation decides to implement the Consolidation, the
Corporation will promptly file articles of amendment ("Articles of Amendment") with the Director under the Canada Business Corporations Act (the "CBCA") in the form prescribed by that Act to
amend the Corporation's articles of incorporation. The Consolidation will become effective on the date shown in the certificate of amendment in connection therewith, or such other date indicated in
the Articles of Amendment. 

No Dissent Rights  

        Under the CBCA, shareholders do not have dissent and appraisal rights with respect to the proposed Consolidation. 

Vote Required and Recommendations of the Board of Directors  

        The Share Consolidation Resolution is a special resolution. The text of the special resolution which will be submitted to the shareholders is set forth on
Schedule "A" to this Management Information Circular. 

        For the reasons indicated above, the board of directors and management of the Corporation believe the Consolidation is in the best interests of the Corporation
and its shareholders and, accordingly, recommend that shareholders vote FOR the Share Consolidation Resolution. The Share Consolidation Resolution must be approved by at least
two-thirds of the votes cast by the holders of Common Shares present in person or represented by proxy at the Meeting to be effective. The Share Consolidation Resolution provides that the
board of directors of the Corporation may revoke the special resolution before the issuance of the certificate of amendment by the Director under the CBCA without the approval of the shareholders. 

16

 
 
 

INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON    
    

        No person who has been a director or officer of the Corporation at any time since the beginning of its last completed fiscal year, no proposed nominee for
election as a director, and no associate of any of the foregoing persons has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be
acted upon at the meeting, except as disclosed in this Management Information Circular. 

 
 

OTHER MATTERS WHICH MAY COME BEFORE THE MEETING    
    

        Management of the Corporation knows of no matters to come before the meeting of shareholders other than as set forth in the Notice of Meeting.  HOWEVER, IF OTHER
MATTERS WHICH ARE NOT KNOWN TO MANAGEMENT OF THE CORPORATION SHOULD PROPERLY COME BEFORE THE MEETING, THE ACCOMPANYING PROXY WILL BE VOTED ON SUCH MATTERS IN
ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS VOTING THE PROXY.

 
 

ADDITIONAL INFORMATION    
    

        Additional information relating to the Corporation is available on SEDAR at www.sedar.com. Copies of the Corporation's comparative financial statements and
accompanying Management's Discussion and Analysis for the fiscal year ended December 31, 2005 are available on SEDAR or shareholders may request copies to be sent to them without charge by
contacting the Corporate Secretary of the Corporation at (905) 876-4741. Financial information with respect to the Corporation is provided in the Corporation's comparative financial
statements and accompanying Management's Discussion and Analysis for the most recently completed financial year. 

 
 

APPROVAL    
    

        The contents and the sending of this Management Information Circular have been approved by the Board of Directors. 

DATED as of March 17, 2006

(except as otherwise noted) 

	 	 	BY ORDER OF THE BOARD
	 	 	

 
	 	 	Irwin P. Studen,

Senior Vice President, Finance & Administration,

Chief Financial Officer and Corporate Secretary

17

 
 

SCHEDULE "A"
  
    Share Consolidation Resolution    
    

BE IT RESOLVED as a special resolution of the shareholders of the Corporation that: 

	(1)
	the
articles of the Corporation be amended to consolidate the issued and outstanding common shares of the Corporation ("Common Shares"), on the basis of a consolidation ratio to be
selected by the Corporation's board of directors, in its sole discretion, provided that (a) the ratio may be no smaller than one post-consolidation share for every three
pre-consolidation shares and no larger than one post-consolidation share for every five pre-consolidation shares, and (b) the number of
pre-consolidation shares in the ratio must be a whole number of Common Shares;

	(2)
	no
fractional Common Shares shall be issued in connection with the consolidation and, in the event that a shareholder would otherwise be entitled to receive a fractional share upon
consolidation, such shareholder shall have such fractional share cancelled;

	(3)
	the
effective date of such consolidation shall be the date shown in the certificate of amendment issued by the Director appointed under the Canada Business
Corporations Act (the "CBCA") or such other date indicated in the articles of amendment;

	(4)
	any
director or officer of the Corporation is hereby authorized to execute and deliver, for and on behalf of the Corporation, all such documents and to do all such other acts and
things as may be considered necessary or desirable to give effect to this resolution including, without limitation, the delivery of articles of amendment in the prescribed form to the Director
appointed under the CBCA; and

	(5)
	notwithstanding
the foregoing, the directors of the Corporation are hereby authorized, without further approval of the shareholders of the Corporation, to revoke this special
resolution at any time prior to the endorsement by the Director appointed under the CBCA of a certificate of amendment. 

 
 

SCHEDULE "B"
  
    NATIONAL INSTRUMENT 58-101
  DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES    
    

	1.
	Board of Directors

	a.
	Disclose the identity of the directors who are independent.

Of
the seven proposed members of the Board of Directors, six members are considered by the Board to be independent directors according to the definition of independence set out in Multilateral
Instrument 52-110 Audit Committees ("MI 52-110"). In reaching this conclusion, the Board of Directors took the view that Messrs. Brown, Burke,
Callaghan, Ryan, Reddon and Thierer are unrelated. 

	b.
	Disclose the identity of directors who are not independent, and describe the basis for that determination.

As
Mr. Gordon S. Glenn is the President and Chief Executive Officer, he is not considered to be an independent director. 

	c.
	Disclose whether or not a majority of directors are independent. If a majority of directors are not independent, describe what the board of directors does to
facilitate its exercise of independent judgment in carrying out its responsibilities.

The
Board of Directors considers that six of the seven proposed directors are independent according to the definition of independence set out in MI 52-110. 

	d.
	If a director is presently a director of any other issuer that is a reporting issuer (or the equivalent) in a jurisdiction or a foreign jurisdiction,
identify both the director and the other issuer.

The
following directors are currently directors of other issuers that are reporting issuers (or the equivalent) in a jurisdiction of Canada or a foreign jurisdiction: 

	Name of Director 
	Issuer 

	Michael J. Callaghan	Ciphergen Biosystems Inc. (NASDAQ)
	James Ryan	Excapsa Software Inc. (AIM)

	e.
	Disclose whether or not the independent directors hold regularly scheduled meetings at which non-independent directors and members of management are
not in attendance. If the independent directors hold such meetings, disclose the number of meetings held since the beginning of the issuer's most recently completed financial year. If the independent
directors do not hold such meetings describe what the board does to facilitate open and candid discussion among its independent directors.

        The
Board of Directors and its committees meet as necessary in the absence of the President and CEO and other members of Management. Since the beginning of the fiscal year ended
December 31, 2005, the independent directors of the Board held four such meetings. The Audit Committee also holds in camera sessions with only
the external auditors present. 

 

	f.
	Disclose whether or not the chair of the board is an independent director. If the board has a chair or lead director who is an independent director, disclose
the identity of the independent chair or lead director, and describe his or her role and responsibilities. If the board has neither a chair that is independent nor a lead director that is independent,
describe what the board does to provide leadership for its independent directors.

The
Chairman of the Board of Directors, Michael J. Callaghan, is an independent director. The Chairman of the Board is responsible for overseeing the performance by the Board of its duties, for
communicating periodically with Committee chairs regarding the activities of their respective Committees, for assessing the effectiveness of the Board as a whole as well as individual Board members
and for overseeing the management of the Corporation's business. 

	g.
	Disclose the attendance record of each director for all board meetings held since the beginning of the issuer's most recently completed financial
year.

Since
the beginning of the fiscal year ended December 31, 2005, the Board of Directors held eight meetings. The following chart shows the attendance record of each director at such board
meetings: 

	

	Board Meeting 
	 	M. Callaghan
	 	T. Burke
	 	J. Ryan
	 	K. Brown
	 	G. Glenn

	

	March 2, 2005	 	X	 	X	 	X	 	X	 	X
	

	March 7, 2005	 	X	 	X	 	X	 	X	 	X
	

	March 18, 2005	 	X	 	X	 	 	 	 	 	X
	

	May 4, 2005	 	X	 	X	 	 	 	 	 	X
	

	June 14, 2005	 	X	 	 	 	X	 	X	 	X
	

	June 20, 2005	 	X	 	X	 	X	 	 	 	X
	

	August 2, 2006	 	X	 	X	 	X	 	 	 	X
	

	November 2, 2005	 	X	 	X	 	 	 	X	 	X
	

Note: 

	(1)
	The
attendance records of Messrs. Thierer and Reddon are not disclosed above because Mr. Thierer is a new member of the board (as of February 14, 2006) and
Mr. Reddon is a new nominee to the Board of Directors of the Corporation.

	2.
	Board of Directors

Disclose the text of the board's written mandate. If the board does not have a written mandate, describe how the board delineates its role and
responsibilities.

The
Board of Directors is responsible to supervise the management of the business and affairs of the Corporation and to act with a view to the best interests of the Corporation. The Board of Directors
has adopted a written mandate to formalize their oversight responsibilities, a copy of which is attached to this circular as Schedule "C". The Board of Director's mandate is fulfilled, either
directly or indirectly, through the various standing committees of the Board of Directors, the Audit Committee, the Nominating Committee, the Corporate Governance Committee and the Compensation
Committee. The Board of Directors also, from time to time, appoints ad-hoc committees to report to the Board of Directors on specific matters as they arise. In fulfilling its mandate, the
Board of Directors, directly or through one of its committees, is responsible for the following: 

B-2

 

	•
	the
adoption of a strategic planning process for the Corporation, which includes the annual review of a business plan and budget presented by senior management;

	•
	the
identification of the principal risks of the Corporation's business and ensuring the implementation of appropriate systems and management of these risks by undertaking
thorough quarterly reviews of operations, sales, marketing and Audit Committee reports from management and by the Audit Committee reviewing the activities and findings of the Corporation's external
auditors to identify the principal risks to the Corporation's business;

	•
	succession
planning for the Corporation including the appointment, training and monitoring of senior management;

	•
	ensuring
an appropriate communications policy for the Corporation is implemented; and

	•
	the
integrity of the Corporation's internal control and management information systems.

 

	3.
	Position Description

	a.
	Disclose whether or not the board has developed written position descriptions for the chair and the chair of each board committee. If the board has not
developed written position descriptions for the chair and/or the chair of each board committee, briefly described how the board delineates the role and responsibilities of each such
position

Pursuant
to the Board's written mandate, the Board is responsible for developing position descriptions for the Chair of the Board and the chair of each Board committee. 

Chairman of the Board 

The
Chairman of the Board is responsible for overseeing the performance by the Board of its duties, for communicating periodically with Committee chairs regarding the activities of their respective
Committees, for assessing the effectiveness of the Board as a whole as well as individual Board members and for overseeing the management of the Corporation's business. 

Chairman of the Audit Committee 

The
Chairman of the Audit Committee is responsible for overseeing the performance by the Audit Committee of its duties, for assessing the effectiveness of the Audit Committee and individual Audit
Committee members and for reporting periodically to the Board. 

Chairman of the Nominating Committee 

The
Chairman of the Nominating Committee is responsible for overseeing the performance by the Nominating Committee of its duties, for assessing the effectiveness of the Nominating Committee and
individual Nominating Committee members and for reporting periodically to the Board. 

Chairman of the Corporate Governance Committee 

The
Chairman of the Corporate Governance Committee is responsible for overseeing the performance by the Corporate Governance Committee of its duties, for assessing the effectiveness of the Corporate
Governance Committee and individual Corporate Governance Committee members and for reporting periodically to the Board. 

B-3

 

Chairman of the Compensation Committee 

The
Chairman of the Compensation Committee is responsible for overseeing the performance by the Compensation Committee of its duties, for assessing the effectiveness of the Compensation Committee and
individual Compensation Committee members and for reporting periodically to the Board. 

	b.
	Disclose whether or not the board and CEO have developed a written position description for the CEO. If the board and CEO have not developed such a position
description, briefly describe how the board delineates the role and responsibilities of the CEO.

The
Board of Directors has developed a written position description for the CEO. The CEO is specifically charged with the responsibility for managing the strategic and operational agenda of the
Corporation and for the execution of the directives and policies of the Board of Directors. The roles and responsibilities of the CEO include, among other things: 

	(a)
	developing,
together with the Board of Directors, the Corporation's strategic direction and monitoring same;

	(b)
	directing
the overall business operations of the Corporation;

	(c)
	ensuring
that the Board of Directors is kept appropriately informed of the overall business operations of the Corporation and major issues facing the Corporation;

	(d)
	having
ultimate accountability for the development and execution of the strategy and policies of the Corporation and their communication to the Corporation's key internal and external
shareholders;

	(e)
	having
responsibility for the day-to-day operations of the Corporation, including the annual planning process, capital management, financial management,
acquisitions, divestitures, etc., all of which must be accomplished within the strategic framework of the Corporation established by the Board of Directors;

	(f)
	having
the responsibility for the employment, compensation, job descriptions, performance assessment, leadership development and succession planning of human resources;

	(g)
	representing
the Corporation to its major shareholders, including investment and financial communities, governments, customers and the public;

	(h)
	bringing
the following material decisions to the Board of Directors for their review and approval:

	(1)
	disposition
of assets or cancellation of debt other than in the ordinary and normal course of business;

	(2)
	acquisition
or initiation of a new business or undertaking or the assumption of any commitment, obligation or liability other than in the ordinary and normal course of business; 

B-4

 

	(3)
	issuance
or sale of securities of the Corporation or rights, options or warrants to acquire securities of the Corporation;

	(4)
	redemption
or repurchase of securities of the Corporation;

	(5)
	declaration
or payment of a dividend or other distribution in respect of any securities of the Corporation;

	(6)
	any
transaction, contract, agreement, undertaking or arrangement with a person with whom the Corporation does not act at arm's length; and

	(7)
	any
other transaction, contract, agreement, undertaking, commitment or arrangement, not in the ordinary and normal course of business which is or would be material in relation to the
Corporation; and

	(i)
	presenting
to the Board of Directors any material business issues resulting from communications with shareholders.

 

	4.
	Orientation and Continuing Education

	a.
	Briefly describe what measures the board takes to orient new directors regarding

	i.
	the role of the board, its committees and its directors; and

	ii.
	the nature and operation of the issuer's business.

New
directors are provided with customized presentations, investor packages, product literature and director insurance information. The information and presentations are tailored for each director
depending on their familiarity with the operations of the Corporation and the industry generally. 

	b.
	Briefly describe what measures, if any, the board takes to provide continuing education for its directors. If the board does not provide continuing education,
describe how the board ensures that its directors maintain the skill and knowledge necessary to meet their obligations as directors.

At
each quarterly Board meeting, senior management provides the directors with an Audit Committee package and an in-depth presentation detailing the Corporation's most recent and
historical financial results. In addition, the Corporation holds meetings for the Board of Directors at different company locations to maintain the Board's familiarity with the Corporation's
operations. The Corporation has no formal policy of providing professional development courses to Board members, however, the Corporation does engage consultants on an as-needed basis to
make presentations to the Board on matters relevant to the Corporation. 

	5.
	Ethical Business Conduct

	a.
	Disclose whether or not the board has adopted a written code for the directors, officers and employees. If the board has adopted a written
code:

	i.
	disclose how a person or company may obtain a copy of the code;

The
Corporation has adopted a Code of Business Conduct and Ethics which can be found on SEDAR at www.sedar.com. A copy of the Code of Business Conduct and Ethics can also be obtained by contacting the
Corporate Secretary at 555 Industrial Drive, Milton, Ontario, L9T 5E1, telephone (416) 815-0700. 

B-5

 

	ii.
	describe how the board monitors compliance with its code, or if the board does not monitor compliance, explain whether and how the board satisfies itself
regarding compliance with its code;

The
Board is ultimately responsible for the implementation and administration of the Code of Business Conduct and Ethics and has designated a Compliance Officer for the
day-to-day implementation and administration of the Code. 

	iii.
	provide a cross-reference to any material change report filed since the beginning of the issuer's most recently completed financial year that pertains to any
conduct of a director or executive officer that constitutes a departure from the code.

There
are no such reports. 

	b.
	Describe any steps the board takes to ensure directors exercise independent judgment in considering transactions and agreements in respect of which a director
or executive officer has a material interest.

Under
the Canada Business Corporations Act to which the Corporation is subject, a director or officer of the Corporation must disclose to the
Corporation, in writing or by requesting that it be entered in the minutes of meetings of the Board of Directors, the nature and extent of any interest that he or she has in a material contract or
material transaction, whether made or proposed, with the Corporation, if the director or officer: (a) is a party to the contract or transaction (b) is a director or an officer, or an
individual acting in a similar capacity, of a party to the contract or transaction; or (c) has a material interest in a party to the contract or transaction. Subject to limited exceptions set
out in the Canada Business Corporations Act, the director cannot vote on any resolution to approve the contract or transaction. 

Further,
it is the policy of the Corporation that an interested director or officer recuse himself from the decision-making process pertaining to a contract or transaction in which he or she has an
interest. 

	c.
	Describe any other steps the board takes to encourage and promote a culture of ethical business conduct.

The
Corporation's Audit Committee has adopted a Whistleblower Policy establishing procedures for the submission of complaints and concerns regarding accounting, auditing and other matters. 

	6.
	Nomination of Directors

	a.
	Describe the process by which the board identifies new candidates for board nomination.

The
Board of Directors has delegated to the Nominating Committee the responsibility to identify and recommend qualified individuals to become new members of the Board. In fulfilling this
responsibility, the Nominating Committee considers: (i) the competencies and skills that the Board considers to be necessary for the Board, as a whole, to possess; (ii) the competencies
and skills that the Board considers each existing director to possess; and (iii) the competencies and skills each new nominee will bring to the Board. 

B-6

 

	b.
	Disclose whether or not the board has a nominating committee composed entirely of independent directors. If the board does not have a nominating committee
composed entirely of independent directors, describe what steps the board takes to encourage an objective nomination process.

All
of the members of the Nominating Committee are independent according to the definition of "independence" set out in MI 52-110, with the exception of Gordon Glenn. Because the majority
of the Nominating Committee is independent and functions in accordance with a detailed mandate, the Board of Directors of the Corporation believes it has encouraged an objective nomination process. 

	c.
	If the board has a nominating committee, describe the responsibilities, powers and operation of the nominating committee.

In
addition to the responsibilities set out in (a) above, the mandate of the Nominating Committee includes the assessment of the competencies and skill of each existing director and to
determine the appropriate size of the Board with a view to effective decision making. 

The
Nominating Committee meets at least once a year and additional meetings are held as deemed necessary by the Committee Chair. The Nominating Committee has a written charter that sets out its
mandate and responsibilities and authority to engage outside advisors as required. 

	7.
	Compensation

	a.
	Describe the process by which the board determines the compensation for the issuer's directors and officers.

The
Compensation Committee is responsible for reviewing the adequacy and format of compensation to directors in light of the responsibilities and risks associated with directorship. With respect to
the compensation of the Corporation's officers, see "Report on Executive Compensation" above. 

	b.
	Disclose whether or not the board has a compensation committee composed entirely of independent directors. If the board does not have a compensation committee
composed entirely of independent directors, describe what steps the board takes to ensure an objective process for determining such compensation.

The
Compensation Committee is composed entirely of independent directors according to the definition of "independence" as set out in MI 52-110. 

	c.
	If the board has a compensation committee, describe the responsibilities, powers and operation of the compensation committee.

The
overall purpose of the Compensation Committee is to develop, monitor and assess the Corporation's approach to the compensation of its directors, senior officers and employees. Among other things,
the Compensation Committee is responsible for: (i) reviewing the compensation practices and policies of the Corporation to ensure they are competitive and that they provide appropriate
motivation for corporate performance and increased shareholder value; (ii) oversight of the administration of the Corporation's compensation programs, including equity-based compensation
programs, and making recommendations to the Board regarding their adoption, amendment or termination; (iii) annually review and approve the annual base salary and bonus targets for senior
executives of the Corporation other than the CEO; and (iv) review and approve annual corporate goals and objectives for the CEO and evaluate the CEO's performance and based on this evaluation,
annually review and approve the CEO's annual base salary, bonus and any stock option grants or other awards. 

B-7

 

The
Compensation Committee meets at least once a year and additional meetings are held as deemed necessary by the Committee Chair. The Compensation Committee has a written charter that sets out its
mandate and responsibilities and authority to engage outside advisors as required. 

	d.
	If a compensation consultant or advisor has, at any time since the beginning of the issuer's most recently completed financial year, been retained to assist in
determining compensation for any of the issuer's directors and officers, disclose the identity of the consultant or advisor and briefly summarize the mandate for which they have been retained. If the
consultant or advisor has been retained to perform any other work for the Issuer, state that fact and briefly describe the nature of the work.

No
compensation consultant or advisor was retained by the Corporation since the beginning of the fiscal year ended December 31, 2005. 

	8.
	Other Board Committees

If the board has standing committees other than the audit, compensation and nominating committees, identify the committees and describe their function.

Other
than the Audit Committee, the Compensation Committee, the Nominating Committee, the Board has established a Corporate Governance Committee. In addition to these regular committees, the Board may
appoint ad hoc committees periodically to address issues of a more short-term nature. 

The
key responsibilities of the Corporate Governance Committee is to develop and monitor the Corporation's overall approach to corporate governance issues and, subject to approval by full board the
directors, to implement and administer a system of corporate governance which reflects superior standards of corporate governance practices and to continue to develop the Corporation's approach to
corporate governance issues. In addition, the Corporate Governance Committee is to undertake an annual review of corporate governance issues and practices as they affect the Corporation and make a set
of recommendations to the directors during each calendar year. 

In
addition, the Corporation has established a Disclosure Committee comprised of the Chair of the Audit Committee, the President and CEO, and the Senior Vice-President, Finance and CFO. It
is the policy of the Corporation that all disclosures made by the Corporation to its security holders and to the public generally should be accurate and complete in all material respects, should
fairly present the Corporation's financial condition and the results and current status of its operations, and should be made on a timely basis as required by applicable law and stock exchange
requirements. The purpose of the Disclosure Committee is to assist the Corporation in complying with this policy and to help ensure that adequate and appropriate controls and procedures are
established to maintain compliance with this policy. 

	9.
	Assessments

Disclose whether or not the board, its committees and individual directors are regularly assessed with respect to their effectiveness and contribution. If assessments are
regularly conducted, describe the process used for the assessments. If assessments are not regularly conducted, describe dhow the board satisfies itself that the board, its committees, and its
individual directors are performing effectively.

The
Nominating and Corporate Governance Committees (in conjunction with the Chairman) annually review and assess the effectiveness of the Board as a whole, the membership of the Board
committees, the mandates and activities of each committee and the contribution of individual directors and will make such recommendations to the Board arising out of such review as it deems
appropriate. 

B-8

SCHEDULE "C"

SYSTEMS XCELLENCE INC.

MANDATE OF THE BOARD OF DIRECTORS  

Introduction  

        The term "Corporation" or "SXC" herein shall refer to Systems Xcellence Inc. and the term "Board" shall refer to the board of directors of the Corporation.
The Board is elected by the shareholders and is responsible for the stewardship of the business and affairs of the Corporation. The Board seeks to discharge such responsibility by reviewing,
discussing and approving the Corporation's strategic planning and organizational structure and supervising management to oversee that the foregoing enhance and preserve the underlying value of the
Corporation. 

        Although
directors may be elected by the shareholders to bring special expertise or a point of view to Board deliberations, they are not chosen to represent a particular constituency.
The best interests of the Corporation as a whole must be paramount at all times. 

Duties of Directors  

        The Board discharges its responsibility for overseeing the management of the Corporation's business by delegating to the Corporation's senior officers the
responsibility for day-to-day management of the Corporation. The Board discharges its responsibilities both directly and through its committees, the Audit Committee, the
Nominating Committee, the Corporate Governance Committee and the Compensation Committee. In addition to these regular committees, the Board may appoint ad hoc committees periodically to address
certain issues of a more short-term nature. In addition to the Board's primary roles of overseeing corporate performance and providing quality, depth and continuity of management to meet
the Corporation's strategic objectives, principal duties include, but are not limited to the following categories: 

Appointment of Management  

	1.
	The
Board has the responsibility for approving the appointment of Chief Executive Officer ("CEO") and all other senior management, and approving their compensation, following a review
of the recommendations of the Compensation Committee. To the extent feasible, the Board shall satisfy itself as to the integrity of the CEO and other executive officers and that the CEO and other
executive officers create a culture of integrity throughout the Corporation.

	2.
	The
Board from time to time delegates to senior management the authority to enter into certain types of transactions, including financial transactions, subject to specified limits.
Investments and other expenditures above the specified limits, and material transactions outside the ordinary course of business are reviewed by and subject to the prior approval of the Board.

	3.
	The
Board oversees that succession planning programs are in place, including programs to appoint, train, develop and monitor management. 

Board Organization  

	4.
	The
Board will respond to recommendations received from the Nominating and Corporate Governance Committees and the Compensation Committee, but retains the responsibility for managing
its own affairs by giving its approval for its composition and size, the selection of the Chair of the Board, candidates nominated for election to the Board, committee and committee chair
appointments, committee charters and director compensation.

	5.
	The
Board may delegate to Board committees matters it is responsible for, including the approval of compensation of the Board and management, the conduct of performance evaluations and
oversight of internal controls systems, but the Board retains it oversight function and ultimate responsibility for these matters and all other delegated responsibilities. 

 

Strategic Planning  

	6.
	The
Board has oversight responsibility to participate directly, and through its committees, in reviewing, questioning and approving the mission of the business and its objectives and
goals.

	7.
	The
Board is responsible for adopting a strategic planning process and approving and reviewing, on at least an annual basis, the business, financial and strategic plans by which it is
proposed that the Corporation may reach those goals, and such strategic plans will take into account, among other things, the opportunities and risk of the business.

	8.
	The
Board has the responsibility to provide input to management on emerging trends and issues and on strategic plans, objectives and goals that management develops. 

Monitoring of Financial Performance and Other Financial Reporting Matters  

	9.
	The
Board is responsible for enhancing congruence between shareholder expectations, corporate plans and management performance.

	10.
	The
Board is responsible for:

	(a)
	adopting
processes for monitoring the Corporation's progress toward its strategic and operational goals, and to revise and alter its direction to management in light of changing
circumstances affecting the Corporation; and

	(b)
	taking
action when Corporation performance falls short of its goals or other special circumstances warrant.

	11.
	The
Board shall be responsible for approving the audited financial statements, interim financial statements and the notes and Management's Discussion and Analysis accompanying such
financial statements.

	12.
	The
Board is responsible for reviewing and approving material transactions outside the ordinary course of business and those matters which the Board is required to approve under the
Corporation's governing statute, including the payment of dividends, issuance, purchase and redemptions of securities, acquisitions and dispositions of material capital assets and material capital
expenditures. 

Risk Management  

	13.
	The
Board has responsibility for the identification of the principal risks of the Corporation's business and ensuring the implementation of appropriate systems to effectively monitor
and manage such risks with a view to the long-term viability of the Corporation and achieving a proper balance between the risks incurred and the potential return to the Corporation's
shareholders.

	14.
	The
Board is responsible for the Corporation's internal control and management information systems. 

Policies and Procedures  

	15.
	The
Board is responsible for:

	(a)
	developing
the Corporation's approach to corporate governance, including developing a set of corporate governance guidelines for the Corporation and approving and monitoring
compliance with all significant policies and procedures related to corporate governance; and

	(b)
	approving
policies and procedures designed to ensure that the Corporation operates at all times within applicable laws and regulations and to the highest ethical and moral standards
and, in particular, adopting a written code of business conduct and ethics which is applicable to directors, officers and employees of the Corporation and which constitutes written standards that are
reasonably designed to promote integrity and to deter wrongdoing. 

C-2

 

	16.
	The
Board enforces its policy respecting confidential treatment of the Corporation's proprietary information and Board deliberations.

	17.
	The
Board is responsible for monitoring compliance with the Corporation's Code of Business Conduct and Ethics. 

Communications and Reporting  

	18.
	The
Board has approved and will revise from time to time as circumstances warrant a Disclosure Policy and Continuous Disclosure Documents Guidelines to address communications with
shareholders, employees, financial analysts, the media and such other outside parties as may be appropriate.

	19.
	The
Board is responsible for:

	(a)
	overseeing
the accurate reporting of the financial performance of the Corporation to shareholders, other security holders and regulators on a timely and regular basis;

	(b)
	overseeing
that the financial results are reported fairly and in accordance with generally accepted accounting standards and related legal disclosure requirements;

	(c)
	taking
steps to enhance the timely disclosure of any other developments that have a significant and material impact on the Corporation;

	(d)
	reporting
annually to shareholders on its stewardship for the preceding year; and

	(e)
	overseeing
the Corporation's implementation of systems which accommodate feedback from stakeholders. 

Position Descriptions  

	20.
	The
Board is responsible for:

	(a)
	developing
position descriptions for the Chair of the Board, the chair of each Board committee and the CEO (which will include delineating management's responsibilities);

	(b)
	approving
the corporate goals and objectives that the CEO is responsible for meeting; and

	(c)
	developing
a description of the expectations and responsibilities of directors, including basic duties and responsibilities with respect to attendance at Board meetings and advance
review of meeting materials. 

Orientation and Continuing Education  

	21.
	The
Board is responsible for:

	(a)
	ensuring
that all new directors receive a comprehensive orientation, that they fully understand the role of the Board and its committees, as well as the contribution individual
directors are expected to make (including the commitment of time and resources that the Corporation expects from its directors) and that they understand the nature and operation of the Corporation's
business; and 

C-3

 

	(b)
	providing
continuing education opportunities for all directors, so that individuals may maintain or enhance their skills and abilities as directors, as well as to ensure that their
knowledge and understanding of the Corporation's business remains current. 

Nomination of Directors  

	22.
	In
connection with the nomination or appointment of individuals as directors, the Board is responsible for:

	(a)
	considering
what competencies and skills the Board, as a whole, should possess;

	(b)
	assessing
what competencies and skills each existing director possesses; and

	(c)
	considering
the appropriate size of the Board, with a view to facilitating effective decision making. 

In
carrying out each of these responsibilities, the Board will consider the advice and input of the Nominating Committee. 

	23.
	Director
nominees shall be selected by a majority of the independent directors. 

Board Evaluation  

	24.
	The
Board is responsible for ensuring that the Board, its committees and each individual director are regularly assessed regarding his, her or its effectiveness and contribution. An
assessment will consider, in the case of the Board or a Board committee, its mandate or charter and in the case of an individual director, any applicable position description, as well as the
competencies and skills each individual director is expected to bring to the Board. 

Annual Review  

	25.
	The
Corporate Governance Committee shall review and reassess the adequacy of this Mandate at least annually and otherwise as it deems appropriate and recommend changes to the Board,
as necessary. The Corporate Governance Committee will ensure that this Mandate or a summary that has been approved by the Corporate Governance Committee is disclosed in accordance with all applicable
securities laws or regulatory requirements in the Corporation's annual management information circular or such other annual filing as may be permitted or required by applicable securities regulatory
authorities. 

Chairman of the Board  

	26.
	The
chairman of the Board shall be responsible for overseeing the performance by the Board of its duties, for communicating periodically with Committee chairs regarding the activities
of their respective Committees, for assessing the effectiveness of the Board as a whole as well as individual Board members and for overseeing the management of the Corporation's business. 

C-4

QuickLinks

SYSTEMS XCELLENCE INC. NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

SYSTEMS XCELLENCE INC. MANAGEMENT INFORMATION CIRCULAR SOLICITATION OF PROXIES

PROXIES AND VOTING

NON-REGISTERED HOLDERS

REVOCATION OF PROXIES

VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS THEREOF

ELECTION OF DIRECTORS

EXECUTIVE COMPENSATION

Performance Graph — SXC versus the S&P/TSX 300 Composite Total Return Index

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIORS OFFICERS

STATEMENT OF CORPORATE GOVERNANCE PRACTICES

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

APPOINTMENT OF AUDITORS

SHARE CONSOLIDATION

INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

OTHER MATTERS WHICH MAY COME BEFORE THE MEETING

ADDITIONAL INFORMATION

APPROVAL

SCHEDULE "A" Share Consolidation Resolution

SCHEDULE "B" NATIONAL INSTRUMENT 58-101 DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}]]