10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER:  000-31146

724 SOLUTIONS INC.

(Exact name of registrant as specified in its charter)

Canada

(State or other jurisdiction of incorporation and organization)

Inapplicable

(I.R.S. Employer Identification No.)

1221 State Street, Suite 200
Santa Barbara, CA  93101

(Address of principal executive offices, including zip code)

(805) 884-8308

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common Shares,
no par value (together with associated rights to purchase additional Common Shares).
(Title of class)

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

Yes   o No   x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes   o No   x

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

Yes   x No   o

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

Yes   o No   x

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

Large accelerated filer    o Accelerated filer   o Non-accelerated filer    x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o No   x

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Registrant’s common shares on June 30, 2005 of $8.36, as reported on the Nasdaq National Market, was approximately $45.5 million.  Common shares held as of June 30, 2005 by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded from this computation, in that such persons may be deemed to be affiliates of the Registrant.  This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

As of March 1, 2006, the Registrant had outstanding 6,074,703 common shares, no par value.

INDEX

724 SOLUTIONS INC.

ANNUAL REPORT ON FORM 10-K

		PAGE
PART I
Item 1.	Business	3
Item 1A	Risk Factors	17
Item 1B	Unresolved Staff Comments.	32
Item 2.	Properties	32
Item 3.	Legal Proceedings	32
Item 4.	Submission of Matters to a Vote of Security Holders	33
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
Item 6.	Selected Financial Data	43
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	72
Item 8.	Financial Statements and Supplementary Data	72
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A.	Controls and Procedures	72
Item 9B.	Other Information	73
PART III
Item 10.	Directors and Executive Officers of the Registrant	73
Item 11.	Executive Compensation	76
Item 12.	Security Ownership of Certain Beneficial Owners and Management	83
Item 13.	Certain Relationships and Related Transactions	85
Item 14.	Principal Accountant Fees and Services	87
PART IV
Item 15.	Exhibits and Financial Statement Schedules	88
SIGNATURES		91
Consolidated Financial Statements		F-1

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

          Statements contained in this annual report on Form 10-K (“Report”) which are not historical facts are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipate that,” “believes,” “continue to,” “estimates,” “expects to,” “hopes,” “intends,” “plans,” “to be,” “will be,” “will continue to be,” or similar words. These forward-looking statements include the statements in this Report regarding: future developments in our markets and the markets in which we expect to compete, including the wireless communications industry; our estimated cost reductions; our future ability to fund our operations and become profitable; our development of new products and relationships; our ability to increase our customer base; the services that we or our customers will introduce and the benefits that end users will receive from these services; the impact of entering new markets; our plans to use or not to use certain types of technologies in the future; our future cost of revenue, gross margins and net losses; our future restructuring, research and development, sales and marketing, general and administrative, stock-based compensation, depreciation and amortization expenses; our future interest expenses; the value of our goodwill and other intangible assets; our future capital expenditures and capital requirements; and the anticipated impact of changes in applicable accounting rules.

          The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include the risks described in “Item 1A—Risk Factors” below. We do not undertake any obligation to update this forward-looking information, except as required under applicable law.

PART I

ITEM 1. BUSINESS.

OVERVIEW

AN INVESTMENT IN OUR COMMON SHARES INVOLVES SUBSTANTIAL RISKS AND UNCERTAINTIES.  WE ENCOURAGE YOU TO CAREFULLY REVIEW THE INFORMATION SET FORTH IN PART I, ITEM I; PART I, ITEM 1A  UNDER THE CAPTION “RISK FACTORS”; AND THE FOREGOING SECTION TITLED “INFORMATION REGARDING FORWARD-LOOKING STATEMENTS”, FOR A DESCRIPTION OF THESE RISKS AND UNCERTAINTIES.

          724 Solutions Inc. (“724 Solutions”, the “Company”, the “Corporation”, or “we”, “us” or applicable derivations thereof) designs, develops, markets and supports software products for use by mobile network operators worldwide. Mobile network operators are telecommunications companies that provide a range of mobile voice and data communications services to their consumer and business customers.  Examples of large mobile network operators include Verizon Wireless, Cingular Wireless, Sprint Nextel, Vodafone and China Mobile.

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          We offer software products that enable Internet connectivity to mobile devices such as mobile phones and handheld computing devices.  We also offer software that helps to deliver text messaging, multimedia messaging, voice services and transactions to mobile network operators’ end user customers using mobile phones and handheld computing devices.

          We were incorporated in 1997 and we introduced our initial products in 1999. Initially, we focused on creating wireless software products that assisted financial services companies in making their traditional services available to their customers wirelessly from mobile phones and other handheld computing devices.  In January 2001, we acquired Tantau Software with a view to expanding our customer base, utilizing Tantau’s software products to strengthen our products offered to financial services customers, and to expand our sales to mobile network operators.  In 2001, we began offering our mobile alerting software products and our mobile Internet gateway product (software that enables internet connectivity to mobile devices) to mobile network operators. In October 2002, our products and solutions for mobile network operators and other customers were re-branded as the X-treme Mobility Suite (XMS) of products.  We no longer offer products developed specifically for financial institutions, although we continue to provide services to a small number of financial services customers and continue to support earlier sales to them.

          During 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably.  At the same time, we judged that the market for mobile data services in the mobile network operator sector was potentially larger and likely to develop sooner. As a consequence, we began a process to restructure the company to focus on business opportunities in the mobile network operator marketplace.  During 2004, we completed this process and are now focused on selling our software products to mobile network operators.

          We continue to develop and expand our X-treme Mobility Suite of products for mobile network operators to assist them in growing their next-generation data services.

          Our website is www.724.com.  Information appearing on our website shall not be deemed to be part of this Report.

PROPOSAL FROM AUSTIN VENTURES

          On February 28, 2006 we received a proposal from our largest shareholder, Austin Ventures, to acquire all of our outstanding common shares not owned by Austin Ventures for cash consideration of $3.07 per common share.

          Austin Ventures proposed that the transaction be effected by way of a court-approved plan of arrangement.  In addition to court approval, the transaction would require the approval of our shareholders, including by way of a majority of the votes cast by holders other than Austin Ventures and related parties.

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          Our Board of Directors had previously formed a Special Committee composed entirely of directors who are independent of management and independent of Austin Ventures to consider potential value enhancing strategic transactions for our shareholders.  This Special Committee, in consultation with our financial and legal advisors, reviewed and considered the Austin Ventures proposal, as well as other potential means to maximize shareholder value.  The evaluation by the Special Committee was independent of ongoing company operations.

          On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of our outstanding common shares not owned by Austin Ventures for cash consideration of $3.34 per common share.  We accepted the revised proposal after careful consideration and evaluation by our Special Committee of independent directors in conjunction with our financial and legal advisors.  This revised and accepted proposal is set to terminate on April 6, 2006 in the event a definitive arrangement agreement is not reached by that date.

          We and Austin Ventures intend to move diligently towards negotiating a definitive arrangement agreement and, subject to receipt of a satisfactory fairness opinion and valuation report and completion by Austin Ventures of its due diligence, completing a transaction in accordance with the agreement and all applicable legal and regulatory requirements. 

ACQUISITIONS

          We have completed four acquisitions:

          YRLESS.    In March 2000, we acquired Internet messaging gateway developer YRLess Internet Corporation of Oakville, Ontario. YRLess developed the YMG-2000, a scaleable, platform-independent carrier-grade short messaging service gateway for mobile data carriers.

          EZLOGIN.    In June 2000, we completed our acquisition of Ezlogin, a provider of Internet software tools for user directed personalization.

          SPYONIT.    In September 2000, we completed our acquisition of Chicago-based Spyonit, a provider of intelligent alerting software.

          TANTAU SOFTWARE.    In January 2001, we completed our acquisition of Austin-based Tantau Software, a developer and designer of software and related services that enable enterprises to conduct high-volume, secure, m-commerce transactions. As part of the transaction, 724 Solutions issued to Tantau’s equity holders 1.9 million shares, and outstanding options to purchase shares of Tantau were converted into options to purchase an aggregate of 180,000 of our shares (all adjusted for the 10 for 1 reverse split undertaken in April 2003). After the completion of the transaction, 724 Solutions’ shareholders owned approximately 68% of the combined company and Tantau’s shareholders owned approximately 32% of the combined company, on a fully diluted basis.

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          The purpose of the acquisition was to create a global provider of software primarily for the mobile data marketplace. The combined company was intended to have an expanded geographic presence and set of customers, strong infrastructure and application technology, an experienced management team, and a greater ability to address a broader market, including the mobile network operator market. Our X-treme Mobility Gateway product that we sell to mobile network operators incorporates technology that we acquired through our purchase of Tantau. Following the completion of the transaction, John Sims, Tantau’s president and chief executive officer, assumed the role of chief executive officer of 724 Solutions.

INDUSTRY OVERVIEW

          Our principal focus is to design, develop, acquire, market and support software products for the mobile telecommunications marketplace. In this market, we work with mobile network operators and other industry participants to deliver a wide variety of data services.

          Over the course of the past several years mobile network operators have developed a mobile data business that is built around a series of discrete data services that now collectively generate a meaningful percentage of their overall revenues. These data services include games, polyphonic ring tones, color content and graphics, animation, short messaging services (SMS) and multi-media messaging services (MMS). Also, mobile network operators are introducing services based on location technologies, e-mail services and application to peer services such as a multimedia message showing the winning goal in a sporting event. Our software assists mobile network operators in delivering these services.  

           Mobile network operators, equipment manufacturers and infrastructure and application software providers are responding to the growing demand for wireless access to Internet-related and other mobile data services in a variety of ways. For example, mobile network operators continue to roll out next generation networks, which are required for the delivery of advanced mobile data services and improved user experience with existing services. Our software products address important aspects of these next generation networks. Mobile phone and other mobile equipment manufacturers are also increasingly making mobile data functionality a key feature of their product offerings. For example, mobile device manufacturers are increasingly offering higher quality and feature-rich mobile devices. We expect that the continued implementation of next generation networks and the continued development of mobile devices will contribute to a further increase in the use of data services and a greater reliance on software like ours to support those services. 

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BUSINESS STRATEGY

THE MARKET OPPORTUNITY

          As mobile network operators deploy their next-generation data networks, they face many challenges. We believe that next-generation data networks need to allow mobile network operators to make use of best-of-breed components that enable a wide variety of new revenue generating opportunities. It is also important that mobile network operators deploy a reliable data network that can seamlessly support the dramatic growth of next-generation services, without creating economic barriers or compromising their return on investment.  We have designed our X-treme Mobility Suite of products to provide mobile network operators with compelling solutions to these challenges.

OUR STRATEGY

          In order to address these market opportunities, our strategy is to:

          PROVIDE AN OPEN, FLEXIBLE TECHNOLOGY ARCHITECTURE: Our product architecture is open and generally designed to enable customers to expand the functionality of their next-generation networks, and to be compatible with existing systems. In this regard, our architecture allows customers to add new applications, modes of interaction and devices as their needs evolve. We expect to continue broadening the range of capabilities available to our customers.

          OFFER SOLUTIONS THAT ASSIST OUR CUSTOMERS IN GROWING THEIR MOBILE DATA REVENUES: We are focused on developing and delivering differentiated solutions for our mobile network operator customers. These solutions are designed to assist our customers in increasing the average revenue per user that they derive from mobile data services. Our approach is to take advantage of our deep understanding of the competitive dynamics within our target markets and the common needs of our individual customers, and then to combine and apply our core software products and support services in creative ways to deliver innovative mobile data services.

          LEVERAGE STRATEGIC PARTNERSHIPS: We have established and continue to develop strategic relationships with distribution partners and providers of complementary products and services to extend our market reach in order to enhance our solutions and improve our cost structure.

          IMPROVE OPERATING EFFICIENCY: We maintain a conservative approach to the management of costs and have implemented a series of initiatives over the past four years to substantially improve our cost structure. We will continue to look for ways to reduce our operating costs and deliver our products efficiently.

          RETAIN OUR KEY EMPLOYEES: As a software company, we are keenly aware of the critical importance of our key personnel to our success. To ensure that employees are motivated to remain with the company and to continue contributing their valuable expertise and experience, we strive to create a desirable work environment, to provide challenging work assignments and to offer competitive compensation programs.

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724 SOLUTIONS – CUSTOMER BENEFITS

          We believe that our products enable customers to maintain and deepen consumer relationships and accelerate the adoption of mobile data services and derive new revenue streams. Our products can be rapidly implemented, integrate easily with existing systems, are scalable and provide a robust platform for future growth. Key benefits of our products include:

          ACHIEVE LEVELS OF RELIABILITY ON PAR WITH VOICE NETWORKS: Our core technology is capable of being deployed on a robust and geographically distributed basis, allowing our customers to achieve levels of availability equivalent to those derived from voice networks.

          RAPIDLY INTRODUCE NEW AND INNOVATIVE PREMIUM CONTENT: Our products are designed to allow mobile network operators to rapidly provision premium content providers into mobile data services, and to manage the complex business rules associated with those services.

          EASE OF INTEGRATION AND OPEN STANDARDS: Our products link to our customers’ existing systems, enabling them to reduce their initial investment, and to extend the productivity and functionality of their existing infrastructure to offer new services.

          IMPROVE SCALABILITY AND FLEXIBILITY: Our products are designed to scale linearly to accommodate the growth of our customers’ mobile data services, allowing our customers to synchronize the growth of their infrastructure investments with the growth in their mobile data revenues.

OUR PRODUCTS

          724 Solutions designs, develops, markets, acquires and supports software products designed for deployment on large-scale mobile data networks. Our X-treme Mobility Suite of products currently consists of our X-treme Mobility Gateway, X-treme MMS Accelerator, X-treme Service Activity Manager, X-treme Alerts Platform and Multimedia Application Gateway products, each of which is described in more detail below. These products are all designed for use in mobile data networks, but each performs unique functions and may be used and purchased separately by our customers. These products were developed to be reliable, scalable and fault tolerant and have the following features:

• Open Architecture – Our products support widely used communications standards, protocols and programming languages such as WAP, MMS, SMS and Java technologies.

• Flexible Framework – Our products feature adaptive architecture that allows modular enhancements such as new protocols, well-defined customization points and interfaces.

• Scalable – Our products are designed to be scalable across both processors and machines.

• High Performance – Our products are designed to allow fast transaction processing in order to permit efficient hardware utilization.

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          The software products within XMS enable mobile network operators to implement solutions based upon open standards technologies such as WAP, MMS, SMS, J2ME and others. The applications and services enablers within XMS are specifically designed to assist mobile network operators in implementing innovative business models and bringing highly targeted content to their subscribers. A more detailed description of these products is set out below.

          X-treme Mobility Gateway

          The X-treme Mobility Gateway (XMG) is an open, secure, scalable and fault tolerant software product that is used in a mobile network operator’s data network. XMG allows mobile device users to connect to a mobile network operator’s data network.  During the connection setup, XMG facilitates the user’s login to the mobile network operator’s network.  Once a user is connected, the user can send requests for data services, such as mobile ringtones, from the user’s mobile device.  These requests are sent from the user’s mobile device to XMG, and XMG forwards the request to the data service provider.  The data service provider then sends the data as a response to XMG, which forwards it on to the appropriate user device.   Sales of our XMG product accounted for approximately 60% of the revenue from our XMS suite in the year ended December 31, 2005.

          X-treme MMS Accelerator

          The X-treme MMS Accelerator (XMA) is an open and standards-based software product used in a mobile network operator’s data network.  XMA delivers multimedia messages, such as picture messages, from a mobile network operator’s network to a user’s device.  XMA is designed to deliver “bulk” multimedia messages that are time sensitive in a cost-efficient manner.  An example is a multimedia message containing a sporting event video clip, which must be delivered to many users’ devices very soon after the sporting event is completed. 

          X-treme Service Activity Manager

          The X-treme Service Activity Manager (XSAM) is a software product that is used in a mobile network operator’s data network.  XSAM allows mobile network operators to create reusable common business processes to allow third party content providers to quickly integrate into the mobile network operator’s data network, and provide content to mobile users.  An example of a business process is “check to see if this prepaid user’s account balance is sufficient to buy this ringtone”.  XSAM allows this process to be defined once by the mobile network operator, and then used by each third party content provider interested in delivering ringtones, or similar data content.  XSAM also allows mobile network operators to string many of these business processes together to form a complete data service.   

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          X-treme Alerts Platform and Applications

          Our X-treme Alerts Platform (XAP) is a software product that allows mobile network operators to offer alerting services to mobile device users. XAP provides a mechanism to capture the user’s content interests, such as,  “I’m interested in seeing my favorite football team’s game highlight.”  XAP scans the content to determine if a user’s content interest is matched.  If matched, XAP formulates a message in a format specified by the user and then sends it to the mobile operator’s delivery infrastructure for delivery to the user’s mobile device. In addition, through mobile network operators, we deliver a series of actionable alerting solutions for their own use and for them to offer to their enterprise customers to help them lower operating costs and improve customer relationship management.  These actionable alerting solutions include collections management, fraud management and account management notifications. These solutions involve a broad range of notification channels including SMS, MMS, WAP Push, Instant Messaging, email and voice.

          Multimedia Application Gateway

          Multimedia Application Gateway (AGW) is a software product that provides subscriber functionality to a mobile network operator’s multimedia messaging services.  AGW has been decoupled from the mobile network operator’s multimedia message delivery infrastructure, usually provided by a Multimedia Messaging Service Center (MMSC), so that new multimedia functionality can be added into AGW, allowing mobile network operators to rapidly deploy new multimedia services, without the need to update their messaging infrastructure. 

          The current subscriber functionality provided by AGW is Legacy Device support, Email Smart Push and Multimedia Album. 

• Legacy Device Support:  As mobile network operators offer multimedia services, such as picture messaging, the subscribers to whom they can offer these services are limited to those subscribers with multimedia capable terminals. With Legacy Device support, subscribers who do not have multimedia capable devices can still participate in multimedia services.  These subscribers receive a text message with a link to a website where they can view the multimedia messages sent to them.  This expands the addressable subscriber base for multimedia services.

• Email Smart Push (ESP): ESP allows multimedia subscribers to send multimedia messages to email addresses.  This expands the addressable subscriber base for multimedia services.

• Multimedia Album: The Multimedia Album is a web-based service that allows subscribers to create, edit, store, send and share multimedia messages.  Additionally, subscribers can upload multimedia messages from their terminals into their albums, and upload media from their PCs into their albums.

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SUPPORT SERVICES

          Together with our resellers and distributors, we offer a services suite that includes professional services, training services, support and XAP application hosting. These services are designed to quickly deliver cost-effective solutions.

• Professional Services – Our professional services team and our system integrators provide our customers with a range of services to allow them to rapidly integrate and deploy our technology and bring their various mobile data services and applications to market. Our professional services focus on those areas where our products interface with our customers’ internal systems and on those areas where our customers are looking to differentiate their services in the marketplace.

• Training Services – We provide our customers with sophisticated product information and hands-on experience in order to help improve productivity and minimize learning time so they can take full advantage of their technology investment.

• Customer Support – We provide our customers with ongoing technical support as an essential part of the sale and servicing of our products.  We offer our customers several options for obtaining this support ranging from standard product support to onsite, dedicated teams supporting an entire solution including hardware, custom code and 724 products.

• XAP Application Hosting – We provide a managed X-treme Alerts Platform, including voice alerts, SMS alerts, Multimedia Message (MMS) alerts, fraud alerts and collection alerts.  Our XAP software is hosted in New Jersey with Computer Sciences Corporation, and the voice hardware is housed in Florida with InterVoice.

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CUSTOMERS

          We sell our software products to customers throughout the world, primarily directly or indirectly through resellers and systems integrators to mobile network operators. In addition, we provide our customers with support, maintenance, professional services and training services.

          Our agreements with our mobile network operator customers grant them nonexclusive licenses to use our software in connection with providing mobile data services to their subscribers. Similarly, our agreements with resellers and systems integrators grant the resellers and systems integrators nonexclusive licenses to resell our software to mobile network operators in connection with providing mobile data services to their subscribers. The relevant contractual terms, including pricing and payment terms for licenses, are negotiated with each customer. Products are licensed under either a perpetual license model or under a time-based license model. In addition, we typically provide fee-based maintenance and support services to mobile network operators, directly or indirectly through resellers and systems integrators, under which such operators receive error corrections and remote support.

          In 2005, we derived approximately 0%, 49.1%, 43.4% and 7.5% of our revenues from customers in Canada, the United States, Europe and Asia Pacific, respectively. In 2004, we derived approximately 0%, 70.4%, 28.2% and 1.4% of our revenues from customers in Canada, the United States, Europe and Asia Pacific, respectively. See note 14 to our consolidated financial statements.

HEWLETT-PACKARD COMPANY

          In January 2002, we entered into a subcontract agreement with Hewlett-Packard Company in connection with a wireless gateway project at Sprint Nextel. Under this agreement, we licensed our X-treme Mobility Gateway product to Hewlett-Packard for re-licensing the software to Sprint Nextel. We also agreed, as subcontractor to Hewlett-Packard, to develop custom software for Sprint and to perform related services in connection with the software. These services included the integration of the software at Sprint Nextel and ongoing consultancy, training and maintenance and support services in connection with the software.  All of these services were performed as a subcontractor to Hewlett-Packard, and we received remuneration as follows:  license fees for the use of our software by Sprint Nextel, professional services fees for performance of integration, consultancy and training services, and maintenance and support fees with respect to support for the software.

          This subcontract agreement was terminated as of October 31, 2005.  We recognized approximately $5.9 million in revenue in the twelve months ended December 31, 2005 related to this subcontract. This represented 32% of our total revenue of $18.3 million. We anticipate that the termination of this subcontract will result in a reduction in monthly revenues of approximately $500,000. Our contract with Sprint Nextel for our XSAM product is unaffected by this termination.

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RESEARCH AND DEVELOPMENT

          As of March 1, 2006, our research and development department consisted of 59 employees and full-time equivalents. These employees are responsible for assessing new technologies, scheduling new releases, product architecture, security, performance engineering, product requirements, quality assurance and product support.

SALES AND MARKETING

          Our sales and marketing activities are primarily directed at mobile network operators. A number of departments within a customer’s organization are typically involved in purchase decisions with respect to our products, including senior management, network engineering personnel, and the procurement and marketing departments.

          We maintain sales offices in the United States, the United Kingdom and Hong Kong, and we have individual sales representatives in several other countries. Our sales activities are supported by marketing efforts, including marketing communications, product management, market research and strategic alliances. As of March 1, 2006, our sales and marketing group consisted of 15 employees and full-time equivalents. Our sales employees generally receive incentive compensation based on individual sales volume in addition to their base salaries.

          In addition to offering our X-treme Mobility Suite of products directly to mobile network operators, to expand our distribution capability we supplement our direct sales and marketing efforts by utilizing relationships with resellers such as hardware and other software/solutions providers and independent sales agents and regional systems integrators. These relationships are important to us because, in some cases, these distribution partners have an established local presence in markets in which we do not, are familiar with local trade customs in those markets and may be existing suppliers to end customers in those markets and often are the system integrator in the sale, installation and ongoing support of our software product. These relationships are customary in the software industry.  Moreover, in some cases, rather than dealing directly with suppliers like the Company, large mobile network operators sometimes prefer to deal with larger and, in some cases, more locally well known companies.

STRATEGIC RELATIONSHIPS

          We have established and continue to develop relationships with mobile network operators, wireless network software and equipment suppliers and content and technology providers throughout the world to facilitate the sale and adoption of our products and services. We anticipate that some of these relationships will lead to formal arrangements in which strategic partners will agree to incorporate, resell and/or implement our solutions. Through strategic relationships, we seek to gain worldwide access and positioning, technological leadership, and an early awareness of emerging mobile technologies. These relationships generally do not give rise to material rights and obligations for us outside of specific agreements with respect to the sale of our products.

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COMPETITION

          The market for our products and services is becoming increasingly competitive. The widespread adoption of open standards may make it easier for new market entrants and existing competitors to introduce products that compete against ours. We believe that we will compete primarily on the basis of the quality, functionality and ease of integration of our products, as well as on the basis of price. Because we are smaller than most of our competitors, we believe that we can be more attentive to the needs of our customers than some of our competitors.   As a provider of next-generation IP-based network and data services, we assess potential competitors based primarily on their product functionality and range of services, the security and scalability of their product architecture, their customer base and geographic focus, and their capitalization and other resources.

Our principal current and potential competitors include:

MOBILE ACCESS GATEWAY VENDORS AND MESSAGING SOLUTION PROVIDERS: Companies in this category include Openwave Systems, LogicaCMG, Comverse, Materna, Nokia and Ericsson. Some of these companies can be both partners and competitors with respect to our software products.

ALERTS FOCUSED BUSINESSES: Companies that focus in the development and delivery of alerts and message-based technology include: Xiam, First Hop, Materna and Infospace. These companies are competitive with our XAP software product.

NETWORK EQUIPMENT AND DEVICE MANUFACTURERS: Ericsson, Nokia, Motorola and other large wireless technology vendors are both potential competitors and potential partners for our software products.

          Particularly with respect to several of our competitors for the mobile access gateway product and competitors who are equipment and device manufacturers, our competition have longer operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong brand recognition in each of the above-mentioned categories.  These competitors may be able to compete more effectively than us based on price or by bundling other goods and services with their product offering that we cannot. However, we believe that we will compete primarily with these competitors on the basis of the quality, warranty, functionality and ease of integration of our products, as well as on the basis of price. 

          In addition, particularly with respect to our alerts products, we face competition from small private companies that may have even lower cost structures and may be able to take more financial risk with respect to customer pricing than we are willing to consider.  We believe that we will compete with these competitors on the basis of the quality, warranty, functionality and ease of integration of our products, as well as on the basis of price. 

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          Our competitors have established, and may establish in the future, strategic relationships among themselves or with third parties to increase their ability to address the needs of our current and prospective customers. Through these relationships or independently, current and potential competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products to both our existing customers and our potential customers. There can be no assurance that we will be able to compete successfully with existing or new competitors for new customers and for ongoing business from our current customers. Failure by us to adapt to changing market conditions and to compete successfully with established or new competitors may have a material adverse effect on our results of operations and financial condition.

INTELLECTUAL PROPERTY

           We protect our proprietary technology through a combination of contractual confidentiality provisions, trade secrets, and patent, copyright and trademark laws. We have received registered trademarks in Australia, Canada, the United Kingdom, Mexico, Japan and the European Community. In addition, we have applied for registration of some of our trademarks in the United States.

          We have also applied for patents relating to our mobile commerce technology, the X-treme Mobility Suite of products and our multi-channel framework technology. We have applied for patent protection in Canada, the United States, Japan and Europe. To date, we have received twenty-three patents with respect to the technologies relating to our X-treme Mobility Suite of products. Our performance depends in part on our ability to protect our intellectual property rights in our products, including our ability to enforce our existing patent rights. Our XMG and XMA products are built using the key concepts in our patents of processing multiple tasks simultaneously, as opposed to sequentially, which is a cornerstone of our ability to process information faster than competitive products. Our inability to protect these rights could have a material adverse effect on our results of operations and financial condition. However, we do not believe that our business will be materially affected if we do not receive the patents and trademarks for which we have applied and not yet received.

          There can be no assurance that the confidentiality provisions in our contracts will be adequate to prevent the infringement or misappropriation of our copyrights, pending and issued patents, trademarks and other proprietary rights. There can be no assurance that independent third parties will not develop competing technologies, or reverse engineer our trade secrets, software or other technology. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent, as do the laws of Canada and the United States. Therefore, the measures taken by us may not adequately protect our proprietary rights.

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          We use certain third-party software that may not be available to us on commercially reasonable terms or prices or at all in the future. Moreover, some of our third-party license agreements are non-exclusive and, therefore, our competitors may have access to some of the same technology.

          To date, no claims have been made that any of our products infringe on the proprietary rights of third parties, but third parties could claim infringement by us with respect to our existing or future products. Any claim of this kind, whether or not it has merit, could result in costly litigation, divert management’s attention, cause delays in product installation, or cause us to enter into royalty or licensing agreements on terms that may not be acceptable to us.

EMPLOYEES       

          As of March 1, 2006, we had 113 employees and full-time equivalents worldwide. 

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ITEM 1A. RISK FACTORS

RISK FACTORS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES IN THE FUTURE.

          We have not been profitable since our inception. Any shortfall in our revenues relative to our expectations could cause a significant increase to our net losses. We cannot predict if we will ever achieve profitability and, if we do, we may not be able to sustain or increase our profitability.

WE MAY EXPERIENCE AN INCREASE IN PRICE PRESSURE IN THE FUTURE; AND IF WE ARE NOT SUCCESSFUL IN REDUCING OUR COSTS, WE MAY EXPERIENCE A DECREASE IN GROSS MARGINS.

          We believe that a variety of factors in the current market contribute to the risk that prices and therefore our gross margins will decrease in future fiscal quarters. For example, as our customers continue to assess their business strategies and their budgets for wireless spending, we may feel additional pressure to lower our prices. In addition, consolidation among mobile network operators, as well as heightened competition, could create increased pricing pressure in the marketplace.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND ITS FUTURE PROSPECTS.

          Because we are in an early stage of development, our prospects are difficult to predict and may change rapidly. We may encounter difficulties as a young company in a new and rapidly evolving market, including as a result of our dependence on a small number of products with only limited market acceptance. Our business strategy may not be successful, and we may not successfully address these risks.

WE HAVE A LENGTHY AND COMPLEX SALES CYCLE FOR SEVERAL OF OUR PRODUCTS, WHICH COULD CAUSE THE DELAY OR LOSS OF REVENUE AND INCREASE OUR EXPENSES.

          Our sales efforts target mobile network operators worldwide, which require us to expend significant resources educating prospective customers and partners about the uses and benefits of our products. Because the purchase of our products is a significant decision for these prospective customers, they may take a long time to evaluate them. Our sales cycle has typically ranged from four to six months, but can be longer due to significant delays over which we have little or no control. As a result of the long sales cycle, it may take us a substantial amount of time to generate revenue from our sales efforts.

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WE ARE DEPENDENT UPON THE GROWTH OF PENETRATION OF OUR PRODUCTS IN THE MOBILE NETWORK OPERATOR MARKETPLACE. 

          We have made mobile network operators the main focus of our activities. Our future success depends on our ability to increase revenues from sales of our software and services directly and indirectly to mobile network operators. We may not be able to attract a large number of these customers.

          Currently, only a limited number of mobile network operators and other customers have implemented and deployed services based on our products. Mobile network operators may not widely deploy or successfully sell services based on our software and services, and subscribers to these services may not seek to use them. Any developments of this kind could limit our ability to sell our solutions to companies in this industry.

          In addition, our success is dependent upon increased adoption by end users of the services that are based on our software and services. Mobile network operators and their competitors (for example, other communications providers) may successfully deploy and market services that compete with the services that are based on our technology. If subscribers of our mobile network operator customers do not increase their use of services that are based on our software and services, our operating results will be harmed.

WE FACE RISKS AS A RESULT OF OUR OPERATIONS IN INTERNATIONAL MARKETS. 

          We expect that sales in international markets will be a major factor in our growth, particularly since the use of wireless networks and wireless devices have generally proceeded more rapidly outside North America.  Risks inherent in conducting business internationally include:

• reliance on local distribution partners;

• fluctuations in currency exchange rates;

• unexpected changes in regulatory requirements applicable to our business;

• customer concentration;

• the pace of adoption of our technology;

• export restrictions on encryption and other technologies;

• difficulties in collecting accounts receivable resulting in longer collection periods;

• lower pricing of license and professional service fees; and

• differences in foreign laws and regulations, including foreign tax, intellectual property, labor and contract law.

Any of these factors could harm our international operations and, consequently, our operating results and growth.

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OUR PRODUCTS HAVE ACHIEVED LIMITED MARKET ACCEPTANCE TO DATE, AND IF THEY FAIL TO ACHIEVE BROADER MARKET ACCEPTANCE, OUR BUSINESS WILL NOT GROW.

          Our products are among a number of competing products that are currently available in a new and rapidly evolving market. Other companies may introduce other software products that will compete with ours. Customers may not prefer our products to competing technologies. Some potential customers may be reluctant to work with us due to our fluctuating stock price, or due to our financial condition. If customers do not accept our products as the preferred solution, we may not attract new customers, and our business will not grow.

WE NEED TO RETAIN OUR CUSTOMERS AND ADD NEW CUSTOMERS OR OUR REVENUE MAY BE SUBSTANTIALLY REDUCED AND OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.

          We have agreements with existing customers in which they either pay us based on the usage of the services that are based on our products or have an option to purchase additional software licenses and/or renew their current relationship with us. If any of our customers discontinue their use of our software in connection with the services that they offer or discontinue their relationship with us for any reason, do not renew their agreements or seek to reduce or renegotiate their purchase and payment obligations, our revenue may be substantially reduced. Consolidation of companies in the telecommunications industry may reduce the number of potential new customers that would be available to us. If our sales efforts to these potential customers are not successful, our products may not achieve market acceptance and our revenue will not grow. Further decreases in adoption will have a material impact on our revenues.

WE HAVE RELIED ON SALES TO A LIMITED NUMBER OF CUSTOMERS, AND IF WE FAIL TO RETAIN THESE CUSTOMERS OR TO ADD NEW CUSTOMERS, OUR REVENUE MAY BE SUBSTANTIALLY REDUCED AND OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.

          To date, a significant portion of our revenues in any particular period has been attributable to a limited number of customers. In 2005, 32% of our revenue was derived from Hewlett-Packard (as reseller to Sprint Nextel), 19% was derived from Vodafone and 18% was derived from Nokia.  Most of our revenue from these customers and our other customers depends on their or their customers’ continued use of our products. If our customers or their customers discontinue or materially reduce their use of our products, or obtain one or more additional suppliers of competing software and services, our revenues may decline.

          As discussed above, on October 31, 2005, our subcontract agreement with Hewlett-Packard with respect to the deployment of our access gateway solution at Sprint Nextel terminated. We recognized $5.9 million in revenue in the twelve months ended December 31, 2005 related to this subcontract. This represents 32% of our total revenue of $18.3 million. 

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          We believe that we may continue to rely upon a limited number of customers for a significant portion of our revenues in the foreseeable future, and any failure by us to capture or retain a significant share of these customers could materially harm our business.

          Also, if our customer base consolidates, we will have increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.

          See Part I, Item 1, “Business -Customers” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

IF WE DO NOT RESPOND ADEQUATELY TO EVOLVING TECHNOLOGY STANDARDS, SALES OF OUR PRODUCTS MAY DECLINE.

          Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging technologies, including technologies related to communications and the Internet generally. The wireless data market is a rapidly evolving market and is characterized by an increasing number of market entrants that have introduced or developed, or are in the process of introducing or developing, products that facilitate the delivery of data services through wireless devices. In addition, our competitors may develop alternative products that gain broader market acceptance than ours. As a result, the life cycle of our products is difficult to estimate. 

          We need to develop and introduce new products and enhancements to our existing products on a timely basis to keep pace with technological developments, evolving industry standards, changing customer requirements and competitive technologies that may render our products obsolete. These research and development efforts may require us to expend significant capital and other resources. In addition, as a result of the complexities inherent in our products, major enhancements or improvements will require long development and testing periods. If we fail to develop products and services in a timely fashion, or if we do not enhance our products to meet evolving customer needs and industry standards, including security technology, we may not remain competitive.

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ANY DISRUPTION OF THE SERVICES SUPPORTED BY OUR PRODUCTS DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY DAMAGE OUR REPUTATION, REDUCE OUR REVENUE, EXPOSE US TO COSTLY LITIGATION OR REQUIRE CAPITAL INVESTMENTS IN ALTERNATIVE SECURITY TECHNOLOGY.

          Despite our efforts to maximize the security of our platform, we may not be able to stop unauthorized attempts to gain access to or disrupt transactions between our 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 or instructions regarding transactions. Any of these events could substantially damage our reputation. We rely on encryption and authentication technology licensed from third parties to provide key components of the security and authentication necessary to achieve secure transmission of confidential information. We cannot necessarily ensure that this technology, future advances in this technology or other developments will be able to prevent security breaches. As a result, we may need to develop or license other technology in the future, to the extent available, to address these security concerns.

          If a third-party were able to steal a user’s proprietary information, we could be subject to claims, litigation or other potential liabilities that could cause our expenses to increase substantially. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to costly litigation or a significant loss of revenue. Although our customer agreements contain provisions which limit our liability relating to security to some extent, our customers or their consumers may seek to hold us liable for any losses suffered as a result of unauthorized access to their communications. Any litigation of this kind, regardless of its outcome, could be extremely costly and could significantly divert the attention of our management. We may not have adequate insurance or resources to cover these losses.

FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY EXCHANGE LOSSES.

          Our functional currency is the U.S. dollar, as we recognize the majority of our revenues in dollars.  In the foreseeable future, the majority of our non-US dollar denominated expenses will be incurred in Canadian dollars, Euros, Swiss francs and United Kingdom pounds sterling. Changes in the value of these currencies relative to the U.S. dollar may result in currency gains and losses, which could affect our operating results.  We do not currently hedge against these currency fluctuations.  In the year ended December 31, 2005, we incurred realized and unrealized foreign currency losses relating to the translation of our non-U.S. dollar denominated monetary assets and liabilities of approximately $260,000. No assurance can be given as to what foreign exchange gains or losses there may be in future periods.

WE MAY LIMIT INVESTMENTS IN OTHER COMPANIES AND NEW TECHNOLOGIES.

          Because of the continuing volatility in the financial markets, as well as other factors, we intend to limit equity investments in other companies and the purchase of new technologies during the next few fiscal quarters, and possibly longer. As a result, we may not take advantage of investment opportunities that could provide us significant financial benefits, or that could provide us with the opportunity to build relationships with other companies in our industry and target markets.

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WE MAY HAVE DIFFICULTIES COLLECTING RECEIVABLES.

          A significant portion of our receivables is derived from customers in foreign countries. Due to varying economic conditions and business practices in these countries, our collections cycle from these customers may be longer than with our North American customers. In the event of adverse economic conditions, there will be a greater risk that our customers will have difficulties in paying us in accordance with the terms of their contracts, and our risk of bad debt may increase substantially.

OUR GROSS MARGINS MAY DECREASE.

          We believe that certain factors in the current market may contribute to the risk that our gross margins will decrease in future fiscal quarters. We may have to lower our prices in order to accommodate our customers. In addition, many of our customers are reluctant to make a commitment to pay large upfront license fees or to guarantee purchases of a minimum number of licenses or licensed capacity, which could also cause our revenues to decrease. Some mobile network operators are also unwilling to pay for installations and customizations to our products, which could negatively impact our operating results. 

WE WILL NEED TO RECRUIT, TRAIN AND RETAIN KEY MANAGEMENT AND OTHER QUALIFIED PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS.

          Our ability to execute our business successfully depends in large part upon our ability to have a sufficient number of qualified employees to achieve our goals. There are only a limited number of persons with the requisite skills to serve in many key management and non-management positions, and it is difficult to retain and hire these persons. If we are unable to do so, our business could be negatively affected. The morale of our current employees may have been adversely affected by previous workforce reductions and departures, potentially impacting their performance or their willingness to remain with us.  Our ability to attract potential new employees in the future may suffer if our reputation suffers as a result of these staffing reductions or otherwise.

OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS THAT COULD DAMAGE OUR REPUTATION.

          The software that we develop is complex and must satisfy the stringent technical requirements of our customers. We must develop our products quickly to keep pace with the rapidly changing industry in which we operate. Software products that are as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. In addition, our software may not properly operate when integrated with the systems of some customers or when used to deliver services to a large number of a customer’s subscribers.

          While we continually test our products for errors and work with customers to identify and correct bugs, errors in our product may be found in the future. Our software may not be free from errors or defects even after it has been tested, which could result in the rejection of our products and damage to our reputation, as well as lost revenue, diverted development resources and increased support costs.

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WE MAY BE SUBJECT TO LITIGATION CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS TO US.

          As noted in Item 3 – Legal Proceedings, we and certain of our former officers and directors were named as defendants in a series of purported class actions relating to our initial public offering. Litigation may be time consuming, expensive, and distracting from the conduct of our business, and the outcome of litigation may be difficult to predict. The adverse resolution of any of these proceedings could have a material adverse effect on our business, results of operations and financial condition.

OUR PRODUCTS CONTAIN ENCRYPTION TECHNOLOGY WHOSE EXPORT IS RESTRICTED BY LAW, WHICH MAY SLOW OUR GROWTH OR RESULT IN SIGNIFICANT COSTS.

          The U.S., Canadian and other foreign governments generally limit the export of encryption technology, which our products incorporate. A variety of cryptographic products generally require export approvals from certain government agencies in the case of exports from certain countries, although there are currently no restrictions on exports of these products from Canada into the U.S. If any export approval that we receive is revoked or modified, if our software is unlawfully exported or if the U.S., Canadian or other relevant government adopts new legislation or regulations restricting export of software and encryption technology, we may not be able to distribute our products to potential customers, which will cause a decline in sales. We may need to incur significant costs and divert resources in order to develop replacement technologies or may need to adopt inferior substitute technologies to satisfy these export restrictions. These replacement or substitute technologies may not be the preferred security technologies of our customers, in which case our business may not grow. In addition, we may suffer similar consequences if the laws of any other country limit the ability of third parties to sell encryption technologies to us.

IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO DISCONTINUE PRODUCT DEVELOPMENT, REDUCE OUR SALES AND MARKETING EFFORTS OR FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES. 

          In order to help ensure that we would have sufficient capital to take advantage of our core business opportunities, we have taken significant actions to reduce our operating expenses and in the first half of 2004, raised $8.0 million of convertible debt. However, most of our operating expenses, such as employee compensation and lease payments for facilities and equipment, are relatively stable, and these expense levels are based in part on our expectations regarding future revenues. As a result, any sustained shortfall in our revenues relative to our expectations would negatively impact our operating results. Accordingly, if the cost-cutting actions that we have taken are insufficient, we may not have sufficient capital to fund our operations, and additional capital may not be available on acceptable terms, if at all.

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          Any of these outcomes could adversely impact our ability to respond to competitive pressures or could prevent us from conducting all or a portion of our planned operations. We may need to undertake additional measures to reduce our operating expenses in the future.

          We expect that the cash we receive through our operations and our cash on hand will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. After that, we may need to raise additional funds, and additional financing may not be available on acceptable terms, if at all. We also may require additional capital to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. If we issue additional equity securities to raise funds, the ownership percentage of existing shareholders will be reduced. If we incur debt, the debt will rank senior to our common shares, we will incur debt service costs and we will likely have to enter into agreements that will restrict our operations in some respects and our ability to declare dividends to the holders of our common shares.

          The terms of the Secured Convertible Promissory Notes (the “Notes”) that we have issued to our affiliate, Austin Ventures, may also make it more difficult for us to obtain additional financing.  For example, these Notes limit our ability to issue equity securities at prices that are less than specified amounts, and Austin Ventures has obtained a security interest as to our assets.

          The $8.0 million of convertible debt plus interest due at maturity of approximately $1.4 million is payable in the second quarter of 2007 in cash or shares at a conversion price of $3.07 at the option of Austin Ventures. If Austin Ventures demands cash we may not have sufficient funds to meet that demand and we may have to raise additional capital. We cannot predict the terms under which capital may be available to us at that time, if at all.

RISK FACTORS RELATED TO OUR INDUSTRY

OUR FUTURE REVENUES AND OPERATING RESULTS ARE DEPENDENT TO A LARGE EXTENT UPON UNCERTAIN GENERAL ECONOMIC CONDITIONS.

          Our future revenues and operating results are dependent to a large extent upon general economic conditions, conditions in the wireless market and within that market, our primary target market of mobile network operators. If general economic conditions are adverse, if the economies in which our target customers are located suffer from a recession, if demand for our solutions does not expand, or if war or terrorism impacts the U.S., Europe, Asia or our other target markets, our ability to increase our customer base may be limited, and our revenue may decrease further.

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OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS DATA SERVICES DOES NOT CONTINUE TO GROW.

          The markets for wireless data services and related products are still emerging and continued growth in demand for, and acceptance of, these services remains uncertain. Our products depend on the acceptance of wireless data services and Internet-enabled devices in the mobile network operator market. Current barriers to market acceptance of these services include cost, reliability, platform and distribution channel constraints, consumer privacy concerns, functionality and ease of use. Mobile individuals currently use many competing products, such as portable computers, to remotely access the Internet. These products generally are designed for the visual presentation of data, while, until recently, wireless devices historically have been limited in this regard. We cannot be certain that these barriers will be overcome.

          Since the market for our products is new and evolving, it is difficult to predict the size of this market or its future growth rate, if any. Our future financial performance will depend in large part upon the continued demand for data services through wireless devices. We cannot ensure that a sufficient volume of subscribers will demand these services. If the market for these wireless online services grows more slowly than we currently anticipate, our revenue may not grow.

OUR FUTURE REVENUE DEPENDS ON CONSUMERS USING THE SERVICES THAT ARE BASED ON OUR PRODUCTS, AND IF OUR CUSTOMERS DO NOT SUCCESSFULLY MARKET THESE SERVICES, OUR REVENUE WILL NOT GROW.

          Revenue under most of our license agreements depends on the number of monthly subscribers to the services that are based on our products or the amount of use of those services. As a result, our revenue growth will be limited if the number of subscribers or use of the services that are based on our software does not increase. To stimulate consumer adoption of these services, our customers must implement our products quickly. However, our customers may delay implementation because of factors that are not within our control, including budgetary constraints, limited resources committed to the implementation process and limited internal technical support.

          Consumer adoption of these services also requires our customers to market these services. However, our customers currently have no obligation to launch a marketing campaign of any kind, may choose not to do so, or may not do so effectively. Some of our customers have only provided these services on a test basis to a limited number of consumers. Some of our customers may choose not to expand their use of these services if they do not perceive a sufficiently high rate of adoption among their consumers. As a result, we cannot ensure that a large number of consumers will use these services in the future.

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OUR BUSINESS DEPENDS ON CONTINUED INVESTMENT AND IMPROVEMENT IN COMMUNICATION NETWORKS.

          Some of our customers and other mobile network operators have made substantial investments in 2.5 generation and 3rd generation networks. These networks are designed to support more complex applications, and to provide consumers with a more robust user experience. If network operators delay their deployments of these networks, or do not roll them out successfully, there could be reduced demand for our products and services. In addition, if communication service providers fail to continue to make investments in their networks or do so at a slower pace in the future, there may be less demand for our products and services.

WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW PRODUCTS, WHICH COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR REVENUE TO DECLINE.

          The widespread adoption of open industry standards may make it easier for new market entrants and existing competitors to introduce products that compete with ours. In addition, competitors may develop or market products and services that are superior or more cost-effective than ours, which could decrease demand for our products and cause our revenue to decline. Currently, our competitors include:

• mobile access gateway vendors and messaging solution providers;

• alerts focused businesses; and

• network equipment and device manufacturers.

          We may also face competition in the future from established companies that have not previously entered the market for wireless data infrastructure software and services. Barriers to entry in the software market are relatively low and it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. See Item 1 — Business - “Competition” above.

MANY OF OUR COMPETITORS ARE SIGNIFICANTLY LARGER THAN US.

          Many of our competitors are significantly larger than us in terms of revenue, marketing and research and development expenditures and numbers of employees in their sales, services and support organizations. The competitors we face on our XMS sales opportunities include Nokia, Ericsson, Comverse, Alcatel and Openwave. Our success is dependent on our ability to win our share of these opportunities against these larger competitors and to retain our customers. Many of these competitors are able to bundle other products (including handsets and/or network equipment) into sales of competitive products, which they might argue reduces risk to their customers.  We do not believe that we can offer similar product bundles, which could prevent us from competing with these competitors, offering similar pricing, retaining key customers or acquiring new customers. 

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CHANGES IN GOVERNMENT REGULATIONS MAY RESULT IN INCREASED EXPENSES, TAXES OR LICENSING FEES THAT COULD DECREASE THE DEMAND FOR OUR PRODUCT AND NEGATIVELY IMPACT OUR RESULTS.

          We are not currently subject to direct regulation by any governmental agency, other than regulations applicable to businesses generally and laws and regulations directly applicable to access to, or commerce on, the Internet and wireless networks. However, a number of legislative and regulatory proposals under consideration by federal, state, provincial, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet and wireless networks, including but not limited to, online content, user privacy, taxation, access charges and liability for third-party activities. Additionally, it is uncertain how existing laws governing issues such as property ownership, copyright, trade secrets, libel and personal privacy will be applied to the Internet and wireless networks. The adoption of new laws or the broader application of existing laws may expose us to significant liabilities and additional operational requirements and may decrease the growth in the use of the Internet and wireless networks, which could, in turn, both decrease the demand for our products and increase the cost of doing business.

RISKS RELATING TO INTELLECTUAL PROPERTY

WE RELY ON THIRD-PARTY SOFTWARE, TECHNOLOGY AND CONTENT, THE LOSS OF WHICH COULD FORCE US TO USE INFERIOR SUBSTITUTE TECHNOLOGY OR TO CEASE OFFERING OUR PRODUCTS.

          We must now, and may in the future, license or otherwise obtain access to the intellectual property of third parties. In addition, we use, and will use in the future, some third-party software that may not be available in the future on commercially reasonable terms, or at all. For example, we could lose our ability to use this software if the rights of our suppliers to license it were challenged by individuals or companies that asserted ownership of these rights. The loss of, or inability to maintain or obtain, any required intellectual property could require us to use substitute technology, which could be more expensive or of lower quality or performance, or force us to cease offering our products. Moreover, some of our license agreements from third parties are non-exclusive and, as a result, our competitors may have access to some of the technologies used by us. 

IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE OUR COMPETITIVE ADVANTAGE.

          We depend on our ability to develop and maintain the proprietary aspects of our technology. We seek to protect our proprietary technology, including software, documentation and other written materials under patent, trade secret and copyright laws, as well as confidentiality provisions in contracts with our customers, suppliers, contractors and employees, all of which afford limited protection. We cannot ensure that these steps will be adequate, that we will be able to secure the desired patent or trademark registrations for our patent/trademark applications in Canada, the U.S. or other countries, or that third parties will not breach the confidentiality provisions in our contracts or infringe or misappropriate our copyrights, patents or pending patents, trademarks and other proprietary rights. Similarly, we cannot ensure that our employees will comply with the confidentiality agreements that they have entered into with us, and misappropriate our technology for the benefit of a third party. If a third party or any employee breaches the

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confidentiality provisions in our contracts or misappropriates or infringes on our intellectual property, we may not have adequate remedies. In addition, third parties may independently discover or invent competing technologies that are not covered by our patents or may reverse-engineer our trade secrets, software or other technology. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent, as do the laws of the U.S. and Canada. Therefore, the measures we are taking to protect our proprietary rights may not be adequate.

THIRD PARTIES MAY CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR INTELLECTUAL PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSES FOR LITIGATION OR FOR DEVELOPING OR LICENSING NEW TECHNOLOGY.

          Although we are not currently aware of any claims asserted by third parties that our products infringe their intellectual property rights, in the future, third parties may assert claims of this kind. We cannot predict whether third parties will assert these types of claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against these types of claims, whether they are with or without any merit or whether they are resolved in favor of or against us, or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may not be available on acceptable terms, or at all, which could prevent us from selling our products, increase our expenses or make our products less attractive to customers.

RISKS RELATING TO THE OWNERSHIP AND TRADING OF OUR COMMON SHARES

IF WE CAN NO LONGER FULFILL STOCK EXCHANGE LISTING REQUIREMENTS, THE LIQUIDITY OF OUR COMMON SHARES WILL BE LIMITED.

          On March 8, 2006, we received a Nasdaq Staff Deficiency Letter indicating that we are not in compliance with the Nasdaq’s Marketplace Rule 4310(c)(2)(B), which requires a listed company to have a minimum of  $2,500,000 in stockholders’ equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.  We have submitted a response, and Nasdaq staff is reviewing our eligibility for continued listing on the Nasdaq Capital Market; however, in the event that the plan to regain and remain in compliance is not acceptable to Nasdaq staff, we may be delisted from the Nasdaq Capital Market.  The Toronto Stock Exchange (“TSX”) has its own listing requirements, with which we currently comply.

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          If our common shares are not listed on the Nasdaq Capital Market, trading of our common shares could be conducted in the U.S. in the over-the-counter market on an electronic bulletin board established for unlisted securities, or directly through market makers in our common shares. If our common shares trade in the U.S. over-the-counter market, an investor may find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common shares.  A delisting from the Nasdaq Capital Market and failure to obtain listing on such other market or exchange would subject our securities to the so-called U.S. “penny stock rules,” which impose additional sales practice and market-making requirements on broker-dealers who sell or make a market in such securities.  In addition, when the market price of our common shares is less than $5.00 per share, as is the case as the date of this filing, we are subject to the U.S. penny stock rules even if our common shares are still listed on the Nasdaq Capital Market.

THE RIGHTS THAT HAVE BEEN AND MAY IN THE FUTURE BE GRANTED TO OUR SHAREHOLDERS MAY ALLOW OUR BOARD AND MANAGEMENT TO DETER A POTENTIAL ACQUISITION OF OUR COMPANY.

          Our Board of Directors has adopted a shareholder rights plan, or “poison pill” which will expire on the date of our next shareholders’ meeting in 2006.  While our Board of Directors currently does not intend to seek shareholder approval to renew the shareholder rights plan, it remains in effect at the present time.   Under the plan, rights to purchase common shares have been issued to holders of common shares. These rights become exercisable under certain circumstances in which someone acquires 20% or more of our outstanding shares. As part of the $8 million financing transactions in May 2004 and June 2004 between Austin Ventures and us, our Board of Directors agreed to waive the terms and provisions of the plan to permit the acquisition by Austin Ventures or its affiliates of up to forty-nine percent of our outstanding common shares.  As a result of the plan, anyone wishing to take over the company may be forced under certain circumstances to negotiate a transaction with our Board and management or comply with certain bid criteria in order not to trigger the exercise of rights. The need to negotiate with the Board or management or to comply with certain bid criteria could add complexity to a proposed takeover. For example, a proposed hostile bidder might have to bring court or regulatory proceedings to have the shareholder rights plan cease-traded. This could prolong the take-over process and, arguably, deter a potential bidder.

OUR ABILITY TO ISSUE PREFERRED SHARES COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, TO THE DETRIMENT OF HOLDERS OF COMMON SHARES.

          Our ability to issue preferred shares could make it more difficult for a third party to acquire us, to the detriment of holders of common shares. Provisions in our articles of incorporation may make it difficult for a third party to acquire control of us, even if a change in control would be beneficial to our shareholders. Our articles authorize our Board to issue, at its discretion, an unlimited number of preferred shares. Without shareholder approval, but subject to regulatory approval in certain circumstances, the Board has the authority to attach special rights, including voting or dividend rights, to the preferred shares. Preferred shareholders who possess these rights could make it more difficult for a third party to acquire us.

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IF THE PROPOSED PURCHASE BY AUSTIN VENTURES OF THE BALANCE OF OUR COMMON SHARES DOES NOT PROCEED, YOU MAY NOT HAVE AS BENEFICIAL AN OPPORTUNITY TO SELL YOUR SHARES, AND RESOURCES THAT WE HAVE INVESTED IN NEGOTIATING THE TRANSACTION MAY NOT PRODUCE ANY BENEFIT.

          On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of our outstanding common shares not then-owned by Austin Ventures for cash consideration of $3.34 per common share. After careful consideration and evaluation by our Special Committee of independent directors, which had been previously constituted in order to consider potential value enhancing strategic transactions for our shareholders, we accepted the proposal.  The proposal involves certain termination rights by either party, as well as an expiry date of April 6, 2006 in the event that a definitive agreement is not reached by that time.  If the transaction does not proceed, or proceeds on less favorable terms than as proposed, we may not have alternative transactions available to us or our shareholders that are as beneficial as the transaction that has been proposed.  In pursuing this transaction, we will have also expended significant management attention and resources, which may be of little or no value if an agreement cannot be achieved and closed.  

YOUR TAX LIABILITY MAY INCREASE IF WE ARE TREATED AS A PASSIVE FOREIGN INVESTMENT COMPANY. 

          If at any time we qualify as a passive foreign investment company under U.S. tax laws, U.S. Holders (as defined below in this Report) may be subject to adverse tax consequences. We could be a passive foreign investment company if 75% or more of our gross income in any year is considered passive income for U.S. tax purposes. For this purpose, passive income generally includes interest, dividends, some types of rents and royalties, and gains from the sale of assets that produce these types of income. In addition, we could be classified as a passive foreign investment company if the average percentage of our assets during any year that produced passive income or that were held to produce passive income, is at least 50%. If we are classified as a passive foreign investment company, and if U.S. Holders sell any of their common shares or receive some types of distributions from us, they may have to pay taxes that are higher than if we were not considered a passive foreign investment company. It is impossible to predict how much shareholders’ taxes would increase, if at all.

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          Shares held by a U.S. Holder generally are treated as shares in a passive foreign investment company if, at any time during the holding period of the U.S. Holder with respect to such shares, we were a passive foreign investment company.  There is a risk that we were a passive foreign investment company for the year 2005 or prior years. To determine whether we were a passive foreign investment company, our revenue and expenses and the value of our assets would need to be examined each year.  The tests are complex and require, among other things, that we determine how much of our income each year will be passive income. In addition, we are required to determine each year whether the value of our assets that produce passive income or are held to produce passive income will constitute at least 50% of our total assets. The manner in which the tests apply to our business is not certain.  In certain years prior to 2005, as a result of the size of our cash position, based on the published position of the Internal Revenue Service (“IRS”) that for this purpose, cash is considered to be an asset which produces passive income, even if the cash is held as working capital, we would have been considered a passive foreign investment company. The published position of the IRS that cash held as working capital is a passive asset has not been promulgated in regulations, and no other official guidance has been issued on the question.   Therefore, although the risk that we were a passive foreign investment company is substantial, it is unclear that we were a passive foreign investment company for such prior years, and shareholders should consult their own advisors regarding our status as a passive foreign investment company for 2005 and prior years. Even if it were determined that we were not a passive foreign investment company for 2005 or prior years, no assurances can be given that we will not be a passive foreign investment company in future years. See Item 5 “Market for Registrant’s Common Equity and Related Stockholder Matters – Passive Foreign Investment Company Considerations.”

          Each holder of our common shares is urged to consult, his, her or its own tax advisor to discuss the potential consequences to such investor if at any time we qualify as a passive foreign investment company.

FUTURE SALES OF COMMON SHARES BY OUR EXISTING SHAREHOLDERS COULD CAUSE OUR SHARE PRICE TO FALL.

          The volume of trading in our common shares on the TSX and the NASDAQ Capital Market has not been substantial. As a result, even small dispositions of our common shares in the public market could cause the market price of the common shares to fall. The perception among investors that these sales will occur could also produce this effect.

          We have granted options to purchase our common shares in accordance with our 2005 Stock Incentive Plan, 2000 Stock Option Plan and previous stock option plans. The exercise of options and the subsequent sale of shares could adversely affect the market price of our common shares.  In addition, our affiliate, Austin Ventures, owns approximately 9% of our common shares, and if Austin Ventures exercises its right to convert the Notes held by it plus the interest due at March 1, 2006 into common shares, it will own approximately 38.5% of our outstanding common shares.  As a result, sales of our common shares by Austin Ventures could adversely affect the market price of our shares.  Austin Ventures has the right to require us to register these shares with the Securities and Exchange Commission (“SEC”) for resale. 

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A LIMITED NUMBER OF SHAREHOLDERS OWN A SIGNIFICANT PORTION OF OUR COMMON SHARES, AND MAY ACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER SHAREHOLDERS.

          Our significant shareholders and members of our management team, including Austin Ventures, which is affiliated with a member of our Board of Directors, beneficially owned approximately 10% of our common shares as of March 1, 2006. Austin Ventures may receive additional common shares upon conversion of the Notes that it owns (please see note 8 to our consolidated financial statements for the year ended December 31, 2005).  Accordingly, these shareholders may, if they act together, exercise significant influence over all matters requiring shareholder approval, including the election of a majority of the directors and the determination of significant corporate actions. This concentration could also have the effect of delaying or preventing a change in control that could be otherwise beneficial to our shareholders. Furthermore, in the event that Austin Ventures were to convert all or part of the Notes as it is entitled to do, the ownership percentage of existing shareholders will be reduced, which would be reflected in certain performance metrics of the Corporation such as earnings per share, and which may also negatively impact the market value of our securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM  2. PROPERTIES.

          Our registered office, as required by the Canada Business Corporations Act, is located in Toronto, Ontario, Canada and our principal executive office is located in Santa Barbara, California.  We also have development and sales offices in Hong Kong, Switzerland and the United Kingdom.  We occupy all of our offices under lease agreements with terms from one to five years.

ITEM  3. LEGAL PROCEEDINGS.

          The Company has been named in several class actions filed in federal court in the Southern District of New York between approximately June 13, 2001 and June 28, 2001 (collectively the “IPO Allocation Litigation”). The IPO Allocation Litigation was filed on behalf of purported classes of plaintiffs who acquired the Company’s common shares during certain periods. These lawsuits have since been consolidated into a single action and an amended complaint was filed on or about April 19, 2002. Similar actions have or since been filed against over 300 other issuers that have had initial public offerings since 1998 and all are included in a single coordinated proceeding in the Southern District of New York.

          The amended complaint in the IPO Allocation Litigation names as defendants, in addition to the Company, some former directors and officers of the Company (the “Individual Defendants”) and certain underwriters of the Company’s initial public offering of securities (the “Underwriter Defendants”). In general, the amended complaint alleges that the Underwriter Defendants: (1) allocated shares of the Company’s offering of equity securities to certain of their customers, in exchange for which these customers agreed to pay the Underwriter Defendants extra commissions on transactions in other securities; and (2) allocated shares of the Company’s initial public offering to certain of the Underwriter Defendants’ customers, in exchange for which the customers agreed to purchase additional common shares of the Company in the after-market at certain pre-determined prices. The amended complaint also alleges that the Company and the Individual Defendants failed to disclose these facts and that the Company and the Individual Defendants were aware of, or disregarded, the Underwriter Defendants’ conduct. In October 2002, the Individual Defendants were dismissed from the IPO Allocation Litigation without prejudice.

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          In July 2003, a committee of the Company’s Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of the Company and of the Individual Defendants for the conduct alleged in the action to be wrongful in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurers.

          In June 2004, an agreement of settlement was submitted to the Court for preliminary approval.  The Court granted the preliminary approval motion on February 15, 2005, subject to certain modifications.

          On August 31, 2005, the Court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes.  The Court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005.  The settlement fairness hearing has been set for April 24, 2006.  Following the hearing, if the Court determines that the settlement is fair to the class members, the settlement will be approved.  There can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all.

          If the proposed settlement is not consummated, the Company intends to continue to vigorously defend itself and the Individual Defendants against these claims. However, due to the inherent uncertainties of litigation, and because the IPO Litigation is at a preliminary stage, we cannot accurately predict the ultimate outcome IPO Allocation Litigation. No amount is accrued at December 31, 2005, as a loss is not considered probable and estimable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          Not applicable.

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PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

          Our common shares are listed on the Nasdaq Capital Market under the symbol “SVNX” and on the TSX (the “TSX”) under the symbol “SVN.” Prior to September 18, 2002 and between June 12, 2003 and July 13, 2004, our common shares were traded on the Nasdaq National Market. The following table sets forth the high and low closing sales prices per share of our common shares as reported on Nasdaq Capital Market and Nasdaq National Market, as applicable, and the TSX for each of the quarters during the fiscal years ending December 31, 2005 and December 31, 2004. 

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Year Ended December 31, 2005

	724 Solutions
	Nasdaq [US$]				TSX [Cdn. $]
	High		Low		High			Low
Q1	$	15.34	$	6.67	$	18.80	$	8.15
Q2	$	14.10	$	7.43	$	17.23	$	9.31
Q3	$	8.22	$	3.99	$	10.00	$	4.71
Q4	$	5.99	$	2.21	$	6.94	$	2.56

Year Ended December 31, 2004

	724 Solutions
	Nasdaq [US$]				TSX [Cdn. $]
	High		Low		High		Low
Q1	$	4.39	$	3.06	$	5.75	$	3.85
Q2	$	4.00	$	2.80	$	5.23	$	3.90
Q3	$	3.95	$	3.00	$	4.96	$	4.17
Q4	$	7.98	$	4.13	$	9.60	$	5.05

          On March 8, 2006 we received a Nasdaq Staff Deficiency Letter indicating that we fail to comply with the Nasdaq’s Marketplace Rule 4310(c)(2)(B).  Marketplace Rule 4310(c)(2)(B) requires companies listed on the Nasdaq Capital Market to have a minimum of $2,500,000 in stockholders’ equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. 

          We submitted a response to Nasdaq and Nasdaq staff is reviewing our eligibility for continued listing on the Nasdaq Capital Market.  If Nasdaq is not satisfied with our proposal, they will issue a delisting notice, which can be appealed. In the event such an appeal was not successful, our shares would be delisted from Nasdaq.

RECORD HOLDERS

          As of March 1, 2006, approximately 33 of the holders of record of our Common Shares had addresses in the U.S.  These holders owned 3,944,787 Common Shares, or approximately 65% of our total issued and outstanding Common Shares.

DIVIDEND POLICY

          We have never declared or paid any cash dividends on our Common Shares.  We currently intend to retain any future earnings to fund the development and growth of our business and we do not anticipate paying any cash dividends in the foreseeable future.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

          The following table sets forth certain information relating to our option plans as of December 31, 2005:

Plan Category	Name of Plan	Number of Common Shares to be Issued upon Exercise of Outstanding Options			Weighted-Average Exercise Price of Outstanding Options		Number of Securities Remaining for Future Issuance under Plan
Option Plans approved by the Corporation’s Shareholders	Pre-IPO Canadian Plan		8,323		$	31.83		—	(1)
	Pre-IPO U.S. Plan		226		$	100.00		—	(1)
	2000 Stock Option Plan		880,789	(2)	$	8.94		—	(1)
	2005 Plan(3)		523,213		$	5.70		251,787
Subtotal			1,412,551		$	7.87		251,787
Option Plans not approved by the Corporation’s Shareholders	TANTAU Plan(4)		21,897		$	21.66		—	(1)
Totals			1,434,448		$	8.10		251,787

(1)	724 will not make further grants under this Plan.
(2)	Includes 15,500 Common Shares subject to options that were granted under the TANTAU Plan prior to, and assumed by us upon, the acquisition of TANTAU Software, Inc.  While these options are governed by the terms of the TANTAU Plan, applicable rules of the TSX provided that these options are notionally counted against available grant room under the 2000 Plan.
(3)	In December 2004, we granted 427,000 options to purchase Common Shares to certain of our officers and directors under the 2005 Plan, subject to obtaining shareholder approval for these grants which was subsequently obtained at our annual meeting of shareholders held in 2005.
(4)	Outstanding options under this plan were assumed upon our acquisition of TANTAU.

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MATERIAL UNITED STATES FEDERAL AND CANADIAN INCOME TAX CONSEQUENCES 

GENERAL

          The following discussion of material U.S. federal income tax consequences and Canadian federal income tax consequences of ownership of 724 Solutions’ common shares is included for general information purposes only and does not purport to be a complete description of all potential tax consequences.  The discussion does not address any potential tax effects to non-U.S. Holders (as defined below) nor does the discussion address all potential tax effects that may be relevant to U.S. Holders subject to special U.S. federal income or Canadian tax treatment, including: 

• persons who own (actually or constructively) 5% or more of either the total voting power or total value of all capital stock of 724 Solutions;

• persons subject to the alternative minimum tax;

• persons who are or have been residents of Canada or engaged in a trade or business in Canada through a permanent establishment;

• persons who hold their shares as part of a hedge, straddle or conversion transaction;

• persons whose functional currency is not the U.S. dollar;

• insurance companies;

• financial institutions;

• dealers in securities;

• traders that mark to market;

• tax-exempt organizations; and

• retirement plans.

          The following discussion does not address the effect of applicable state, provincial, local or foreign (other than Canadian) tax laws.

          “U.S. Holder” means a holder of shares of 724 Solutions who is (i) a citizen or resident of the U.S., (ii) a corporation or other entity taxable as a corporation created in or organized under the laws of the U.S. or any political subdivision of the U.S., (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) in general, a trust if a U.S. court can exercise primary supervision over the administration of that trust, and one or more U.S. persons have the authority to control all of the substantial decisions of that trust.  A “non-U.S. Holder” means a holder of shares who is not a “U.S. Holder.”

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

          This summary of material U.S. federal income tax consequences is based on the Internal Revenue Code, Treasury regulations, administrative rulings and practice and judicial precedent, each as in effect at the date of this annual report, all of which are subject to change.  Any such change, which may or may not be retroactive, could alter the tax consequences discussed herein.  No rulings have been or are expected to be sought from the IRS concerning the tax consequences of holding common shares of 724 Solutions, and this tax discussion as to the material U.S. federal income tax consequences will not be binding on the IRS or any court.  This discussion relies on assumptions, including assumptions regarding the absence of changes in existing facts.

TAXATION OF DIVIDENDS

          Subject to the discussion below under “Passive Foreign Investment Company Considerations,” for U.S. federal income tax purposes, the U.S. dollar value of any distribution made out of 724 Solutions’ current or accumulated earnings and profits as determined for federal tax income purposes will be included in gross income by a U.S. Holder and will be treated as foreign source dividend income (except that if more than 50% of 724 Solutions’ stock is owned by U.S. persons, a portion of any dividends may be treated as U.S. source for purposes of calculating such Holder’s U.S. foreign tax credit).  The U.S. dollar value of any distribution received in Canadian dollars will be based on the spot exchange rate for the date of receipt.

          If dividends paid by 724 Solutions were to exceed 724 Solutions’ current and accumulated earnings and profits as determined for U.S. federal income tax purposes, any excess would be treated as a non-taxable return of capital to the extent of the U.S. Holder’s adjusted basis in the common shares of 724 Solutions, and thereafter as a capital gain.

          Under recently-enacted U.S. federal income tax legislation, a non-corporate U.S. holder’s “qualified dividend income” currently is subject to tax at reduced rates not exceeding 15%. For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if either (a) the stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or (b) that corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury.  The IRS has determined that the Canada-U.S. Tax Convention is satisfactory for this purpose.  Dividends paid by a foreign corporation will not qualify for the reduced rates, however, if such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes.  See the discussion under “Passive Foreign Investment Company Considerations” below. 

          A U.S. Holder will be required to include in income the Canadian withholding tax paid with respect to dividends and may claim a foreign tax credit or a deduction with respect to such tax, subject to applicable limitations.

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TAXATION OF GAINS

          Upon the sale or disposition of a common share of 724 Solutions, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your adjusted tax basis in the share.  Subject to the discussion below under the heading “Passive Foreign Investment Company Considerations,” such gain or loss will generally be treated as U.S. source capital gain or loss.  If you are an individual, any such capital gain will generally be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met.

PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS

          The rules governing “passive foreign investment companies” can have significant tax effects on U.S. Holders.  If we are a passive foreign investment company, or “PFIC”, for any taxable year in which a U. S. Holder owns any of our common shares, the U.S. federal income tax consequences of owning and disposing of common shares may differ from those described above.  Our treatment as a PFIC could result in a reduction in the after-tax return to the U.S. Holders of our common shares. 

          For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is “passive income,” or (ii) at least 50% of the average value (or in some cases, adjusted tax basis) of all of our assets for the taxable year produce or are held for the production of “passive income.”  For this purpose, passive income generally includes interest, dividends, some types of rents and royalties, annuities and the excess of gains over losses from the disposition of assets that produce these types of income. 

          Common shares held by a U.S. Holder generally are treated as shares in a PFIC if, at any time during the holding period of the U.S. Holder with respect to such shares, we were a PFIC.  There is a risk that we were a PFIC for the year 2005 or prior years. To determine whether we were a PFIC, our revenue and expenses and the value of our assets would need to be examined each year. The tests are complex and require, among other things, that we determine how much of our income each year will be passive income. In addition, we are required to determine each year whether the value of our assets that produce passive income or are held to produce passive income will constitute at least 50% of our total assets. The manner in which the tests apply to our business is not certain. In certain years prior to 2005, as a result of the size of our cash position, based on the published position of the IRS that for this purpose, cash is considered to be an asset that produces passive income, even if the cash is held as working capital, we would have been considered a PFIC. The published position of the IRS that cash held as working capital is a passive asset has not been promulgated in regulations, and no other official guidance has been issued on the question.   Therefore, although the risk that we were a PFIC is substantial, it is unclear that we were a PFIC for such prior years, and shareholders should consult their own advisors regarding our PFIC status for 2005 and prior years. Even if it were determined that we were not a PFIC for 2005 or prior years, no assurances can be given that we will not be a PFIC in future years.

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          If we are a PFIC for U.S. federal income tax purposes for any taxable year in which a U.S. Holder owns common shares, such U.S. Holder would be subject to certain U.S. tax consequences, including special rules applicable to certain “excess distributions,” as defined in Section 1291 of the Code, and gain on the sale of common shares. In general, the U.S. Holder must allocate the excess distribution or gain ratably to each day in such holder’s holding period for the common shares.  The portion of the excess distribution or gain allocated to the current taxable year and any taxable year in the holding period before we were a PFIC would be taxed as ordinary income for the current year.  The portion of the excess distribution or gain allocated to each of the other taxable years would be subject to tax at the maximum ordinary income rate in effect for such taxable year and an interest charge would be imposed on the resulting tax liability determined as if that liability had been due with respect to that prior year.

          The tax consequences referred to above will not apply if the U.S. Holder makes a timely election to treat us as a qualified electing fund, or QEF, for the first taxable year in which the U.S. Holder owns common shares and in which we are a PFIC, and certain other requirements are satisfied.  A shareholder making the QEF election is required for each taxable year to include in income a pro rata share of the ordinary income and net capital gain of the QEF, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge.  The inclusion in income is required regardless of whether or not we actually distribute any dividends, and a U.S. Holder could therefore have a tax liability for our earnings or gain without a corresponding receipt of cash.  To make a QEF election, U.S. Holders will need to have an annual information statement from us setting forth, among other things, our earnings and capital gains for the year.  Because of the substantial risk that we have been a PFIC, we will supply the PFIC annual information statement to any U.S. Holder who requests it, provided we are able to do so.  Further information can be requested from Investor Relations, (805) 884-8308 extension 4, or through our website at www.724.com/contactus/ir.asp.

          The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS.  In general, a U.S. Holder must make a QEF election on or before the due date for filing its income tax return for the first year to which the QEF election will apply.  In certain circumstances, however, U.S. Holders may make a retroactive election to be treated as a QEF.  This retroactive election in some cases requires the filing of a protective statement with the holder’s income tax return for the first year to which the QEF election would apply.  In addition, QEF elections may in certain circumstances be made for years after the first year in which we are a PFIC, but adverse consequences may result from elections filed for such years.  U.S. Holders should consult with their own tax advisors concerning the advisability, requirements, procedures and timing for making a QEF election or a retroactive QEF election.

          As an alternative to making the QEF election the U.S. Holder of PFIC stock which is publicly traded may in certain circumstances avoid the tax consequences generally applicable to holders of a PFIC by electing to mark the stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the U.S. Holder’s adjusted tax basis in the PFIC stock.  Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years.  This election is available for so long as our common shares constitute “marketable stock.”  The term “marketable stock” includes stock of a PFIC that is “regularly traded” on a “qualified exchange or other market.” Generally, a “qualified exchange or other market” means (i) a national securities exchange which is registered with the U.S. Securities and Exchange Commission or the national market system established pursuant to Section 11A of the Securities Exchange Act of 1934 or (ii) a foreign securities exchange that meets certain requirements.  A class of stock that is traded on one or more qualified exchanges or other markets is “regularly traded” on such exchanges or markets for any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.  We believe that the Nasdaq Capital Market will constitute a qualified exchange or other market for this purpose.  However, no assurances can be provided that our common shares will continue to trade on the Nasdaq Capital Market, that the Toronto Stock Exchange will be deemed to be a qualified exchange or other market for this purpose, or that the shares will be regularly traded for this purpose.  As set forth above, Nasdaq staff is reviewing our eligibility for continued listing on the Nasdaq Capital Market, and in the event that we cannot submit a plan to regain and remain in compliance which is acceptable to Nasdaq staff, we may be delisted from the Nasdaq, which would remove the ability of U.S. Holders to treat our shares as regularly traded on the Nasdaq Capital Market.  See “Risks Relating to the Ownership and Trading of our Common Shares.”   

          Any U.S. Holder who owns, directly or indirectly, any stock in a PFIC must file an annual return with the IRS.  All U.S. Holders are advised to consult their own tax advisers about the PFIC rules generally and about the advisability, requirements, procedures and timing of their making any of the available tax elections, including the QEF or mark-to-market elections, or elections that may apply if a corporation ceases to be a PFIC.

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U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING

          A holder of 724 Solutions common shares may, under certain circumstances, be subject to certain information reporting requirements and backup withholding tax with respect to dividends paid on the 724 Solutions common shares, or the proceeds of sale of the 724 Solutions common shares, unless such holder (i) is a corporation or comes within certain other exempt categories, and when required, demonstrates this fact or (ii) provides a correct taxpayer identification number (“T.I.N.”), certifies that such holder is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules.  A holder of 724 Solutions common shares who does not provide a correct T.I.N. may be subject to penalties imposed by the U.S. Internal Revenue Service.  Any amount withheld under backup withholding rules generally will be creditable against the holder’s U.S. federal income tax liability and a holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for a refund with the IRS. The backup withholding tax rate is currently 28%, and is scheduled to increase to 31% after 2010.

          THIS TAX DISCUSSION DOES NOT PURPORT TO CONTAIN A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX CONSIDERATIONS RELEVANT TO THE OWNERSHIP OF 724 SOLUTIONS COMMON SHARES.  THUS, 724 SOLUTIONS’ SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OWNERSHIP OF 724 SOLUTIONS COMMON SHARES, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.  STOCKHOLDERS THAT ARE NOT U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THE CONSEQUENCES OF INVESTING IN 724 SOLUTIONS’ COMMON SHARES.

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MATERIAL CANADIAN INCOME TAX CONSEQUENCES

          The following discussion summarizes the principal Canadian federal income tax considerations generally applicable to a person, referred to as an “Investor”, who holds common shares of 724 Solutions, and who at all material times for the purposes of the Income Tax Act (Canada) (the “Act”), deals at arm’s length with us, is not affiliated with us, holds common shares as capital property, is a non-resident of Canada, and does not, and is not deemed to, use or hold any common share in, or in the course of, carrying on business in Canada.

          This summary is based on the current provisions of the Act, including the regulations under the Act, and the Canada-United States Income Tax Convention (1980), referred to as the “Treaty”, as amended. This summary takes into account all specific proposals to amend the Act and the regulations under the Act publicly announced by the government of Canada prior to the date of this report, and our understanding of the current published administrative and assessing practices of the Canada Revenue Agency. It is assumed that all of those amendments will be enacted substantially as currently proposed, although no assurances can be given in this respect. Except to the extent otherwise expressly set out in this summary, this summary does not take into account any provincial, territorial, or foreign income tax law.  Special rules, which are not discussed in this summary, may apply to a non-resident holder that is an insurer carrying on business in Canada and elsewhere, or a financial institution as defined by section 142.2 of the Act.  If you are in any doubt as to your tax position, you should consult with your tax advisor.

TAXATION OF DIVIDENDS

          Any dividend on a common share paid or credited, or deemed under the Act to be paid or credited, by us to an Investor, will generally be subject to Canadian withholding tax at the rate of 25% on the gross amount of the dividend, or such lesser rates as may be available under an applicable income tax treaty.  We will be required to withhold any such tax from the dividend, and remit the tax directly to the Canada Revenue Agency for the account of the Investor.  Pursuant to the Treaty, the rate of withholding tax applicable to a dividend paid on a common share to an Investor who is a resident of the United States for the purposes of the Treaty will be reduced to 5% if the beneficial owner of the dividend is a company that owns at least 10% of our voting stock, and in any other case will be reduced to 15%.  Under the Treaty, dividends paid or credited to an Investor that is a United States tax exempt organization as described in Article XXI of the Treaty will not be subject to Canadian withholding tax.  It is the position of the Canada Revenue Agency that United States limited liability companies generally do not qualify as residents of the United States under the Treaty and therefore Treaty reductions are not available to those Investors.  

TAXATION OF GAIN ON DISPOSITION

          An Investor generally will not be subject to tax pursuant to the Act on any capital gain realized by the Investor on a disposition of a common share unless the common share constitutes “taxable Canadian property” to the Investor for purposes of the Act and the Investor is not eligible for relief pursuant to an applicable bilateral tax treaty. A common share that is disposed of by an Investor will not constitute taxable Canadian property of the Investor provided that the common share is listed on a stock exchange that is prescribed for the purposes of the Act (the TSX and NASDAQ are so prescribed), and that neither the Investor, nor one or more persons with whom the Investor did not deal at arm’s length, alone or together, at any time in the five years immediately preceding the disposition, owned 25% or more of the issued shares of any class or series of our capital stock. Even if a common share is taxable Canadian property to an

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Investor, the Treaty will generally exempt an Investor who is a resident of the United States for the purposes of the Treaty, and who would otherwise be liable to pay Canadian income tax in respect of any capital gain realized by the Investor on the disposition of a common share, from that liability, provided that the value of the common share is not derived principally from real property situated in Canada.  We are of the view that the value of the 724 Solutions common shares is not currently derived principally from real property situated in Canada.  The Treaty may not be available to a non-resident investor that is a U.S. limited liability company, which is not subject to tax in the United States.

          THE FOREGOING SUMMARY OF MATERIAL U.S. AND CANADIAN TAX CONSEQUENCES IS BASED ON THE CONVENTION BETWEEN CANADA AND THE UNITED STATES OF AMERICA WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS, U.S. LAW, CANADIAN LAW, AND REGULATIONS, ADMINISTRATIVE RULINGS AND PRACTICES OF THE U.S. AND CANADA, ALL AS THEY EXIST AS OF THE DATE OF THIS REPORT.  THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS THAT MAY BE RELEVANT TO ANY PARTICULAR INVESTORS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.  INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES AND WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF OWNERSHIP OF 724 SOLUTIONS COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, PROVINCIAL, LOCAL AND FOREIGN TAX LAWS, ESTATE TAX LAWS AND PROPOSED CHANGES IN APPLICABLE LAWS.

RECENT SALES OF UNREGISTERED SECURITIES

          None.

ITEM 6. SELECTED FINANCIAL DATA.

          The selected consolidated statement of operations data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004 have been derived from our audited financial statements, which are included elsewhere in this Report.  The selected statement of operations data for the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 have been derived from other audited financial statements not included in this report.  Our results of operations beginning in the year 2001 reflect our January 2001 acquisition of Tantau.  These operating results are not necessarily indicative of results for any future period. Our historical financial results should not be relied upon as a predictor of our future performance.  The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information beginning on page F-1 in this report, as well as the information set forth under Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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	2005			2004			2003			2002			2001
Revenue:
Product	$	7,445		$	8,844		$	6,964		$	8,823		$	27,054
Services		10,820			6,228			5,891			11,905			16,763
Total revenue		18,265			15,072			12,855			20,728			43,817
Operating expenses:
Cost of product revenue
Amortization of intangible assets		—			—			3,468			4,418			80,172
Write-down of inventory		—			—			—			2,748			—
Other		28			26			—			—			904
Cost of services revenue		7,430			6,614			6,031			7,277			18,382
Research and development		6,982			6,271			9,433			16,636			39,052
Sales and marketing		4,036			4,985			6,968			17,241			36,807
General and administrative		3,362			3,074			4,086			6,973			15,904
Depreciation		597			595			908			5,068			8,142
Stock-based compensation:
Cost of services revenue		53			15			14			311			411
Research and development		122			40			1,227			10,872			27,730
Sales and marketing		136			34			296			3,833			11,077
General and administrative		720			63			141			2,787			7,951
Restructuring charges		—			993			50			17,901			16,488
Write-down of fixed assets, goodwill, intangible and other assets		—			—			9,097			7,624			324,617
Total operating expenses		23,466			22,710			41,719			103,689			587,637
Loss from operations		(5,201	)		(7,638	)		(28,864	)		(82,961	)		(543,820	)
Interest income (expense), net		(709	)		(396	)		254			751			5,773
Loss on settlement of liability		(165	)		—			—			—			—
Equity in loss of affiliate		—			—			—			—			(1,591	)
Gain (loss) on sale of investments		—			—			283			150			(4,591	)
Write-down of investments		—			—			—			(5,347	)		(9,975	)
Loss for the period	$	(6,075	)	$	(8,034	)	$	(28,327	)	$	(87,407	)	$	(554,204	)
Basic and diluted loss per share	$	(1.01	)	$	(1.34	)	$	(4.73	)	$	(14.71	)	$	(97.20	)
Weighted-average number of shares used in computing basic and diluted loss per share (in thousands)		6,034			5,984			5,983			5,942			5,702
Cash and cash equivalents	$	5,272		$	5,417		$	13,436		$	19,129		$	60,279
Short-term investments and restricted cash		4,228			8,215			1,946			19,524			28,857
Working Capital		10,116			14,056			14,104			27,306			75,512
Fixed assets, deferred charges, goodwill, intangible and   other assets		1,003			1,421			612			13,983			35,729
Total assets		13,496			18,467			18,939			55,666			135,830
Long-term liabilities		—			92			—			—			—
Notes payable to related parties		7,969			7,947			—			—			—
Notes payable, net of current portion		—			—			—			—			296
Leasehold inducements		—			—			—			—			284
Deferred consideration, net of current portion		—			—			—			—			1415
Long-term interest payable to related parties		768			343			—			—			—
Total shareholders' equity		2,382			7,095			14,716			41,289			109,246

The historic common share numbers have been adjusted to reflect the 10 for 1 share consolidation completed in the second quarter of 2003 Certain comparative figures for prior years have been reclassified to conform to the financial statement presentation adopted in the current year.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion and analysis should be read together with our audited consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 and accompanying notes set forth elsewhere in this report. All financial information is presented in U.S. dollars.

          Some of the statements set forth in this section are forward-looking statements relating to our future results of operations.  Our actual results may vary from the results anticipated by these statements.  Please see “Information Regarding Forward-Looking Statements”.

OVERVIEW

          724 Solutions designs, develops, markets and supports software products for use by mobile network operators worldwide. Mobile network operators are telecommunications companies that provide a range of mobile voice and data communications services to their consumer and business customers.  Examples of large mobile network operators include Verizon Wireless, Cingular Wireless, Sprint Nextel, Vodafone and China Mobile, some of which currently license our products.

          We offer software products that enable Internet connectivity to mobile devices such as mobile phones and handheld computing devices.  We also offer software that helps to deliver text messaging, multimedia messaging, voice services and transactions to mobile network operators’ end user customers using mobile phones and handheld computing devices.

          We were incorporated in 1997 and we introduced our initial products in 1999. At that time, we focused on creating software products that assisted financial services companies in making their traditional services available to their customers through mobile phones and handheld computing devices.  In January 2001, we acquired Tantau Software with a view to expanding our customer base, utilizing Tantau’s software products to strengthen our products offered to financial services customers, and to expand our sales to mobile network operators.  In 2001, we began offering our mobile alerting software products and our mobile Internet gateway product (software that enables Internet connectivity to mobile devices) to mobile network operators. In October 2002, our products and solutions for mobile network operators and other customers were re-branded as the X-treme Mobility Suite of products (“XMS”). 

          In 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably.  At the same time, we judged that the market for mobile data services in the mobile network operator sector was potentially larger and likely to develop sooner. As a consequence, we began to restructure our business to focus on opportunities in the mobile network operator marketplace.  During 2004, we completed this process and are now focused on selling our software products to mobile network operators. We no longer offer products developed specifically for financial institutions, although we continue to provide services to a small number of financial services customers and continue to support earlier sales to these customers.

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          We continue to develop and expand our X-treme Mobility Suite of products for mobile network operators to assist them in growing their next-generation data services.  In addition, we may in the future acquire products and/or companies that have developed software that aligns with our X-treme Mobility Suite of products.

SUBSEQUENT EVENTS

PROPOSAL FROM AUSTIN VENTURES

          On February 28, 2006 we received a proposal from Austin Ventures to acquire all of our outstanding common shares not owned by Austin Ventures for cash consideration of $3.07 per common share.

          Austin Ventures proposed that the transaction be effected by way of a court-approved plan of arrangement.  In addition to court approval, the transaction would require the approval of our shareholders, including by way of a majority of the votes cast by holders other than Austin Ventures and related parties.  Options to purchase our common shares would also be acquired as part of the acquisition.

          Our Board of Directors had previously formed a Special Committee composed entirely of directors who are independent of management and independent of Austin Ventures to consider potential value enhancing strategic transactions for our shareholders.  This Special Committee, in consultation with our financial and legal advisors, reviewed and considered the Austin Ventures proposal, as well as other potential means to maximize shareholder value.  The evaluation by the Special Committee was independent of ongoing Company operations.

           On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of our outstanding common shares not owned by Austin Ventures for cash consideration of $3.34 per common share.  We accepted the revised proposal after careful consideration and evaluation by our Special Committee of independent directors in conjunction with our financial and legal advisors.

           Austin Ventures and us intend to move diligently towards negotiating a definitive arrangement agreement and, subject to receipt of a satisfactory fairness opinion and valuation report and completion by Austin Ventures of its due diligence, completing a transaction in accordance with the agreement and all applicable legal and regulatory requirements.  This revised and accepted proposal is set to terminate on April 6, 2006 in the event a definitive arrangement agreement is not reached by that date.

NASDAQ NOTICE OF NON-COMPLIANCE

           On March 8, 2006 we received a Nasdaq Staff Deficiency Letter indicating that we fail to comply with the Nasdaq’s Marketplace Rule 4310(c)(2)(B).  Marketplace Rule 4310(c)(2)(B) requires companies listed on the Nasdaq Capital Market to have a minimum of $2,500,000 in stockholders’ equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. 

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           We submitted a response to Nasdaq and Nasdaq staff is reviewing our eligibility for continued listing on the Nasdaq Capital Market.  If Nasdaq is not satisfied with our proposal, they will issue a delisting notice which can be appealed. In the event such an appeal was not successful, our shares would be delisted from Nasdaq.

DEVELOPMENTS IN 2005

2005 STOCK OPTION PLAN

           On April 28, 2005, we held our annual and special meeting of shareholders (the “Meeting”).  At the Meeting, our shareholders approved our 2005 Stock Incentive Plan (the “2005 Plan”) adopted by our Board of Directors. A total of 775,000 common shares are initially reserved for issuance under the 2005 Plan.

           Our shareholders also approved the December 2004 grant of 427,000 options to certain of our executives, officers and directors. Subject to certain conditions, the options vest over four years from the December 2004 grant date. The total fair value at April 28, 2005 was calculated to be $2.8 million using the Black-Scholes option pricing model. The fair value related to those options that remain outstanding is being expensed as stock-based compensation over the remaining vesting period. We expensed approximately $687,000 related to this grant in 2005. Please see note 9 to our consolidated financial statements for the year ended December 31, 2005.

TERMINATION OF SUB-CONTRACT BETWEEN 724 SOLUTIONS and HEWLETT-PACKARD

           On October 31, 2005, our subcontract agreement with Hewlett-Packard terminated. We recognized approximately $5.9 million in revenue in the twelve months ended December 31, 2005 related to this subcontract. Our contract with Sprint for our X-treme Service Activity Manager product is unaffected by this termination.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

           We periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. We have determined that our critical accounting policies relating to our core ongoing business activities are primarily those that relate to (i) revenue recognition, (ii) allowance for doubtful accounts, (iii) income taxes, (iv) litigation, (v) valuation of intangible assets, (vi) valuation of fixed assets, and (vii) restructuring provisions.

SOURCES OF REVENUE

           We derive revenue from licensing our products and providing related services, including installation, integration, maintenance and support. We recognize revenue from our license agreements when all the following conditions are met:

• We have an executed license agreement with the customer;

• We have delivered the software product to the customer;

• The amount of the fees to be paid by the customer is fixed and determinable; and

• Collection of these fees is deemed probable.

           Software license agreements can be multiple element arrangements that include related maintenance and implementation fees. Accordingly, the fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence of fair value (“VSOE”) of each element in accordance with Statement of Position (“SOP”) 97-2. For these multiple element contracts falling under SOP 97-2 for which we do not have sufficient VSOE, we use the residual method to record revenues. Under this method, if we have VSOE for all undelivered elements (typically, services and maintenance) we record the remaining value of the contract as license revenue after allocating full value to the undelivered elements.

           In some software license agreements, some of our products cannot be considered “off-the-shelf” and the contracted deliverables and professional services may be essential to the functionality of the software. In these circumstances, we recognize revenue as the deliverables and services are performed and revenue is earned in accordance with the percentage of completion method of accounting.

           For license and services agreements that provide significant commitments to refunds and/or penalties on the services and/or license components should the system not perform according to documented specifications, we defer recognition of revenue for the amount subject to refund or penalty until we achieve contractually defined milestones or until customer acceptance has occurred, as the case may be for those agreements.

           We typically license our software on a per user or capacity basis.  Accordingly, our revenue is dependent on whether, and the extent to which our customers continue to use our software.

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PRODUCT REVENUE

          Product revenue consists of the following:

• Variable License Fee Arrangement – a variable license fee based on the numbers of users or the total capacity in a period. Revenue is recognized on an ongoing basis when determinable and will vary with the number or the total capacity of our customers’ end users.  In some of our agreements, there may be a cap on the total license fees paid by our customer for a particular product.

• Reseller/OEM Arrangement – the reseller or OEM typically pays a non-refundable licensing fee for our software and/or a royalty fee based on the related number of users or based on a given capacity. We recognize revenue associated with non-refundable license fees when we have met our revenue recognition criteria for license agreements as outlined above. We recognize royalty fee revenue when the amount is determinable and all of our other revenue recognition criteria for license revenue are met.

• Fixed License Fee Arrangement – a license fee for a fixed number of copies or unlimited use of the software for a period of time ranging from 3 months to perpetuity. If the license is not a perpetual license, we recognize the revenue ratably over the term of the license. If the license is a perpetual license, we recognize the revenue when the general conditions outlined above under “Sources of Revenue” are met.

SERVICE REVENUE

IMPLEMENTATION AND CUSTOMER SERVICE FEES

           Revenue from implementation and customer service fees includes fees for implementation of our product offerings (which may include hardware and third party software operating on the hardware), consulting and training services. Customers are charged a fee based on time and expenses and a fee for the hardware and third party software they choose to buy from us. Revenue is recognized as the implementation is performed or as the hardware is delivered and accepted or deferred until we achieve contractually defined milestones or until customer acceptance has occurred, as the case may be, for those contracts.

MAINTENANCE FEES

           We receive revenue from maintaining and servicing our products for customers. The maintenance fee is typically equal to a specified percentage of the customer’s cumulative license fees, and may include a minimum quarterly amount. If associated with the fixed fee license model, the maintenance revenues received will be recorded as deferred revenue and recognized on a straight-line basis over the contract period. When associated with the variable fee license model, any maintenance payments will be recognized on a monthly basis as earned.

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MANAGED ALERTS SERVICE FEES

           We receive revenue from providing services to our customers using our managed X-treme Alerts Platform (“XAP”).  These can include revenue from voice alerts, Short Message Service (SMS) alerts, Multimedia Message (MMS) alerts, fraud alerts, and collection alerts.  Our XAP software is hosted in New Jersey with Computer Sciences Corporation and the voice hardware is hosted in Florida with InterVoice. Customers typically pay a per alert fee, subject to monthly minimums.  The fees are recognized on a monthly basis as earned.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

           We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our general credit terms are 30 to 60 days from the invoice date.  We perform an ongoing credit evaluation of each customer’s financial condition and if the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payment, an additional allowance would be required. At December 31, 2005, our allowance for doubtful accounts totals $19,000.  Our maximum exposure to loss on receivables at any point in time is the total accounts receivable, which was $2.5 million at December 31, 2005.  Due to the significant number of estimates utilized in determining an expected rate of uncollectible receivables, actual results of collections could be materially different from these estimates.

INCOME TAXES 

           We record a valuation allowance against deferred income tax assets when we believe it is not more likely than not that some portion or all of the deferred income tax assets will be realized. We consider factors such as the reversal of deferred income tax liabilities, projected taxable income, the character of the income tax asset and the potential for realization due to tax planning strategies. At December 31, 2005, while we have $86.6 million in available net tax benefit of loss carry forwards and other deferred tax assets, we have experienced losses in recent years and the extent of future income for tax purposes before utilization of these benefits is uncertain.  Accordingly, the entire balance of deferred tax assets has been reduced by a valuation allowance.  Due to the significant number of estimates and projections utilized in determining an appropriate valuation for our deferred income tax assets, the actual valuation allowance against the tax assets could be materially different from these estimates.

LITIGATION

           We are a party from time to time to legal proceedings, such as the securities litigation relating to our initial public offering. In these cases, we assess the likelihood that a loss will result, as well as the amount of that loss, and the financial statements provide for the best estimate of the losses. In making our assessment of the existence of a loss, we consider advice from legal counsel, the nature of the claim and other settlements, if any, that are occurring from similar claims.  To the extent that any of these legal proceedings are resolved and require us to pay an amount in excess of what has been provided for in the financial statements, we would be required to record, against earnings, the excess at that time. If the resolution resulted in a gain, or a loss less than that provided for, the gain is recognized when received or receivable.

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VALUATION OF INTANGIBLE ASSETS

           We have acquired several other businesses. As part of the completion of any business combination, we are required to value any intangible assets acquired at the date of acquisition. We utilize the most current internally-generated and publicly available information to develop an estimate of future undiscounted cash flows including, among other things, estimated lives, residual values and terminal values, and believe the estimates to be reasonable at the date prepared.  This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the intangible assets acquired. There can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired intangible assets. To assist us with the valuation process, we have adopted the practice of using independent valuation experts in the valuation process for intangible assets acquired through material acquisitions. However, it is possible that either we or the independent valuation experts will make judgments or estimates that differ from actual circumstances.  In these cases, we may be required to record a provision or write-off certain of our intangible assets. Similarly, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are required to annually test the value of our goodwill. Changes in estimates could result in different conclusions for the underlying value of goodwill. We perform our annual impairment testing on goodwill at December 31 of each fiscal year, provided that circumstances do not arise during the year that would necessitate an earlier evaluation.  As at December 31, 2005, the carrying value of our goodwill and intangible assets has been written down to nil.

VALUATION OF FIXED ASSETS

           We monitor the appropriateness of the carrying values of our fixed assets, primarily office furniture and computer software and equipment, on an ongoing basis, in accordance with applicable accounting requirements. As required, if an indicator of potential impairment is evident, we will review the projected undiscounted future cash flows associated with the relevant fixed asset, to determine if the undiscounted cash flows exceed the carrying amount of the fixed asset. If it is determined that the net carrying amount of the fixed asset is not recoverable, then an adjustment would be made to reduce the net carrying amount to the fair value amount of the asset. We utilize the most current internally-generated and publicly available information to develop our estimates of future undiscounted cash flows including, among other things, estimated lives, residual values and terminal values, and believe the estimates to be reasonable. Additionally, determination of fair values of fixed assets may also involve various methods of estimation, if comparable independent fair values are not readily available. Accordingly, different assumptions related to cash flows or fair values of fixed assets could materially affect our estimates.  We have recorded charges to write-down fixed assets, primarily arising due to the restructuring activities we have undertaken.  As at December 31, 2005, our net book value of fixed assets was $836,000.

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RESTRUCTURING PROVISIONS

           We record restructuring provisions when specified criteria under accounting principles are met.  While these provisions are substantially based on contractual terms, it is necessary to make estimates of the fair values of liabilities in some circumstances, primarily when the charge includes future costs to be incurred on leased space which is no longer being used but for which the lease agreement has not been terminated.  In these cases, we estimate the fair value of future sub-lease rentals that will be realized over the term of the agreement.  These estimates take into account expected demands and prices available for the specific space in the areas the lease is located.  Unless we have a fixed sub-lease for the remaining term of the lease arrangement, the actual amount of sub-lease rental income may differ from the estimates used in developing the provision and those changes may be material.  Changes in estimated sub-lease income are recognized as determinable. 

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

           Our consolidated financial statements for 2005 have been prepared in accordance with U.S. generally accepted accounting principles. 

REVENUE

PRODUCT REVENUE

           Product revenue was $7.4 million in the year ended December 31, 2005, compared to $8.8 million in 2004. Revenue from our X-treme Mobility Suite of products was $7.1 million in the year ended December 31, 2005 compared to $8.5 million in 2004.  Our principal revenue producing deployments for XMS in both 2005 and 2004 were Hewlett-Packard (as a reseller to Sprint Nextel), Nokia and Vodafone.  On October 31, 2005, our subcontract agreement with Hewlett-Packard terminated. This change resulted in a decrease in product revenue of approximately $656,000 in the fourth quarter of 2005 compared to the prior quarter. For the year ended December 31, 2005, product revenue from Hewlett-Packard (as a reseller to Sprint Nextel) decreased by $2.3 million compared to 2004 as Sprint Nextel had significant adoption in 2004. Product revenue from Nokia decreased by approximately $313,000, product revenue from Vodafone increased by approximately $106,000 and revenue from additional license sales to existing customers and license sales to new customers accounted for product revenue of  $1.2 million.

           The termination of the Hewlett-Packard subcontract is expected to reduce our product revenue from Hewlett-Packard (as a reseller to Sprint Nextel) by approximately $3.1 million in 2006 compared to 2005. Our contract with Sprint Nextel for our X-treme Service Activity Manager product is unaffected by this termination.

           In 2005, the XMG product accounted for approximately 63% of our XMS revenue and the Application Gateway (“AGW”) product accounted for approximately 24% of XMS revenue. In 2004, the XMG and AGW products accounted for approximately 74% and 24% of the XMS revenue, respectively.  While we provide our customers with fixed or variable pricing alternatives, in 2005, as in 2004, essentially all of our key revenue producing contracts for the XMS suite were on a variable pricing model.  We anticipate that the XMS products will generate most of our product revenue in 2006.

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           During 2005 and 2004, product revenue from the financial services industry was $308,000 and $328,000, respectively. We will continue to perform under the contracts we currently have with our financial services customers.  We anticipate that revenue from these customers in 2006 will remain close to 2005 levels or decline slightly. Our ability to achieve this revenue, however, is dependent on our remaining financial services customers renewing their contracts.

SERVICE REVENUE

           Service revenue increased to $10.8 million for the year ended December 31, 2005 from $6.2 million in 2004. 

           In 2005, service revenue from XMS increased to $10.0 million from $5.2 million in 2004.  Implementation and customer service fee revenue increased to $4.9 million in 2005 from $1.7 million in 2004. Implementation and customer service fee revenue included approximately $1.0 million and $474,000 related to the delivery of hardware in 2005 and 2004, respectively.  Of the $3.2 million increase in implementation and customer service fee revenue, approximately $1.4 million related to increased integration and delivery of hardware to Vodafone, approximately $238,000 related to increased professional services at Nokia, approximately $647,000 was related to a new XMG and XAP installation at a customer in North America, approximately $350,000 was related to a new XAP installation at a customer in Europe, approximately $183,000 was related to a new X-treme Service Activity Manager (“XSAM”) installation at customer in Asia and most of the remaining increase was a result of increased implementation revenue related to our XSAM and XAP products.

           Managed alerts services revenue was $513,000 in 2005 compared to $455,000 in 2004. Maintenance revenue related to XMS increased to $4.5 million in 2005 from $3.0 million in 2004. 

           Maintenance revenue from Nokia increased by approximately $820,000 due to increased deployment and the fact that we had a full year of revenue from AGW in 2005, maintenance revenue from Hewlett-Packard (as a reseller to Sprint Nextel) increased by approximately $264,000 due to an increased subscriber base using Sprint Nextel services, maintenance revenue from Vodafone increased by approximately $218,000 and maintenance revenue from other deployments increased by a net of approximately $260,000.

           The termination of the Hewlett-Packard reseller agreement resulted in a decrease in service revenue of approximately $524,000 in the fourth quarter of 2005 compared to the prior quarter and is expected to reduce our services revenue from Hewlett-Packard (as a reseller to Sprint Nextel) by approximately $2.8 million in 2006 compared to 2005. 

           Service revenue from the financial services industry was $852,000 in 2005, down from $1.1 million in 2004, mainly because some financial services customers did not renew maintenance contracts.

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OPERATING EXPENSES

COST OF PRODUCT REVENUE

           Our product revenue consists of the sale of software licenses, typically on a per user or capacity basis.  There are no significant out-of-pocket costs associated with manufacturing our software.   Costs that are associated with our software are as follows:

• Development costs: Software development costs are capitalized beginning when a product’s technological feasibility has been established, which generally occurs upon completion of a working model, and ending when a product is available for general release to customers.  All subsequent costs are expensed as incurred.  To date, the completion of working models of our products has substantially coincided with the general release of the products.  As a result, we have not capitalized any software development costs, since those costs have not been significant.

• Amortization of intangible assets: This includes intellectual property that we have acquired and either license as a stand alone product or embed in our software product. The acquired software products are amortized on a straight-line basis over a period of two to five years. All acquired software products had been fully amortized or written down to nil by the end of September 2003 (see note 7 to our consolidated financial statements). Therefore, the amount amortized in 2005 was nil (2004 – nil).

• Other: Some of our products include third party embedded software.  In 2005, we recorded $28,000 of license fees to third party vendors for the use of their software that has been embedded in our software (2004 – $26,000).

• Cost of product revenue also includes the cost of third party inventory purchased from third parties and sold to our customers. In 2005 as in 2004, we did not purchase or sell any third party inventory to our customers.

COST OF SERVICES REVENUE

           Cost of services revenue consists primarily of personnel costs associated with customer support, training and implementations, as well as amounts paid to third-party consulting firms for those services, together with an allocation of expenses for our facilities and administration.  It also includes the cost of hardware and third party software that our customers require us to provide.

           Cost of services revenue was $7.4 million for the year ended December 31, 2005, compared to $6.6 million in 2004, an increase of 12%. Integration, product support and managed services related revenue were all higher in the year ended December 31, 2005 compared to 2004, leading to increased costs in these areas. Hardware costs related to customer deployments were approximately $900,000 in 2005 compared to $400,000 in 2004. Due to improved resource utilization, cost of services revenue increased by a lower percentage than revenue. As a result, cost of services revenue as a percentage of total revenue was 41% for the year ended December 31, 2005, compared to 44% in 2004.

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           We ended 2005 and 2004 with 23 and 21 professional services personnel, respectively, and our average professional services headcount was 25 in 2005 and 16 in 2004. Professional services personnel costs increased by 30% in 2005 compared to 2004 while average headcount increased by 57%. The geographic mix of our professional services personnel has changed from 2004 to 2005, resulting in a lower cost per employee.

RESEARCH AND DEVELOPMENT

           Research and development expenses include compensation of software development teams working on the continuing enhancement of our products as well as our quality assurance and testing activities. These expenses also include the cost of retaining independent contractors and consultants, software licensing expenses, and allocated operating expenses.

           Research and development (R&D) expenses increased to $7.0 million for the year ended December 31, 2005, compared to $6.3 million in 2004, an increase of 11%. Due to our acquisition of the AGW product in the second quarter of 2004 and to meet customer commitments in other areas, we have added R&D personnel since March 2004. We ended 2005 and 2004 with 56 and 49 research and development personnel, respectively. 

           Costs related to R&D personnel increased by 4% in 2005 from 2004, while average headcount increased by 20% year over year. Our R&D costs have increased by a lower percentage than our R&D headcount because we have a higher proportion of our development team in more cost-effective locations.

           We continue to evaluate our R&D expenditure needs based on our product architecture and services and the current market environment. We anticipate that we will hire additional development personnel in 2006. R&D expense, as a percentage of revenue, was 38% for the year ended December 31, 2005, compared to 42% in 2004.

SALES AND MARKETING

           Sales and marketing expenses include compensation of sales and marketing personnel, public relations and advertising, trade shows, marketing materials and allocated operating expenses.

           Sales and marketing (S&M) expenses were $4.0 million for the year ended December 31, 2005, compared to $5.0 million in 2004.  The decrease is a result of the reduction in the average number of sales and marketing personnel to 17 in 2005 from 19 in 2004 and significant reductions in other sales and marketing expenditures.  We ended 2005 and 2004 with 17 and 18 sales and marketing personnel, respectively.  We continue to monitor our sales and marketing expenditures to ensure that they remain aligned with our targeted opportunities as well as prevailing market conditions. S&M expense, as a percentage of revenue, was 22% for the year ended December 31, 2005, compared to 33% in 2004.

GENERAL AND ADMINISTRATIVE

           General and administrative (G&A) expenses include salaries and benefits for corporate personnel and other general and administrative expenses such as facilities, travel and professional consulting costs. Our corporate staff includes executive officers and business development, financial planning and control, legal, human resources and corporate administration staff.

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           G&A expenses increased to $3.4 million for the year ended December 31, 2005, compared to $3.1 million in 2004. The average number of G&A personnel was 13 in 2005 compared to 14 in 2004 and we ended 2005 with 13 general and administrative staff, unchanged from December 31, 2004.  G&A expense, as a percentage of revenue, was 18% for the year ended December 31, 2005, compared to 20% in 2004.  We may need to add additional staff in this area in the coming year to address the increased level of regulatory compliance in today’s environment.

DEPRECIATION

           Depreciation expense was $597,000 in the year ended December 31, 2005, compared to $595,000 in 2004. In 2004 and 2005, we began to reinvest in fixed assets and anticipate that we will make further purchases of fixed assets in 2006.

STOCK-BASED COMPENSATION

           Effective January 1, 2003, we prospectively adopted the fair value accounting method for stock-based awards, as prescribed by SFAS 123, Accounting for Stock-based Compensation.  Prior to January 1, 2003, we elected not to apply fair value accounting to stock-based awards to employees, other than for direct awards of stock and awards settleable in cash, which required fair value accounting.  Prior to January 1, 2003, for awards not elected to be accounted for under the fair value method, we accounted for stock-based compensation in accordance with Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB 25”).  APB 25 is based upon an intrinsic value method of accounting for stock-based compensation.  Under this method, compensation cost is measured as the excess, if any, of the quoted market price of the stock issuance at the measurement date over the amount to be paid by the employee.

           We adopted fair value accounting for stock-based awards using the prospective application transitional alternative available in SFAS 148, Accounting for Stock-based Compensation - Transition and Disclosure.  Accordingly, the fair value method is applied to all awards granted, modified or settled on or after January 1, 2003.  Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period, that is the award’s vesting period.  When awards are exercised, share capital is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when compensation costs were charged against income or acquisition consideration.

           Stock-based awards that are settled in cash or that may be settled in cash at the option of employees are recorded as liabilities.  The measurement of the liability and compensation cost for these awards is based on the intrinsic value of the award, and is recorded into operating income over the service period, that is the vesting period of the award.  Changes in our payment obligation subsequent to vesting of the award and prior to the settlement date are recorded as compensation cost over the service period in operating income. Stock-based awards that are settled in cash or equity at our option are recorded at fair value on the date of grant and recorded as additional paid-in capital.  The fair value measurement of the compensation cost for these awards is based on the Black-Scholes option pricing model, and is recorded in operating income over the service period, that is the vesting period of the award.  When awards are exercised, share capital is credited with the related portion previously credited to additional paid-in capital.

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           Stock-based compensation increased to approximately $1.0 million for the year ended December 31, 2005, compared to $152,000 for the year ended December 31, 2004. Stock compensation expenses in both periods related to the expensing of the fair value of options granted since January 1, 2003.

           At our April 28, 2005 annual and special meeting of shareholders (the “Meeting”), our stockholders approved our 2005 Stock Incentive Plan (the “2005 Plan”) adopted by our Board of Directors. A total of 775,000 common shares are initially reserved for issuance under the 2005 Plan. Our stockholders also approved the December 2004 grant of 427,000 options to certain of our executives, officers and directors. Subject to certain conditions, the options vest over four years from the December 2004 grant date. The total fair value at April 28, 2005 was calculated to be $2.8 million using the Black-Scholes option pricing model. The fair value related to those options that remain outstanding will be expensed as stock-based compensation over the remaining vesting period. Approximately $687,000 of the $1.0 million in stock-based compensation expense in 2005 related to this grant.

RESTRUCTURING COSTS

           We recorded restructuring charges of nil in 2005 compared to a net restructuring charge of $1.0 million in the year ended December 31, 2004.

           Included in our “Accrued Liabilities” as at December 31, 2005 is approximately $93,000 in remaining obligations arising from a restructuring activity undertaken in 2002. Specifically, it relates to the remaining costs associated with an office in Europe that we have vacated. The space was sublet but we are obligated to refurbish the space at the end of the lease. We expect to pay out the remaining balance by the end of the first quarter of 2006.

           We continue to evaluate costs on an ongoing basis to determine if costs of a particular product or function are warranted given the anticipated revenue from or contribution to the business of that product or function.

INTEREST EXPENSE

           We had a net interest expense of $709,000 in the year ended December 31, 2005, compared to a net interest expense of $396,000 in 2004. We issued $8.0 million in convertible notes in the second quarter of 2004; the interest expense associated with this debt was $989,000 in 2005 compared to $524,000 in 2004. Included in the $989,000 was $850,000 payable to Austin Ventures, amortization of deferred charges of $117,000 and amortization of the beneficial conversion feature of $22,000. The increase resulted mainly from the fact that we had a full year of interest in 2005 compared to a partial year in 2004. Interest derived from cash and cash equivalent balances and short-term investments, representing primarily the proceeds from the convertible debt financing completed in the second quarter of 2004, was $280,000 in 2005 compared to $128,000 in 2004. The increase resulted from having a higher average cash and short-term investment balance in 2005 and higher interest rates in 2005.

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           Net interest expense is expected to be approximately $900,000 in 2006, consisting of $1.0 million in interest charges related to the convertible notes payable to related parties offset by interest income of approximately $130,000.

LOSS ON SETTLEMENT OF LIABILITY

           In the year ended December 31, 2005, we issued 33,549 common shares with a market value of $268,000 in settlement of interest owing of $103,000 and recorded a loss on settlement of liability of $165,000. The payment was related to the extinguishment of the liability related to interest due on the convertible notes payable to related parties. We have the option of paying the interest portion due quarterly on the Notes payable in cash or shares at a conversion price of $3.07 (see note 8 to the consolidated financial statements for further details). In the event we settle future interest obligations in shares, we will record additional charges, the amount of which will depend on the price of our shares at the time of settlement.

NET LOSS

           Our net loss decreased to $6.1 million for year ended December 31, 2005 compared to $8.0 million in 2004. Our net loss has decreased due to a number of factors. Our revenue increased by $3.2 million and we maintained tight control over our operating costs. The 2004 loss included the $1.0 million restructuring charge described above. Stock-based compensation charges increased significantly in 2005 to $1.0 million from $152,000 in 2004.

DEVELOPMENTS IN 2004

ADOPTION OF U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR REPORTING PURPOSES

           In 2003 and prior years, our consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles and we have included a reconciliation to U.S. generally accepted accounting principles. Beginning in 2004, our consolidated financial statements have been prepared using U.S. generally accepted accounting principles. We have determined that this is appropriate as the majority of our shareholders reside in the United States. Comparative financial statements have been restated to reflect this change in basis of presentation and a reconciliation setting out the differences between U.S. and Canadian generally accepted accounting principles as applied to our consolidated financial statements is provided in note 20 to our annual audited financial statements included elsewhere in this report.

CONVERTIBLE DEBT ISSUANCE TO RELATED PARTY

           In the second quarter of 2004, we arranged a private placement of secured convertible promissory notes with Austin Ventures, a related party, for a total principal amount of $8,000,000. Austin Ventures is our largest beneficial shareholder.

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           The first tranche of the financing involved the issuance of $3,044,000 of convertible notes and was completed on May 14, 2004. In accordance with the policies of The Toronto Stock Exchange and the NASDAQ National Market, shareholder approval was required to complete the second tranche of the financing. We obtained the approval on June 29, 2004 and completed the second tranche of the financing by issuing $4,956,000 of convertible notes.

           The notes have a three (3) year term and carry an interest rate of 2.5% per quarter. The notes are secured by substantially all of our assets.  All outstanding principal and interest is convertible into our common shares at a conversion price of $3.07 per share. If we issue any common shares or securities convertible into common shares at a price that is less than the conversion price of the notes then in effect, then the conversion price shall be subject to a weighted average anti-dilution adjustment. The conversion price will not be lowered by more than 15% of the initial conversion price of $3.07.

           The principal and interest payable at maturity can be converted into our common shares at the option of Austin Ventures. All interest accrued in the second and third quarters of 2004 plus 50% of the interest charges thereafter are payable at maturity. The periodic interest payments can be paid in common shares at our option at the conversion price then in effect on the interest payment date so long as the market price of the shares on that date is greater than the conversion price. We also agreed to include two nominees from Austin Ventures in any slate of directors proposed for shareholder approval.

ASSET PURCHASE

           In the second quarter of 2004, we completed an agreement with Nokia (NYSE: NOK) to acquire the Nokia Multimedia Application Gateway (AGW) product. AGW is a software product that provides subscriber functionality to a mobile network operator’s multimedia messaging services. AGW has been decoupled from the mobile network operator’s multimedia message delivery infrastructure, usually provided by a Multimedia Messaging Service Center (MMSC), so that new multimedia functionality can be added into AGW, allowing mobile network operators to rapidly deploy new multimedia services, without the need to update their messaging infrastructure.

           The current subscriber functionality provided by AGW is Legacy Device support, Email Smart Push and Multimedia Album. 

• Legacy Device Support:  As mobile network operators offer multimedia services, such as picture messaging (taking a picture using a camera phone, and sending it), the subscribers to whom they can offer these services is limited to those subscribers with multimedia capable terminals. With Legacy Device support, subscribers who do not have multimedia capable terminals can still participate in multimedia services.  These subscribers receive a text message with a link to a website where they can view the multimedia messages sent to them.  This expands the addressable subscriber base for multimedia services.

• Email Smart Push (ESP): ESP allows multimedia subscribers to send multimedia messages to email addresses (versus phone numbers).  This expands the addressable subscriber base for multimedia services.

• Multimedia Album: The Multimedia Album is a web-based service that allows subscribers to create, edit, store, send and share multimedia messages.  Additionally, subscribers can upload multimedia messages from their terminals into their albums, and upload media from their PCs into their album.

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           In the transaction, we purchased approximately $500,000 of development hardware that was deployed in the Toronto development center.  We also signed an OEM agreement under which Nokia will continue to offer the product to its existing and future customers.

RESTRUCTURING AND OTHER CHARGES

           During 2004, we determined it was appropriate to implement additional cost reductions. These efforts were implemented in order to reduce our total cost of revenue, development, sales and marketing and general and administrative costs from approximately $5.8 million in the first quarter of 2004 to approximately $5.0 million in the fourth quarter of 2004, excluding any hardware costs that may be part of a sale to a customer. As part of these restructuring efforts, we reduced our worldwide workforce by 23 people (2 in professional services, 3 in sales and marketing, 13 in research and development, and 5 in general and administration).  This headcount reduction was a result of consolidating development and G&A personnel by closing our offices in Germany and Finland, and reducing our marketing and sales employees from whom we did not expect to generate significant revenue. These activities were substantially completed by June 2004. At December 31, 2004, we had no significant remaining obligations due to our restructurings. In the first quarter of 2004, we initially announced that we would reduce our headcount by approximately 40 people.  With the acquisition of the AGW product in the second quarter, the additional terminations planned in the first quarter were not carried out, as these development staff were redeployed to develop and support the AGW product.

           As a result of these transactions, we recorded $1.2 million in restructuring charges during 2004 of which $674,000 related to severance and $500,000 related to lease exit costs. This amount was offset by a reduction of $181,000 in our 2002 restructuring reserve, as hosting exit costs were lower than we had projected. The $1.2 million amount is the net of the $2.1 million restructuring charge in the first quarter and the $900,000 reversal in the second quarter as described above, and an additional $26,000 reversal in the fourth quarter of 2004.

           Included in our “Accrued Liabilities” as at December 31, 2004 is approximately $93,000 in restructuring reserve related to a restructuring activity undertaken in 2002, specifically to costs associated with an office in Europe that we have vacated. Although the space is sublet, we are obligated to refurbish the space at the end of the lease. We expect to pay out the remaining balance by the end of the first quarter of 2006.

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RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

REVENUE

PRODUCT REVENUE

           In the year ended December 31, 2004, product revenue increased to $8.8 million from $7.0 million in 2003. Revenue from our X-treme Mobility Suite of products increased to $8.5 million in 2004 from $5.8 million in 2003.  Our principal revenue producing deployments for XMS were Hewlett-Packard (as a reseller to Sprint Nextel), Nokia and a European MNO.  Hewlett-Packard (as a reseller to Sprint Nextel) contributed $151,000 of the increase in our XMS product revenue through strong continued customer adoption of mobile data services on Sprint Nextel’s Vision network.  Our OEM relationship with Nokia contributed $2.0 million of the increase and a European XMG customer accounted for $863,000 of the increase.  The increases were partially offset by decreasing product revenue at other deployments, most notably at Radiolinja Origo, where product revenue declined by $329,000 in 2004 compared to 2003, as the 2003 amount included a one-time license fee. In 2004, the XMG product accounted for approximately 74% of our revenue from XMS and the AGW product, the new product purchased from Nokia in 2004, accounted for approximately 24% of the XMS revenue.  In 2003, our XMG product accounted for approximately 93% of the XMS revenue.  While we provide our customers with fixed or variable pricing alternatives, in 2004, as in 2003, essentially all of our key revenue producing contracts for the XMS suite were on a variable pricing model. 

           During 2004 and 2003, product revenue from the financial services industry was $328,000 and $1.2 million, respectively, as some older contracts ended and were not renewed by our financial services customers.

SERVICE REVENUE

           Service revenue increased to $6.2 million for the year ended December 31, 2004 from $5.9 million in 2003. 

           In 2004, service revenue from XMS increased to $5.2 million from $2.7 million in 2003.  Implementation and customer service fee revenue was $1.7 million in 2004 compared to $1.0 million in 2003.  Approximately 50% of the increase was a result of the delivery of hardware to a customer, and the remaining increase was a result of increased implementation revenue related to our XMG revenue.  Managed alerts services revenue was $455,000 in 2004 compared to nil in 2003, primarily due to one customer adopting this platform as a key part of its customer retention and loyalty program.  Maintenance revenue, mainly from Hewlett-Packard (as a reseller to Sprint Nextel) and Nokia totaled $3.0 million, up $1.3 million from $1.7 in the previous year.  Maintenance from Hewlett-Packard (as a reseller to Sprint Nextel) increased due to a significantly increased subscriber base using Sprint Nextel services, while the AGW product maintenance revenue was $378,000 in 2004.

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           Service revenue from the financial services industry was $1.1 million in 2004, down from $3.2 million in 2003, as our older contracts were not renewed by our financial services customers, resulting in less service work for these customers.

OPERATING EXPENSES

COST OF PRODUCT REVENUE

           Amortization of intangible assets includes intellectual property that we have acquired and either license as a stand-alone product or embed in our software products. The acquired software products are amortized on a straight-line basis over a period of two to five years. All acquired software products had been fully amortized or written down to nil by the end of September 2003. Therefore, the amount amortized in 2004 was nil, compared to $3.5 million in 2003. 

           Some of our products include third party embedded software.  In 2004, we recorded $26,000 of license fees to third party vendors for the use of their software that has been embedded in our software.

COST OF SERVICES REVENUE

           Cost of services revenue was $6.6 million for the year ended December 31, 2004, compared to $6.0 million in 2003, an increase of 10%.  Included in the 2004 amount is approximately $400,000 in hardware costs related to a customer deployment. Our average professional services headcount was 20 in 2004 and 2003.  We ended 2004 and 2003 with 22 and 17 professional services personnel, respectively.  Cost of services revenue, as a percentage of total revenue, was 44% for the year ended December 31, 2004, compared to 47% in 2003.

RESEARCH AND DEVELOPMENT

           Research and development (R&D) expenses decreased to $6.3 million for the year ended December 31, 2004, compared to $9.4 million in 2003, a reduction of 34%. The decrease is a result of our restructuring initiatives, as a result of which we reduced our average R&D headcount to 52 in 2004 from 65 in 2003, a reduction of 20%.  We ended 2004 and 2003 with 57 and 48 research and development personnel, respectively.  In addition, through our restructuring initiatives, we reduced the average cost per development employee by approximately 17%, by locating more of our development team in a more cost-effective location.  R&D expense, as a percentage of revenue, was 42% for the year ended December 31, 2004, compared to 73% in 2003.

SALES AND MARKETING

           Sales and marketing (S&M) expenses were $5.0 million for the year ended December 31, 2004, compared to $7.0 million in 2003, a reduction of 28%.  The decrease is a result of the reduction in the average number of sales and marketing personnel to 19 in 2004 from 27 in 2003 – a reduction of 29% and a $350,000, or 50% reduction on marketing expenditures primarily related to public relations and industry events.  We ended 2004 and 2003 with 17 and 21 sales and marketing personnel, respectively.  S&M expense, as a percentage of revenue, was 33% for the year ended December 31, 2004, compared to 54% in 2003.

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GENERAL AND ADMINISTRATIVE

           G&A expenses decreased to $3.1 million for the year ended December 31, 2004, compared to $4.1 million in 2003 – a reduction of 25%. The decrease in G&A expenses reflects our restructuring initiatives through which we reduced our average yearly headcount in G&A to 15 in 2004 from 20 in 2003, a reduction of 25%.  We ended 2004 and 2003 with 13 and 18 general and administrative staff, respectively.  The reduction in personnel together with a reduction in our insurance costs (primarily our directors and officers insurance) and legal fees resulted in savings of approximately $200,000, $230,000 and $250,000, respectively. G&A expense, as a percentage of revenue, was 20% for the year ended December 31, 2004, compared to 32% in 2003. 

DEPRECIATION

           Depreciation expense was $595,000 in the year ended December 31, 2004, compared to $908,000 in 2003. Depreciation decreased as we continue to utilize fixed assets that were fully depreciated.

STOCK-BASED COMPENSATION

           Stock-based compensation decreased to $152,000 for the year ended December 31, 2004, all related to the fair value of options granted in 2003 and 2004, compared to $1.7 million for the year ended December 31, 2003. The 2003 expense included $1.6 million related to the amortization of deferred stock-based compensation recorded as a result of assuming, through acquisitions, stock option plans that included unvested options and common shares.

RESTRUCTURING COSTS

           During 2004, we determined it was appropriate to implement additional cost reductions. These efforts were implemented in order to reduce our total cost of revenue, development, sales and marketing and general and administration costs from approximately $5.8 million in the first quarter of 2004 to just over $5.0 million, excluding hardware costs included in cost of revenue, in the fourth quarter of 2004.  As part of these restructuring efforts, we reduced our worldwide workforce by 23 people (2 in professional services, 3 in sales and marketing, 13 in Research and Development, and 5 in general and administration).  This headcount reduction was a result of consolidating development and G&A personnel by closing our offices in Germany and Finland, and reducing our marketing and sales employees from whom we did not expect to generate significant revenue. These activities were substantially completed by June 2004. Additional terminations planned in the first quarter were not carried out due to the Nokia asset purchase in the second quarter.

           As a result of these transactions, we recorded $1.2 million in restructuring charges of which approximately $700,000 related to severance and $500,000 related to lease exit costs. The $1.2 million number is the net of the $2.1 million restructuring charge in the first quarter and the $900,000 reversal in the second quarter.

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           Included in our “Accrued Liabilities” as at December 31, 2004 is approximately $93,000 in remaining obligations arising from a restructuring activity undertaken in 2002. Specifically, it relates to the remaining costs associated with an office in Europe that we have vacated. Although the space is sublet, we are obligated to refurbish the space at the end of the lease. We will pay out the remaining balance by the end of the first quarter of 2006.

WRITE-DOWN OF GOODWILL, INTANGIBLES AND OTHER ASSETS

           In 2003, we assessed the carrying value of our goodwill by comparing the carrying value of our net assets (approximately $23.8 million, including the amount then assigned to goodwill) to the quoted market price (which we believe is an indicator of the fair market value) of our stock (approximately  $16.9 million calculated using the average closing price of our shares on The Nasdaq Stock Market on the 22 business days in December 2003).  Based on this analysis, we concluded that an impairment in the carrying value of goodwill had occurred.  After allocating our fair value to the fair value of our tangible and intangible assets (which we estimated to be higher than the book value) the resulting implied value of goodwill was determined to be nil.  Accordingly, we recorded a write-down of $9.1 million.

INTEREST EXPENSE

           We had a net interest expense of $396,000 in the year ended December 31, 2004, compared to net interest income of $254,000 in 2003. We issued $8 million in convertible notes in the second quarter of 2004; the interest expense associated with this debt was $524,000 in 2004. Interest derived from cash and cash equivalent balances and short-term investments, representing primarily the unused portion of the proceeds from our issuances of common shares as well as from the convertible debt financing completed in the second quarter of 2004 was $128,000 in 2004. In 2003, interest income was net of interest expense related to a note payable. The note was fully repaid by the end of the first quarter of 2003.

NET LOSS

           Our net loss decreased to $8.0 million for year ended December 31, 2004 compared to $28.3 million in 2003. Our net loss has decreased due to a number of factors. Our revenue increased by $2.2 million and we had lower operating costs as a result of our restructuring initiatives. We wrote down the remaining goodwill of $9.1 million in 2003 and amortized the remaining intangible assets of $3.5 million. Stock-based compensation charges decreased significantly in 2004 to $152,000 from $1.7 million in 2003 and depreciation expenses were lower by $313,000 in 2004 compared to 2003. 

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LIQUIDITY AND CAPITAL RESOURCES

           The following table presents selected financial information as of December 31, 2005, 2004 and 2003 (in thousands):

As at December 31	2005		2004		2003
Cash and cash equivalents	$	5,272	$	5,417	$	13,436
Short-term investments		4,009		8,005		1,748
Restricted cash		219		210		198
		9,500		13,632		15,382
Working capital		616		424		(1,278	)
Current assets less current liabilities	$	10,116	$	14,056	$	14,104

           At December 31, 2005, our cash and short-term investments were $9.5 million compared to $13.6 million in 2004, a reduction of $4.1 million.  The reduction in our cash balance included our loss, excluding non-cash items of $4.0 million, a source of $141,000 related to changes to balance sheet items, a source of $61,000 related to the exercise of stock options and a use of $345,000 related to additions to capital assets.

           Our accounts receivables balance as at December 31, 2005 was $2.5 million, with over 93% of the balance being either current or less than 30 days past due.  We did not incur any bad debt expense in 2005 or in 2004 and we believe that the current reserve of $19,000 is sufficient and that accounts receivable will be collected. Our accrued liabilities balance of $1.6 million includes approximately $93,000 of restructuring reserves that we anticipate will be paid in 2006. Other accrued liabilities and accounts payable are anticipated to remain at approximately the same levels.

           The following table presents selected financial information for the years ended December 31, 2005, 2004 and 2003 (in thousands):

For the year ended December 31	2005			2004			2003
Cash from (used in) operating activities	$	(4,000	)	$	(8,415	)	$	(22,854	)
Cash from  (used in) financing activities		61			7,670			(600	)
Cash from (used in) investing activities		3,642			(7,274	)		17,761
Effect of exchange rate changes on cash		152			—			—
Net decrease in cash and cash equivalents	$	(145	)	$	(8,019	)	$	(5,693	)

           Net cash used in operating activities decreased to $4.0 million for the year ended December 31, 2005, compared to $8.4 million in 2004.  Our revenue has increased year over year and we have maintained tight control over our expense structure. Net cash used in operating activities in 2005 consisted of our net loss of $6.1 million less non-cash expenses of $1.9 million (depreciation and amortization of $597,000, amortization of deferred charges of $119,000, stock-based compensation of $1.0 million and loss on settlement of liability of $165,000), offset by a cash source of $141,000 related to changes to balance sheet items.

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           Net cash used in operating activities in 2004 consisted of our net loss of $8.0 million, cash outflows of $1.9 million related to severance, historic acquisition and hosting exit payments, offset by a cash source of $271,000 related to other working capital changes, a cash source of $435,000 related to long-term liabilities and long-term interest payable increases and non-cash items, primarily depreciation and amortization charges of $661,000, and stock-based compensation expense of $152,000.

           Financing activities provided a cash source of $61,000 for the year ended December 31, 2005, compared to a cash source of $7.7 million in 2004. The 2005 amount was related to the issuance of common shares upon the exercise of options, while the 2004 amount was composed of $8.0 million from the issuance of convertible notes payable to related parties in the second quarter of 2004, offset by a cash use of $351,000 related to issuance costs, plus $22,000 related to the issuance of common shares upon the exercise of options.

           Cash used in investing activities, before the sale (purchase) of short-term investments, business acquisitions and restricted cash was $345,000 in 2005, compared to $1.0 million in 2004. Both the 2005 and 2004 amounts related to the purchase of fixed assets.

           We expect our quarterly cash expenditures in 2006 to increase somewhat from the $5.2 million achieved in the fourth quarter of 2005, as we add additional personnel to our development teams, but we will maintain our focus on cost management. We estimate our projected cash expenditures for 2006 to be approximately $24.0 to $26.0 million, including capital expenditures. Most of our revenue contracts are based on a per user or capacity basis.  We anticipate that our cash on hand, together with our cash from operations will be sufficient to cover our cash requirements for at least the next twelve months. However, if our customers decide not to use our software or not to increase their use of our software, our license and maintenance and support revenue will be significantly negatively impacted.

           We may seek to raise additional capital in the future depending upon market conditions and conditions in our business. We may require additional financing if we expand our operations at a faster rate than currently anticipated, if we decide to increase our R&D investments, if our costs unexpectedly increase, if our revenues decrease, if we lose one or more significant customers, or if we seek to effect one or more significant acquisitions.

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CONTRACTUAL OBLIGATIONS

          Contractual obligations at December 31, 2005 are as follows:

	Payment due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 year		More than 5 years
Convertible notes payable to related parties	$	8,000	$	—	$	8,000	$	—	$	—
Long-term interest payable		768		—		768		—		—
Operating leases		819		344		243		232		—
	$	9,587	$	344	$	9,011	$	232	$	—

           The convertible notes payable to related parties are payable to Austin Ventures. They must be repaid at the maturity date in the second quarter of 2007, but if an event of default occurs, the convertible notes payable to related parties may become due prior to the maturity date. Additionally, Austin Ventures has the option to convert the debt to shares at the applicable conversion price at any time prior to the maturity date.

           If Austin Ventures does not convert the debt to shares prior to maturity, we will be required to pay the principal of $8.0 million plus interest due at maturity of approximately $1.4 million in the second quarter of 2007. These amounts are payable in cash or shares at a conversion price of $3.07 at the option of Austin Ventures. If Austin Ventures demands cash we may not have sufficient funds to meet that demand and we may have to raise additional capital. We cannot predict the terms under which capital may be available to us at that time. See note 8 to the consolidated financial statements for the year ending December 31, 2005 for further details.

           Net interest expense is expected to be approximately $900,000 in 2006; $1.0 million in interest charges related to the convertible notes payable to related parties offset by interest income of approximately $130,000. The $1.0 million in interest charges related to the convertible notes payable to related parties includes approximately $893,000 of interest payable to Austin Ventures, approximately $118,000 related to the amortization of the deferred charges and approximately $22,000 related to the amortization of the beneficial conversion feature. We expect to make interest payments to Austin Ventures, in cash or shares at our option, of approximately $447,000 in 2006 and approximately $287,000 in 2007. Additionally, we will incur additional interest charges that are to be paid at the maturity date and are convertible to common shares at the option of Austin Ventures. These amounts will be payable no later than the second quarter of 2007. If Austin Ventures does not exercise its conversion right before maturity, then the interest payable in the second quarter of 2007 related to the portion of interest convertible at the option of Austin Ventures will be approximately $1.4 million dollars.

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DIFFERENCES IN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRESENTED UNDER CANADIAN GAAP

           Under Canadian securities requirements, we are required to provide supplemental information to highlight significant differences that would have resulted in the information provided in this section had we prepared it using our Canadian GAAP financial information. There were no differences between the Company’s financial statements as prepared under U.S. and Canadian GAAP for the year ended December 31, 2003.

           We have identified and disclosed the significant differences between Canadian and U.S. GAAP as applied to our consolidated financial statements for the years ended December 31, 2005 and 2004 in note 20 to the consolidated financial statements for the year ended December 31, 2005.  The only GAAP differences impacting the components of operating loss are the application under Canadian GAAP of the requirement to account for the convertible notes as a “compound instrument” and the requirement to separate the instrument into a liability and equity component. Under Canadian GAAP, we calculated the liability component of the secured convertible notes as the present value of the future obligation using a discount rate of 15%.  The liability component amounted to approximately $7.1 million. The residual amount of $933,000 represents the estimated equity component for the conversion option and is recorded under Canadian GAAP as the “equity portion of the secured convertible notes.”  In addition, under Canadian GAAP the issue costs of $352,000 are allocated between equity and liability components on a proportionate basis while under U.S. GAAP the entire amount is treated as deferred charge. Accordingly, $41,000 of the deferred charge has been shown as an offset to equity for Canadian GAAP purposes, therefore the net “equity portion of convertible notes payable to related parties” is $892,000. The difference between the amounts allocated to the liability and the principal amount of the notes of $8.0 million is being amortized as non-cash imputed interest expense over the period to maturity and the liability is being accreted up to its maturity value.  The additional interest expense for the year ended December 31, 2005 amounted to $311,000 (2004 – $149,000). 

           Additionally, under U.S. GAAP, the costs related to the issuance of the secured convertible notes payable are recorded as a long-term asset and are amortized over the term of the notes.  For Canadian GAAP purposes, these costs are allocated on a pro rata basis between the debt and equity components of the compound instruments. The amount allocated to the debt component has been recorded as a long-term asset and amortized over the term of the notes, and the amount allocated to the equity component has been recorded as a reduction of shareholders’ equity. As a result, under Canadian GAAP, the amortization of the deferred costs is lower by $14,000 for the year ended December 31, 2005 (2004 – $8,000).

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

           In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment,” or SFAS 123R, which requires companies to expense the fair value of employee stock options and other forms of share based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account for share based compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R, we are required to determine the appropriate fair value model to be used for valuing share based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. We currently use the Black Scholes option pricing model to value options. The use of a different model to value options may result in a different fair value than the use of the Black Scholes option pricing model. We are required to adopt SFAS 123R in the first quarter of fiscal 2006. We are evaluating the requirements of SFAS 123R to assess what impact its adoption will have on our financial position and results of operations.

           In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,” which addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of assets exchanged.  The standard is effective for 2006.  We do not expect the adoption of this standard to have a material impact on our results.

           In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” replacing APB Opinion No. 20 and SFAS No. 3, which applies to all voluntary changes in accounting principles and changes required by an accounting pronouncement where no specific transition provisions are included.  SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principles.  This standard also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error.  The standard is effective for 2006.  Early adoption is permitted.  We do not anticipate the adoption of this standard will have a material impact on our results.

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QUARTERLY RESULTS OF OPERATIONS

           The following tables set forth certain unaudited consolidated statements of operations data for each of the eight most recent quarters that, in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements contained elsewhere in this annual report and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information presented. These operating results are not necessarily indicative of results for any future period. You should not rely on them to predict our future performance.

	Quarter Ended
2005	Mar. 31			Jun. 30			Sept. 30			Dec. 31			Total Year
	(In thousands of U.S. dollars, except number of shares and per share amounts)
Revenue:
Product	$	2,985		$	1,704		$	1,295		$	1,461		$	7,445
Services		2,820			2,912			3,166			1,922			10,820
Total revenue		5,805			4,616			4,461			3,383			18,265
Operating expenses:
Cost of product revenue
Other		5			10			10			3			28
Cost of service revenue		2,026			1,907			1,804			1,693			7,430
Research and development		1,687			1,693			1,768			1,834			6,982
Sales and marketing		1,168			1,023			930			915			4,036
General and administrative		804			853			748			957			3,362
Depreciation		157			165			150			125			597
Stock-based compensation:
Cost of revenue		7			15			19			12			53
Research and development		19			35			43			25			122
Sales and marketing		16			43			53			24			136
General and administrative		31			186			233			270			720
Total operating expenses		5,920			5,930			5,758			5,858			23,466
Loss from operations		(115	)		(1,314	)		(1,297	)		(2,475	)		(5,201	)
Interest income (expense), net		(186	)		(180	)		(172	)		(171	)		(709	)
Loss on settlement of liability		(165	)		—			—			—			(165	)
Loss for the period	$	(466	)	$	(1,494	)	$	(1,469	)	$	(2,646	)	$	(6,075	)
Basic and diluted loss per share	$	(0.08	)	$	(0.25	)	$	(0.24	)	$	(0.44	)	$	(1.01	)
Weighted-average number of shares used in computing basic and diluted loss per share (in thousands)		6,027			6,033			6,036			6,039			6,034

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	Quarter Ended
2004	Mar. 31			Jun. 30			Sept. 30			Dec. 31			Total Year
	(In thousands of U.S. dollars, except number of shares and per share amounts)
Revenue:
Product	$	1,761		$	1,930		$	2,013		$	3,140		$	8,844
Services		1,240			1,119			1,489			2,380			6,228
Total revenue		3,001			3,049			3,502			5,520			15,072
Operating expenses:
Cost of product revenue
Other		—			—			—			26			26
Cost of service revenue		1,528			1,537			1,505			2,044			6,614
Research and development		2,089			1,433			1,410			1,339			6,271
Sales and marketing		1,379			1,197			1,093			1,316			4,985
General and administrative		833			755			796			690			3,074
Depreciation		185			120			124			166			595
Stock-based compensation:
Cost of revenue		2			3			4			6			15
Research and development		4			9			10			17			40
Sales and marketing		4			7			9			14			34
General and administrative		7			14			16			26			63
Restructuring costs		2,100			(900	)		(181	)		(26	)		993
Total operating expenses		8,131			4,175			4,786			5,618			22,710
Loss from operations		(5,130	)		(1,126	)		(1,284	)		(98	)		(7,638	)
Interest income (expense), net		16			(19	)		(183	)		(210	)		(396	)
Loss for the period	$	(5,114	)	$	(1,145	)	$	(1,467	)	$	(308	)	$	(8,034	)
Basic and diluted loss per share	$	(0.85	)	$	(0.19	)	$	(0.25	)	$	(0.05	)	$	(1.34	)
Weighted-average number of shares used in computing basic and diluted loss per share (in thousands)		5,983			5,983			5,983			5,985			5,984

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

IMPACT OF INTEREST RATE EXPOSURE

           As of December 31, 2005, we had approximately $9.5 million in cash, cash equivalents, short-term investments and restricted cash, of which $4.2 million consisted of short-term investments and restricted cash. A significant portion of the cash earns interest at variable rates. In addition, although our short-term investments are fixed-rate instruments, the average term is short. Accordingly, our interest income is effectively sensitive to changes in the level of prevailing interest rates. Our convertible notes payable to related parties bear interest at a fixed rate. Accordingly, we currently do not have any interest rate exposure on our outstanding indebtedness.

IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE

           Our functional currency is the U.S. dollar, as we recognize the majority of our revenues in dollars.  In the foreseeable future, the majority of our non-US dollar denominated expenses will be incurred in Canadian dollars, Euros, Swiss francs and United Kingdom pounds sterling. Changes in the value of these currencies relative to the U.S. dollar may result in currency gains and losses, which could affect our operating results.  We do not currently hedge against these currency fluctuations.  In the year ended December 31, 2005, we incurred realized and unrealized foreign currency losses relating to the translation of our non-U.S. dollar denominated monetary assets and liabilities of approximately $260,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

           The consolidated financial statements and supplementary data of the Company and the report of independent auditors thereon set forth beginning on page F-1 are incorporated herein by reference.

           Quarterly financial information set forth herein under Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

           Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

           Prior to the filing date of this Report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness and operation of the Company’s disclosure controls and procedures. The Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the

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Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

           There have not been any changes in the Company’s internal controls over financial reporting that occurred during the fourth quarter of 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. 

ITEM 9B. OTHER INFORMATION.

          Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          The following sets forth information about our executive officers and directors:

          John J. Sims.  Mr. Sims, 50, has served as our Chief Executive Officer and director since January 2001, when we merged with TANTAU Software, Inc.  He also served as our Chairman from 2002 until March 2004.  Mr. Sims, TANTAU’s co-founder, served as its President and Chief Executive Officer since its inception in February 1999. Prior to TANTAU’s founding, Mr. Sims served as Chief Operating Officer of SCC Communications Corp. (a U.S. telecommunications support service company).  From November 1985 until November 1995, Mr. Sims served in several management positions at Tandem Computers (a developer of computer systems), including Vice President and General Manager of Tandem’s worldwide telecommunications business.  Mr. Sims also served in various financial and general management positions with the Burroughs Corporation (a manufacturer of computer and related equipment) from June 1977 until November 1985.  Mr. Sims holds an accounting degree from the University of Glasgow, Scotland.

          Michael Luna.  Mr. Luna, 45, is currently our Chief Technology Officer. He joined us in October 2004.  Between January 1999 and October 2004, Mr. Luna held a number of senior positions at Openwave Systems Inc., a provider of software and services for mobile data communications, most recently as its Vice President Consulting Engineering in the Market Development Group and CTO office.  Prior to that time, Mr. Luna served as a senior member of the technical staff at AT&T Wireless Services and SBC Technology Resources, Inc.

          Stephen Morrison.   Mr. Morrison, 43, was appointed our Chief Financial Officer and Senior Vice President of Corporate Services in November 2005.   Prior to his appointment to the CFO role, Mr. Morrison spent three years as our Corporate Controller. He joined us in March 2001 as Director of Finance for Asia Pacific.    Prior to March 2001, Mr. Morrison held positions in finance and strategic alliances with Emergis Inc. (formerly BCE Emergis Inc.).   Mr. Morrison is a Certified Management Accountant and holds a Master of Business Administration from the Richard Ivey School of Business of the University of Western Ontario and a Bachelor of Arts in administrative and commercial studies from the University of Western Ontario.

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          Alan Prenoveau. Mr. Prenoveau, 55, is currently our Senior Vice President, Consulting & Delivery Services. Mr. Prenoveau joined TANTAU in November 2000.  Between November 1998 and November 2000, Mr. Prenoveau was General Manager of an Internet start-up focused on providing a fully-hosted e-commerce offering.  In the thirteen years prior to that, he spent five years in various senior management positions in the consulting services division of IBM’s Lotus software products division and eight years in management positions within a variety of GE businesses.  Mr. Prenoveau holds a Masters of Business Administration from Xavier University and a Bachelor of Science with a major in Computer and Information Science from Ohio State University.

          Elda Rudd. Ms. Rudd, 37, is currently our Vice President, Marketing. She joined us in November 2002.  Prior to that time, Ms. Rudd was President & Co-founder of TCS, Inc., a low voltage communications cabling contractor and consultancy.  Between November 2000 and July 2002, Ms. Rudd was Vice-President of Marketing for Westwave Communications, a telecom soft-switch company, and between November 1993 and October 2000, she worked at Nortel Networks in various engineering and marketing management roles in its wireless internet division.  Ms. Rudd holds a Masters of Business Administration from Florida Atlantic University and a Bachelor of Science with a major in Industrial Engineering from University of Miami.

           J. Ian Giffen.  Mr. Giffen, 48, has been a Director of the Corporation since February 2003 and Chairman of the Board of Directors since March 2004. Since 1996, Mr. Giffen has been an advisor/director to software companies and technology investment funds.  From January 1992 to January 1996, Mr. Giffen was Vice President and Chief Financial Officer at Alias Research, a developer of 3D graphics software that was acquired by Silicon Graphics Inc.  Mr. Giffen is a director of  MKS Inc. (a provider of enterprise software configuration management), a director of Sierra Systems Inc. (an IT services company), a director of The Descartes Systems Group Inc. (a provider of software and network-based solutions for logistics management) and a director/advisor to a number of private companies. Mr. Giffen is a Chartered Accountant and has a Bachelor of Arts degree in business administration from the University of Strathclyde in Glasgow.

          James D. Dixon.  Mr. Dixon, 62, was President of bankofamerica.com from February 2000 until January 2002.  Mr. Dixon previously served as Group Executive of Bank of America Technology and Operations between September 1998 and February 2000.  From 1991 until the merger of NationsBank Corporation and Bank America Corporation, Mr. Dixon served as President of NationsBank Services, Inc.  Prior to that, he served as Chief Financial Officer of C&S/Sovran Corporation (a predecessor to NationsBank).  Mr. Dixon is a director of Broadvision, Inc. (a provider of personalized self-service web applications), CheckFree Corporation (a provider of financial electronic commerce products and services) and RARE Hospitality International, Inc. (a restaurant owner, franchiser and operator).

          Barry J. Reiter.  Mr. Reiter, 57, is Chairman of the Technology Group and Chairman of the Corporate Governance Group at Torys LLP (an international law firm with offices in New York and Toronto).  Mr. Reiter is also a director of Alliance Atlantis Communications Inc. (a broadcaster, creator and distributor of filmed entertainment), Movie Distribution Income Fund (an acquirer and distributor of movies), Park Avenue Investment Corporation (a capital pool company), SkyPower Wind Energy Fund LP (a developer of, and investor in, renewable energy businesses) and Avotus Corporation (a communications infrastructure management company).  Prior to joining Torys in 1982, Mr. Reiter was a law professor at the Faculty of Law, University of Toronto.

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          Joseph C. Aragona.  Mr. Aragona, 49, served on TANTAU’s Board of Directors from April 1999 until our acquisition of TANTAU in January 2001.  Mr. Aragona is a General Partner of Austin Ventures (a U.S. venture capital firm), which he joined in 1982.  Mr. Aragona has a BA in Economics from Harvard University and an MBA degree from the Harvard University School of Business Administration. 

          Benjamin L. Scott. Mr. Scott, 55, has served since May 2002 as a Venture Partner with Austin Ventures, a venture capital firm located in Austin, Texas. Between January 2000 and May 2002, Mr. Scott was a partner with Quadrant Management, an investment firm. From October 1997 to November 1999, Mr. Scott served as the Chairman and Chief Executive Officer of IXC Communications. Mr. Scott has served as a senior executive of AT&T, PrimeCo and Bell Atlantic. Mr. Scott also serves on the board of directors of several private companies as well as Active Power, Inc. (a provider of battery-free back-up power solutions).  He holds a Bachelor of Science in psychology from Virginia Polytechnic Institute and State University.   

          As part of the $8 million financing transactions in May and June 2004 between Austin Ventures and us, we agreed to increase our Board of Directors to seven directors, appoint a nominee of Austin Ventures to the Board of Directors and to include two nominees of Austin Ventures in any slate of directors submitted to shareholders for approval. Mr. Aragona and Mr. Scott were nominated to our Board in 2005 under this agreement.

Compensation Committee Interlocks and Insider Participation

           Mr. Reiter and Mr. Giffen served as members of the Governance, Nomination, Human Resources and Compensation Committee of the Board of Directors during the year ended December 31, 2005.  No member of the Governance, Nomination, Human Resources and Compensation Committee was at any time during the year ended December 31, 2005 or at any other time our officer or employee.  Please see “Item 12—Certain Relationships and Related Transactions” regarding certain relationships relating to Mr. Reiter, a member of our Governance, Nomination, Human Resources and Compensation Committee.

           During the year ended December 31, 2005, none of our executive officers served as a member of the Board of Directors, the compensation committee, or any similar committee of another entity, one of whose executive officers served on our Board of Directors, Governance, Nomination, Human Resources and Compensation Committee or Stock Option Committee.

Code of Ethics

           In 2005, we adopted a Code of Ethics that applies to all employees, directors and officers, including our Chief Executive Officer, Chief Financial Officer and principal accounting officer/controller.  All of our employees, directors and officers are required to submit an acknowledgment on a form applicable to their respective role, indicating that they have received and read a copy of the Code of Ethics and understand their obligations to comply with the provisions outlined in it.  No material violations were reported in respect of the Code of Ethics in 2005, and no waivers were sought by or granted to our directors or executive officers in 2005.  A copy of the Code of Ethics is attached to this Report as Exhibit 14.1.

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Audit Committee

           The members of our Audit Committee are J. Ian Giffen (Chair), James Dixon and Benjamin Scott.  The Board has determined that all of the members of the Audit Committee are independent (within the meaning of applicable listing and securities regulation standards) and financially literate (within the meaning of Canadian Multilateral Instrument 52-110).

           The Board has adopted the following definition of “financial literacy”:  “the ability to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement”.  All of the members of the Audit Committee are financially literate as: (i) Mr. Dixon has held many senior executive positions with Bank of America, has served as a chief financial officer and has been chair of the Audit Committee for public companies; (ii) Mr. Giffen has served as a consultant and chief financial officer in the past, is a Chartered Accountant and has fulfilled the position of Audit Committee Chair for a number of companies; and (iii) Mr. Scott has served as a chief executive officer and in senior management positions with various corporations.

           The Board has also determined that all of the members of the audit committee are Audit Committee Financial Experts (within the meaning of applicable SEC rules).

           A copy of the charter of our Audit Committee is attached to this Report as Exhibit 99.1.

ITEM 11. EXECUTIVE COMPENSATION.

          The tables and discussion below present information about our “Named Executive Officers”, consisting of our Chief Executive Officer, our four highest paid current executive officers (including our Chief Financial Officer) whose total salary and bonus exceeded $100,000 for the year ended December 31, 2005 as required by applicable Canadian rules, and any former executive officer who would have been one of the four highest paid executive officers had they continued to serve in that capacity.

Summary Compensation Table

           The following table sets forth the remuneration paid to our Named Executive Officers.  Unless otherwise indicated, all monetary figures in this Report are stated in US dollars, being our functional currency.

			Annual Compensation						Long Term Compensation Awards
Name and Principal Position	Year	Salary ($)		Bonus ($)			Other Annual Compensation ($) (1)		Securities Issuable Under Options Granted (#)		All Other Compensation ($)
John J. Sims, Chief Executive Officer	2005 2004 2003		330,000 330,000 330,000		—   —   —			—   —   —		0 159,500 23,000		—   —   91,176	(2)
Tamara Steffens, SeniorVice President, Sales (3) (4)	2005 2004 2003		180,000 90,000 n/a		—   —   n/a			169,201 37,766 n/a		0 90,000 n/a		—   —   n/a
Glenn Barrett, Chief Financial Officer and Senior Vice President, Corporate Services (5)	2005 2004 2003		210,000 210,000 210,000		—   —   —			—   —   —		0 117,000 6,000		—   —   —
Michael Luna, Chief Technology Officer (6)	2005 2004 2003		220,000 40,865 n/a		—   —   n/a			—   —   n/a		0 90,000 n/a		—   —   n/a
Alan Prenoveau, Senior Vice President, MNO Consulting & Delivery Services	2005 2004 2003		180,000 180,000 180,000		—   —   —			21,367 31,315 27,402		0 45,000 6,000		—   —   —
Elda Rudd, Vice President, Marketing	2005 2004 2003		175,000 175,000 175,000		—   20,000 19,200	(7)		5,000 —   —		0 30,000 6,000		—   —   74,820	(8)
Stephen Morrison, Chief Financial Officer and Senior Vice President, Corporate Services(9)	2005 2004 2003		143,641 140,000 140,000		4,000 —   —			—   —   —		52,600 3,500 1,600		—   —   —

Notes:
(1)	Other annual compensation includes items such as sales commissions, unless otherwise noted.
(2)	In 2003, Mr. Sims received a one-time payment of $91,176 in order to reimburse him for moving costs and expenses incurred by him in connection with his relocation to our office in Santa Barbara, California.
(3)	Ms. Steffens joined the Corporation as Senior Vice President, Sales effective July 1, 2004.
(4)	Ms. Steffens resigned from her position as Senior Vice President, Sales effective March 17, 2006.

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(5)	Mr. Barrett resigned from his position of Chief Financial Officer and Senior Vice President, Corporate Services effective November 29, 2005. His last day of employment with the Company was February 15, 2006.
(6)	Mr. Luna joined the Corporation as Chief Technology Officer effective October 25, 2004.
(7)	In 2004, Ms. Rudd received a performance bonus of $20,000 based on her achievement of established quarterly performance objectives relating to her area of responsibility.  The corresponding figure for 2003 was $19,200.
(8)	In 2003, Ms. Rudd received a one-time payment of $74,820 in order to reimburse her for moving costs and expenses incurred by her in connection with her relocation to our office in Santa Barbara, California.
(9)	Mr. Morrison was appointed to the position of Chief Financial Officer and Senior Vice President, Corporate Services, effective November 29, 2005. Prior to that, he spent three years as our Corporate Controller.

Option Grants During the Year Ended December 31, 2005

          The following table sets forth the options to purchase Common Shares granted to the Named Executive Officers under our stock option plans during the year ended December 31, 2005.

	Securities Under Options Granted #		% of Total Options Granted to Employees in Financial Year(1)			Exercise or Base Price ($/Security)		Market Value of Securities Underlying Options on the Date of Grant ($/Security)		Expiration Date		Potential Realizable Value ($) at Assumed Annual Rate of Stock Price Appreciation for Option Term(2)
Name												5%		10%
Stephen Morrison		1,600		<1	%	$	4.60	$	4.60		8/19/2015		4,624		11,728
Stephen Morrison		51,000		27.4	%	$	4.56	$	4.56		11/29/2015		146,370		370,770

Notes:
(1)	In calculating this percentage, the denominator excludes options granted to directors who are not officers.
(2)	The potential realizable value is calculated based upon the term of the option at its time of grant.  It is calculated assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option, and that the option is exercised and sold on the last day of its term for the appreciated stock price.  Stock price appreciation of 5% and 10% is assumed based upon the rules of the SEC and does not represent any prediction of future stock price performance.

Aggregated Option Exercises During the Year Ended December 31, 2005 and Year-End Option Values

           The following table sets forth, for each Named Executive Officer as at December 31, 2005, the aggregate number of securities acquired on exercise of options during 2005 and the aggregate value realized of the securities acquired on exercise.  It also shows the aggregate number of outstanding options to purchase common shares as at December 31, 2005, together with the value of such options at that date, and the aggregate number of shares purchasable under options that were vested as at December 31, 2005 for each of the Named Executive Officers. 

           Amounts reported under “Value of Unexercised in-the-Money Options at Financial Year-End” represent the difference between:  (i) the market value as at December 30, 2005, the last business day of the year, of the common shares for which vested options were owned having an exercise price less than such market value; and (ii) the exercise price of such options, multiplied by the applicable number of options.  The closing trading price of the common shares on the TSX and on Nasdaq as of December 30, 2005 was CDN $4.26 and US $3.64 per common share, respectively.

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Name	Securities Acquired on Exercise (#)	Aggregate Value Realized ($)	Unexercised Options at Year-End (#) Exercisable/ Unexercisable	Value of Unexercised in-the-Money Options at Financial Year-End ($) Exercisable/ Unexercisable
John J. Sims	—	—	111,375/131,125	11,356/18,429
Tamara Steffens (1)	—	—	22,500/67,500	11,025/33,075
Glenn Barrett (2)	—	—	57,000/96,000	CDN$615/CDN$765
Michael Luna	—	—	22,500/67,500	0/0
Alan Prenoveau	—	—	22,443/38,750	5,018/7,133
Elda Rudd	—	—	26,250/30,750	3,065/5,115
Stephen Morrison	—	—	3,997/56,316	1,112/1,690

Notes:
(1)	Ms. Steffens resigned from her position as Senior Vice President, Sales effective March 17, 2006. Her outstanding stock options will be cancelled on April 17, 2006, other than to the extent that any vested options before that date (22,500) are exercised before that date.
(2)	Mr. Barrett resigned as Chief Financial Officer and Senior Vice President, Corporate Services effective November 29, 2005 and his last day of employment was February 15, 2006. His outstanding stock options were cancelled on March 17, 2006.

Stock Option Committee

           The Stock Option Committee, consisting of Mr. Reiter, administers our capped-off stock option plans, including our Canadian Stock Option Plan and our U.S. Stock Option Plan (which plans govern stock options granted prior to our initial public offering and are collectively referred to as the “Pre-IPO Plans”), and the 1999 Tantau Stock Plan (the “Tantau Plan”, which plan governs the stock options granted prior to our acquisition of Tantau in January 2001 which options were converted into options to purchase shares in the Company connection with the acquisition).

           Upon completion of our initial public offering in 2000, no further grants were made and no further grants will be made under the Pre-IPO Plans.  The Stock Option Committee administered grants under the Amended and Restated 2000 Stock Option Plan and continues to administer grants under the 2005 Stock Option Plan, subject to guidelines determined by the Governance, Nomination, Human Resources and Compensation Committee.

Stock Option Plans

           Our Stock Option Plans are designed to motivate, attract and retain our directors, officers, key employees and consultants and to align their interests with those of our shareholders.

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          Canadian Stock Option Plan.  The Canadian Stock Option Plan was adopted in September 1997 and provides for the grant of options to our employees, officers, directors, consultants and advisors.  All options granted under the plan have a maximum term of 10 years and have an exercise price per share of no less than the fair market value of the common shares on the date of the option grant, as determined by the Board of Directors or a duly authorized committee on that date.  If an optionee’s employment, directorship or consulting relationship with us is terminated without cause, the vested portion of any grant will remain exercisable until the expiration date of the stock option.  In the event of termination for cause, the vested portion of any grant will remain exercisable for a period of 30 days after the date of termination.  Unvested options will expire on termination unless the options would have vested within six months or within the required statutory notice period following a termination without cause, whichever is earlier, or within one year if termination is due to death or disability.  If a change of control of our company occurs, all options become immediately vested and exercisable.  If an optionee under the Canadian Stock Option Plan ceases to be our employee or consultant, we are entitled to exercise our call right to repurchase all options beneficially owned by the optionee.

          U.S. Stock Option Plan.  The U.S. Stock Option Plan was adopted in October 1999 and provides for the grant of options and restricted shares to our employees, officers, directors and consultants.  The plan provides for the grant of both incentive stock options and non-qualified stock options. Non-qualified stock options granted under the plan have a maximum term of 10 years and an exercise price of no less than 85% of the fair market value of the common shares on the date of the grant, as determined by the Board of Directors or a duly authorized committee on such date, or 110% of the fair market value for those optionees who own common shares representing more than 10% of the aggregate voting power of our outstanding securities.  The rights of an optionee upon the termination of his or her employment, directorship or consulting relationship with us and upon a change of control are identical to those rights discussed in the Canadian Stock Option Plan above.  We are entitled to exercise our call right to repurchase all options beneficially owed by an optionee under the U.S. Option Plan should an optionee cease to be our employee or consultant.

          The Tantau Plan.  We assumed the Tantau Plan on January 17, 2001, upon completion of our acquisition of Tantau.  The Tantau Plan provided for the grant of options for the purchase of shares of common stock of Tantau to employees, officers, directors and consultants of Tantau.  The plan provided for the grant of both incentive stock options and non-qualified stock options.  We assumed the options granted under the Tantau Plan, which became options to purchase an aggregate of 351,324 of our common shares, which include a limited number of options granted outside of the Tantau Plan, but which contain comparable economic terms.  We have not granted any additional options under this plan, nor will we in the future. If a change of control of the Company occurs, all outstanding options under this plan become immediately vested and exercisable.

          Amended and Restated 2000 Stock Option Plan.  The 2000 Stock Option Plan was adopted in December 1999 and amended and restated in January 2002.  The stock options granted under the Canadian and U.S. Stock Option Plans prior to the date of completion of the IPO continued to be effective and governed by the terms of the plans under which they were granted.  The maximum number of our common shares available for issuance upon exercise of options granted under the Amended and Restated 2000 Stock Option Plan, including incentive

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stock options and non-qualified stock options, is currently 1,050,000 million.  The options granted under the Amended and Restated 2000 Stock Option Plan have a maximum term of 10 years and an exercise price no less than the fair market value of the common shares on the date prior to the date of the grant as determined by the Board of Directors or duly authorized committee.  Options held by any person under the Amended and Restated 2000 Stock Option Plan, together with any other options granted to that person may not at any time exceed 5% of the aggregate number of common shares outstanding.  If a change of control of the Corporation occurs, all options granted under this plan will become immediately vested and exercisable with respect to options granted prior to January 23, 2002 and one year after the change of control (or earlier in certain circumstances, including involuntary termination) in the case of options granted on or after January 23, 2002. With the approval of the 2005 Stock Option Plan at the Annual and Special Meeting of the Corporation on April 28, 2005, no further options have been granted under the Amended and Restated 2000 Stock Option Plan.

           2005 Stock Option Plan.  The 2005 Stock Option Plan was adopted by the Corporation’s Shareholders on April 28, 2005.   The stock options granted under the Canadian, U.S. and Amended and Restated 2000 Stock Option Plans continued to be effective and governed by the terms of the plans under which they were granted.  Common shares were reserved for issuance under the 2005 Stock Option Plan, subject to adjustment only in the event of a stock split, stock or other extraordinary dividend, or other similar change in the common shares or capital structure of the Corporation.  The maximum aggregate number of common shares which may be issued pursuant to 2005 Stock Option Plan to directors who are not also employees is 190,000 common shares.  The maximum number of common shares with respect to which options and stock appreciation rights may be granted to a participant during a calendar year is 250,000 common shares.  For awards of restricted stock, restricted stock units and deferred share units that are intended to be performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended, the maximum number of common shares subject to such awards that may be granted to a participant during a calendar year is 250,000 common shares.  In the event of a change in control (as defined in the 2005 Plan and which does not include an acquisition of more than 50% of our common shares by Austin Ventures) and if the Corporation terminates a participant’s continuous service without cause or a participant voluntarily terminates continuous service for good reason within twelve months after a change in control, the awards held by such participant shall automatically become fully vested and exercisable for all of the shares at the time represented by the award. 

Summary Information Concerning Stock Option Plans

           Please see chart above under the heading “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS” for summary information with respect to our stock option plans as of December 31, 2005.

Indebtedness of Directors, Officers and Others

           Our directors, senior officers, and their associates were not indebted to the Corporation or to any of the Corporation’s subsidiaries at any time during the last completed fiscal year.

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Employment Contracts

           In November 2000, in connection with our acquisition of TANTAU, we entered into an employment agreement with John J. Sims, our Chief Executive Officer.  The employment agreement was restated in February 2005 in order to reflect his current salary, which was agreed upon in 2003.  In 2005, Mr. Sims received an annual base salary of $330,000.  Additionally, we have established a performance related bonus for Mr. Sims.  Either we or Mr. Sims may terminate Mr. Sims’ employment at any time and for any reason.  However, if we exercise this right, we must pay Mr. Sims a lump sum severance payment in an amount equal to 12 or 18 months’ current base salary and target bonus, determined by the period of time after termination during which Mr. Sims agrees to be bound to non-competition and non-solicitation covenants.  Mr. Sims will receive an identical lump sum severance payment in the same two possible amounts in the event that he terminates his employment for good reason. 

           Stephen Morrison, our Chief Financial Officer and Senior Vice President Corporate Services, is employed under an offer of employment letter that was entered into on November 29, 2005, which amended and restated his previous employment agreement with us.  Mr. Morrison currently receives an annual salary of $180,000 per annum.  Either we or Mr. Morrison may terminate Mr. Morrison’s employment at any time and for any reason.  However, if we exercise this right, we must pay Mr. Morrison a lump sum severance payment in an amount equal to nine months’ current base salary and nine months’ historic bonus (calculated based on a monthly average of bonus amounts paid to him over the 12 months prior to the date of his termination).  Mr. Morrison will also receive a lump sum severance payment based on the same calculation in the event that he terminates his employment for good reason. However, this right to this right to receive the lump sum payment will be limited if a change in control of the Corporation has occurred and the acquirer offers Mr. Morrison employment or continues his employment in a position that is, when taken as a whole, comparable in all significant respects to his position, authority, duties and responsibilities with us prior to such change in control and the acquirer does not terminate his employment within 12 months after the change of control.

           Michael Luna, our Chief Technology Officer, is employed under an offer of employment letter that was entered into on October 7, 2004.  Mr. Luna currently receives an annual salary of $220,000 per annum.  Either we or Mr. Luna may terminate Mr. Luna’s employment at any time and for any reason.  However, if we exercise this right, we must pay Mr. Luna a lump sum severance payment in an amount equal to nine months’ current base salary and nine months’ historic bonus (calculated based on a monthly average of bonus amounts paid to him over the 12 months prior to the date of his termination).  Mr. Luna will also receive a lump sum severance payment based on the same calculation in the event that he terminates his employment for good reason. However, this right to this right to receive the lump sum payment will be limited if a change in control of the Corporation has occurred and the acquirer offers Mr. Luna employment or continues his employment in a position that is, when taken as a whole, comparable in all significant respects to his position, authority, duties and responsibilities with us prior to such change in control and the acquirer does not terminate his employment within 12 months after the change of control. 

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           Alan Prenoveau, our Senior Vice President, MNO Consulting & Delivery Services, is employed under an offer of employment letter that was entered into in November 2000 and amended in March, 2003. Mr. Prenoveau currently receives an annual salary of $180,000.  Either we or Mr. Prenoveau may terminate Mr. Prenoveau’s employment at any time and for any reason.  However, if we exercise this right, we must pay Mr. Prenoveau a lump sum severance payment in an amount equal to nine months’ current base salary and nine months’ historic bonus (calculated based on a monthly average of bonus amounts paid to him over the 12 months prior to the date of his termination).  Mr. Prenoveau will also receive a lump sum severance payment based on the same calculation in the event that he terminates his employment for good reason. However, this right to this right to receive the lump sum payment will be limited if a change in control of the Corporation has occurred and the acquirer offers Mr. Prenoveau employment or continues his employment in a position that is, when taken as a whole, comparable in all significant respects to his position, authority, duties and responsibilities with us prior to such change in control and the acquirer does not terminate his employment within 12 months after the change of control. 

           Elda Rudd, our Vice President, Corporate Marketing is employed under an offer of employment letter that was entered into in October 2002 and restated in March 2005. Ms. Rudd currently receives an annual salary of $175,000. Either we or Ms. Rudd may terminate Ms. Rudd’s employment at any time and for any reason. However, if we exercise this right, we must pay Ms. Rudd a lump sum severance payment in an amount equal to nine months’ current base salary and nine months’ historic bonus (calculated based on a monthly average of bonus amounts paid to her over the 12 months prior to the date of her termination). Ms. Rudd will also receive the lump sum severance payment based on the same calculation in the event that she terminates her employment for good reason. However, this right to receive the lump sum payment will be limited if a change in control of the Corporation has occurred and the acquirer offers Ms. Rudd employment or continues her employment in a position that is, when taken as a whole, comparable in all significant respects to her position, authority, duties and responsibilities with us prior to such change in control and the acquirer does not terminate her employment within 12 months after the change of control. 

           Pursuant to each employment agreement described above, we retain proprietary rights in all intellectual property assets created, developed or conceived of by the officers while they are employed by us.  Additionally, the officers are bound by non-competition and non-solicitation covenants during their term of employment and for varying periods of time thereafter.

           The officers are entitled to participate in plans maintained from time to time by us for the benefit of our employees, including those pertaining to group life, accident, dental, prescription, sickness and medical, and long term disability insurance.

COMPENSATION OF DIRECTORS 

          In 2005, we compensated directors who are not also executive officers for serving on the Board of Directors (independent directors) on the following basis:

• annual Board retainer of $20,000;

• the Chairman of the Board received an additional annual retainer of $10,000;

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• the Chairman of the Audit Committee received an additional annual retainer of $10,000;

• each of the other committee chairpersons received an additional annual retainer of $5,000; and

• the Chairman of the Special Committee received a retainer of $7,500, and each of the other members of the Special Committee received a retainer of $5,000

           We expect that outside directors will be compensated on the same basis in 2006. In addition, under our current compensation arrangements, outside directors are granted options to purchase common shares upon joining the Board and receive subsequent annual grants of options in such number as is deemed appropriate by the Governance, Nomination, Human Resources and Compensation Committee.  These options have an exercise price that is equal to the fair market value of our common shares on the date prior to the date of the grant.  In 2005, we did not grant any options to purchase common shares to our directors who are not also executive officers.  Outside directors are also reimbursed for their reasonable out-of-pocket expenses for attending board and committee meetings. 

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

           Section 16(a) of the Exchange Act, requires our directors, executive officers and persons who own more than 10% of our common shares (collectively, “Reporting Persons”) to file reports of ownership and changes in ownership of our common shares with the SEC.  We believe, based solely on our review of the copies of such reports received or written representations from certain Reporting Persons, that during the fiscal year ended December 31, 2005, all of these reports were filed by the Reporting Persons on a timely basis, other than a Form 4 report of a stock option grant that was not filed by Patrick Engel (our Vice President, Development) on the date required for filing.   

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

           To the knowledge of our directors and officers, as at March 1, 2006, the only shareholders beneficially owning, directly or indirectly, or exercising control or direction over more than 5% of the common shares are set forth in the Principal Shareholders Table below.  In addition, the table sets forth the beneficial common share ownership for each of our directors and each of our executive officers named in the Summary Compensation Table, above, who were still executive officers as of

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March 1, 2006, as well as all of our current directors and executive officers as a group.  Percentage ownership is based upon 6,074,703 common shares outstanding as of March 1, 2006 plus the dilution factor for that particular shareholder’s beneficially owned shares as described in the following sentence.  For purposes of this table, the term “beneficial ownership” includes outstanding common shares, as well as common shares issuable upon exercise of vested options, and options that vest within sixty (60) days of March 1, 2006.

Principal Shareholders Table

Name of Shareholder	Number of common shares		Percent of Class
Austin Ventures (1) 300 West 6th Street, Suite 2300 Austin, Texas 78701	3,452,145	(2)	38.45	%
J. Ian Giffen	16,250	(3)	<1	%
John J. Sims	192,597	(4)	3.10	%
James D. Dixon	19,600	(5)	<1	%
Barry J. Reiter	17,500	(6)	<1	%
Joseph  C. Aragona	3,457,145	(7)(8)	38.48	%
Benjamin L. Scott	11,250	(9)	<1	%
Tamara Steffens (10)	22,500	(11)	<1	%
Michael Luna	22,500	(12)	<1	%
Alan Prenoveau	22,443	(13)	<1	%
Elda Rudd	26,250	(14)	<1	%
Stephen Morrison	3,997	(15)	<1	%
All directors and executive officers as a group (11 persons)	3,811,032	(2)(16)	41.17	%

Notes to Principal Shareholders Table:

(1)

Includes shares that may be deemed to be beneficially held and/or controlled by Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., AV Partners VI, L.P., Austin Ventures VIII, L.P., AV Partners VIII, L.P., Joseph C. Aragona, Kenneth P. DeAngelis, Jeffery C. Garvey, Edward E. Olkkola, John D. Thorton, Blaine F. Wesner, and Christopher A. Pacitti.  Based upon a Schedule 13D and Form 4 filed with the SEC on February 27, 2006, the common shares indicated as beneficially held and/or controlled by Austin Ventures represent:  (a) 465,942 common shares held by Austin Ventures VI, L.P. acquired in connection with our purchase of Tantau Software, Inc.; (b) 13,104 common shares held by Austin Ventures VI Affiliates Fund, L.P acquired in connection with our purchase of Tantau Software, Inc.; (c) 5,357 common shares held by Austin Ventures VI, L.P. acquired in connection with the repayment of interest on the Notes; (d)  150 common shares held by Austin Ventures VI Affiliates Fund, L.P. acquired in connection with the repayment of interest on the Notes; and (e) 63,301 common shares held by Austin Ventures VIII, L.P. acquired in connection with the repayment of interest on the Notes.  The general partners of AV Partners VI, L.P. are Joseph C. Aragona, Kenneth P. DeAngelis, Jeffery C. Garvey, Edward E. Olkkola, John D. Thorton, Blaine F. Wesner and Christopher A. Pacitti, who may be deemed to have shared power to vote these shares.  Each general partner disclaims beneficial ownership of the common shares held by the Austin Ventures Funds except to the extent of his respective pecuniary interest therein.  In addition to those common shares disclosed in the table above, Mr. DeAngelis and DeAngelis, Ltd. (a limited partnership under the control of Mr. DeAngelis) own an additional 116 common shares, and Mr. Olkkola and Rock Harbor (an entity controlled by Mr. Olkkola) own an additional 46 common shares.

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(2)	Includes an aggregate of 2,904,291 common shares issuable to Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII, L.P. upon the conversion of $8,000,000 aggregate principal amount of Notes and $916,173.30 accrued interest thereon at March 1, 2006.
(3)	Includes 16,250 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(4)	Includes 111,375 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(5)	Includes 19,100 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(6)	Includes 17,500 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(7)	The 3,452,145 common shares issued to or beneficially owned by Austin Ventures may be deemed to be beneficially owned by Mr. Aragona due to his affiliation with these funds; however, Mr. Aragona disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.
(8)	Includes 5,000 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(9)	Includes 11,250 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(10)	Ms. Steffens resigned from her position as Senior Vice President, Sales effective March 17, 2006. Her outstanding stock options will be cancelled on April 17, 2006.
(11)	Includes 22,500 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(12)	Includes 22,500 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(13)	Includes 22,443 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(14)	Includes 26,250 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(15)	Includes 3,997 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from  March 1, 2006.
(16)	Includes an aggregate of 278,165 common shares issuable upon the exercise of presently vested options or options that vest within 60 days from March 1, 2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

           None of our directors or officers, or any shareholder of record as of the date of this Report who owned, of record or to our knowledge, more than 5% of the outstanding common shares, or any affiliate or associate thereof, had any material interest, direct or indirect, in any transaction during the last three fiscal years, or since the commencement of our current financial year, in any completed or proposed transaction which has materially affected or will materially affect us or any of our subsidiaries, other than the following:

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Torys LLP

           In 2005, we obtained legal services relating to corporate/commercial/securities matters from Torys LLP, a New York/Toronto law firm.  Mr. Reiter, a member of the Board of Directors, is a partner of that firm.

Austin Ventures

           On May 14, 2004, we entered into a series of agreements, including a Secured Convertible Note Purchase Agreement (the “Purchase Agreement”) between 724 Solutions Inc. and our wholly owned subsidiary 724 Solutions Software Inc., and Austin Ventures VI, L.P. (“AV VI”), Austin Ventures VI Affiliates Fund, L.P. (“AV VI A”), and Austin Ventures VIII, L.P. (“AV VIII”), (collectively, the “Lenders” or “Austin Ventures”) in connection with the private placement of up to $8,000,000 of Secured Convertible Promissory Notes for cash. The non-brokered private placement of Notes was completed in two tranches. The first tranche of the financing involved the issuance of $3,044,000 of Notes and was completed on May 14, 2004. The second tranche of the financing involved the issuance of $4,956,000 of Notes and was completed on June 29, 2004 after we obtained shareholder approval of the transactions.

           The Notes have a 3-year term and accrue interest at a rate of 2.5% per quarter, of which 1.25% is payable in arrears at the beginning of each quarter and the remainder of which is due at maturity. The principal amounts of the Notes and all interest owing at maturity are convertible at the option of the Lenders into common shares at a conversion price of $3.07 per share. The interest payable quarterly is convertible at our option into common shares at a conversion price of $3.07 per share. The conversion price was based on the volume weighted average trading price of the our common shares on the TSX for the five trading days prior to May 14, 2004. Subject to certain exceptions, if we issue any common shares or securities convertible into common shares at a price that is less than the conversion price of the Notes then in effect, then such conversion price shall be subject to a weighted average anti-dilution adjustment, whereby the conversion price will be reduced based on the weighted average price of the additional securities issued. The conversion price will not be lowered by more than 15% of the initial conversion price of $3.07.

           Austin Ventures is our largest beneficial shareholder. Assuming that all of the Notes are converted into common shares at the lowest possible conversion price on the maturity date, all accrued interest on the Notes is paid with common shares, and that no additional common shares are issued, Austin Ventures could be deemed to beneficially own up to 44.23% of our issued and outstanding common shares.

           Joseph C. Aragona is currently a member of our Board of Directors.  He is also a general partner of AV Partners VI, L.P., which serves as the general partner of both AV VI and AV VI A.  In addition, Mr. Aragona is a general partner of AV Partners VIII, L.P., which serves as the general partner of AV VIII.  As a general partner of AVP VI and AVP VIII, Mr. Aragona may have a limited pecuniary interest in the private placement transactions.  Mr. Aragona did not participate in the deliberations or voting of our Board with respect to the approval of the private placement transactions. 

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           We granted the Lenders a blanket security interest in all of our assets to secure the timely payment and performance in full of all of the obligations under the Notes. The security interest ranks senior to all of our indebtedness other than fully-funded indebtedness of up to $1,500,000.

           The Corporation granted the Lenders certain registration rights, pursuant to the terms and provisions of a registration rights agreement, to enable the resale of common shares issuable upon conversion of the Notes and the interest payable thereon and other common shares held by the Lenders.  In accordance with the terms of the registration rights agreement, the Lenders may, at any time, require us to file a registration statement with the SEC, registering these common shares.

           The Notes are subject to customary events of default, including the failure to pay interest or principal, and specified types of bankruptcy events. Additional events of default include the issuance of certain capital securities that, if not for the limitation noted above, would cause the conversion price of the Notes to be lowered by more than 15% of the initial conversion price and our entering into specified types of merger or acquisition transactions.  An event of default would require us to repay all amounts owing under the Notes.

           In January 2005, we issued 33,549 common shares to Austin Ventures in connection with the repayment of interest owing on the Notes.   In January 2006, we issued 35,259 common shares to Austin Ventures in connection with the repayment of interest owing on the Notes.

           On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of our outstanding common shares not then-owned by Austin Ventures for cash consideration of $3.34 per common share, an increase from the original offer by Austin Ventures of $3.07 per share. After careful consideration and evaluation by our Special Committee of independent directors, which had been previously constituted in order to consider potential value enhancing strategic transactions for our shareholders, we accepted the proposal.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

           KPMG LLP has audited our consolidated balance sheets as at December 31, 2005 and December 31, 2004, and the consolidated statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2005, December 31, 2004 and December 31, 2003, as stated in their report appearing herein.  KPMG LLP has been our auditor since March 1999.

Audit Fees

           KPMG LLP billed us CDN$195,000 (approximately US$160,661) in 2005 and CDN$168,000 (approximately US$134,615) in 2004 for professional services rendered for the audit of our annual financial statements and the review of financial statements included in statutory and regulatory filings.

Audit-Related Fees

           There were no additional fees, outside of the audit fees described above, charged by KPMG LLP to us which related to audit issues.  These would include items such as Sarbanes-Oxley Section 404 advisory services, audits of employee benefit plans, transaction due diligence and other services related to dispositions and acquisitions. 

87

Tax Fees

           KPMG LLP billed us CDN$38,165 (approximately US$31,445) in 2005 and CDN$35,325 (approximately US$28,305) in 2004 for professional services rendered for tax compliance, tax advice, and tax planning.  The taxation advisory services provided related primarily to payroll taxation matters, taxation of stock options and preparation of corporate tax returns.

All Other Fees

           KPMG LLP billed us nil in 2005 and CDN$50,600 (approximately US$40,545) in 2004 for professional services rendered in connection with statutory audits and other matters. 

           The Audit Committee has considered whether the provision of these services is compatible with maintaining KPMG LLP’s independence and is of the opinion that the provision of these services does not compromise KPMG LLP’s independence.  The Audit Committee, in accordance with the Audit Committee’s policy for the engagement of our independent auditor to provide non-audit services, must pre-approve all non-audit services provided by KPMG LLP. The policy restricts the type of non-audit services that the auditors may provide to our subsidiaries and us. It includes a mechanism for the consideration and pre-approval by the Audit Committee of all services to be provided by the auditors as well as the associated fees. In 2005, all non-audit services that were performed by the auditors were pre-approved by the Audit Committee.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 

(a)	The following documents are filed as part of this Report:
	1.	Financial Statements.

          Incorporated by reference from the financial statements and notes thereto that are set forth beginning on page F-1 of this Report.

	2.	Financial Statement Schedules.
None.
(b)	The exhibits included in this Report or incorporated herein by reference are as follows:

88

EXHIBIT NUMBER	NAME OF DOCUMENT
3.1(1)	Articles of the Registrant
3.2(2)	Articles of Continuance
3.3(2)	CBCA By-Laws
3.4(2)	Articles of Amendment
4.1(3)	Shareholder Rights Plan Agreement dated as of February 10, 2003, between 724 Solutions Inc. and Computershare Trust Company of Canada, as Rights Agent, including the Form of Rights Certificate attached thereto as Exhibit A.
4.2(4)	Secured Convertible Note Purchase Agreement, dated May 14, 2004, among the Registrant, 724 Solutions Software Inc., Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII,  L.P.
4.3(4)	Registration Rights Agreement, dated May 14, 2004, among the Registrant, Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII, L.P.
4.4(4)	Form of Secured Convertible Promissory Note.
10.1.1(5)	724 Solutions Inc. 1997 Stock Option Plan, as amended and restated.
10.1.2(5)	Form of Stock Option Agreement pursuant to the 724 Solutions Inc. 1997 Stock Option Plan, as amended and restated.
10.1.3(5)	724 Solutions Inc. 2000 Stock Option Plan, as amended and restated.
10.1.4(5)	Forms of Canadian and U.S. Stock Option Agreements pursuant to the 724 Solutions Inc. 2000 Stock Option Plan, as amended and restated, for option grants prior to January 24, 2002.
10.1.5(5)	Forms of Canadian and U.S. Stock Option Agreements pursuant to the 724 Solutions Inc. 2000 Stock Option Plan, as amended and restated (for option grants after January 24, 2002).
10.1.6(6)	Registrant’s Tantau Software Inc. 1999 Stock Option Plan, as amended and restated for options granted prior to January 2001.
10.1.7(5)	Registrant’s Tantau Software Inc. 1999 Stock Option Plan, as amended and restated for options granted in January 2001.
10.1.8(6)	Registrant’s Form of Stock Option Agreement pursuant to the Tantau Software Inc. 1999 Stock Option Plan for options granted prior to January 2001.
10.1.9(5)	Registrant’s Form of Stock Option Agreement pursuant to the Tantau Software Inc. 1999 Stock Option Plan for options granted in January 2001.
10.1.10(9)	Registrant’s 2005 Stock Incentive Plan
10.1.11(9)	Registrant’s Form of Stock Option Agreement pursuant to the 2005 Stock Incentive Plan. (U.S. Optionees.)
10.1.12(9)	Registrant’s Form of Stock Option Agreement pursuant to the 2005 Stock Incentive Plan. (Canadian Optionees.)
10.2.1(7)	Employment Agreement of John J. Sims, dated November 28, 2000.
10.2.2(9)	Restatement Amendment to Employment Agreement of John J. Sims, dated February 25, 2005.
10.2.3(9)	Employment Agreement of Elda Rudd, dated October 24, 2002.
10.2.4(9)	Amendment to Employment Agreement of Elda Rudd, dated March 10, 2005.

89

10.2.5(8)	Employment Agreement of Alan Prenoveau, dated November 22, 2000 and March 5, 2003.
10.2.6(10)	Employment Agreement between the Registrant and Stephen Morrison, dated November 29, 2005
10.2.7*	Employment Agreement between the Registrant and Michael Luna, dated October 7, 2004
10.2.8*	Form of Indemnification Agreement for Directors and Officers.
10.3.1(4)	Security Agreement, dated May 14, 2004, among the Registrant, 724 Solutions Software, Inc., 724 Solutions (US), Inc., 724 Solutions International, Inc., Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII, L.P.
10.3.2(4)	Guaranty, dated May 14, 2004, among 724 Solutions (US), Inc., 724 Solutions International, Inc., Austin Ventures VI, L.P., Austin Ventures VI Affiliates Fund, L.P., and Austin Ventures VIII, L.P.
14.1*	Code of Ethics
21.1*	List of Subsidiaries.
23.1*	Consent of KPMG LLP, Toronto.
31.1*	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2*	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1*	Section 1350 Certification of the Chief Executive Officer
32.2*	Section 1350 Certification of the Chief Financial Officer
99.1*	Audit Committee Charter

(1)	Incorporated by reference to the Registrant’s Registration Statement on Form F-1, File No. 333-90143.
(2)	Incorporated by reference to the Registrant’s definitive Management Information Circular and Proxy Statement for the Annual and Special Meeting of Shareholders, filed on March 31, 2004.
(3)	Incorporated by reference to the Registrant’s Form 8-K, dated February 24, 2003.
(4)	Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on May 18, 2004.
(5)	Incorporated by reference to the Registrant’s Tender Offer Statement on Schedule TO, filed on January 24, 2002.
(6)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 29, 2002.
(7)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 29, 2001.
(8)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 31, 2003.
(9)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 18, 2005
(10)	Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on December 1, 2005
*	Filed herewith.

90

SIGNATURES

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

	724 SOLUTIONS INC.
	By:	/s/ John J. Sims
		John J. Sims
		Chief Executive Officer
Date:  March 31, 2006

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

SIGNATURE	TITLES	DATE
/s/ John J. Sims	Chief Executive Officer and Director  (principal executive officer)	March 31, 2006
John J. Sims
/s/ Stephen Morrison	Chief Financial Officer, Senior Vice President, Corporate Services  (principal financial and accounting officer)	March 31, 2006
Stephen Morrison
/s/ J. Ian Giffen	Chairman and Director	March 31, 2006
J. Ian Giffen
/s/ James D. Dixon	Director	March 31, 2006
James D. Dixon
	Director
Joseph Aragona
/s/ Barry J. Reiter	Director	March 31, 2006
Barry J. Reiter
	Director
Benjamin L. Scott

91

KPMG LLP	Telephone	(416) 228-7000
Chartered Accountants	Fax	(416) 228-7123
Yonge Corporate Centre	Internet	www.kpmg.ca
4100 Yonge St.
Suite 200
North York, ON M2P 2H3

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
724 Solutions Inc.:

We have audited the accompanying consolidated balance sheets of 724 Solutions Inc. and subsidiaries (‘the Company’) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 724 Solutions Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

As described in note 2 to the consolidated financial statements, in 2003 the Company changed its method of accounting for stock-based compensation

Chartered Accountants

Toronto, Canada
March 30, 2006

KPMG, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.

F-1

724 SOLUTIONS INC.
Consolidated Balance Sheets
(In thousands of U.S. dollars)

December 31, 2005 and 2004

	2005			2004
Assets
Current assets:
Cash and cash equivalents (note 3)	$	5,272		$	5,417
Short-term investments (note 3)		4,009			8,005
Restricted cash (note 3)		219			210
Accounts receivable, net of allowance for doubtful accounts of $19 (2004 - $18) (note 4)		2,471			2,831
Prepaid expenses and other receivables		522			583
Total current assets		12,493			17,046
Deferred charges		167			286
Fixed assets (note 5)		836			1,135
Total assets	$	13,496		$	18,467
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	358		$	613
Accrued liabilities (note 17)		1,622			2,101
Interest payable to related parties		108			103
Deferred revenue		289			173
Total current liabilities		2,377			2,990
Long-term liabilities		—			92
Convertible notes payable to related parties in 2007 (note 8)		7,969			7,947
Long-term interest payable to related parties in 2007 (note 8)		768			343
Total liabilities		11,114			11,372
Shareholders’ equity (note 9):
Unlimited common shares authorized, no par value:
6,039,444 common shares issued and outstanding (2004 - 5,989,300)		764,859			764,530
Additional paid-in capital		1,312			279
Accumulated deficit		(763,996	)		(757,921	)
Accumulated other comprehensive income		207			207
Total shareholders’ equity		2,382			7,095
Lease commitments (note 11)
Contingent liabilities (note 12)
Total liabilities and shareholders’ equity	$	13,496		$	18,467

See accompanying notes to consolidated financial statements.

F-2

724 SOLUTIONS INC.
Consolidated Statements of Operations
(In thousands of U.S. dollars, except shares and per share amounts)

Years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Revenue:
Product	$	7,445		$	8,844		$	6,964
Services		10,820			6,228			5,891
Total revenue		18,265			15,072			12,855
Operating expenses:
Cost of product revenue
Amortization of intangible assets		—			—			3,468
Other		28			26			—
Cost of service revenue		7,430			6,614			6,031
Research and development		6,982			6,271			9,433
Sales and marketing		4,036			4,985			6,968
General and administrative		3,362			3,074			4,086
Depreciation		597			595			908
Stock-based compensation:
Cost of revenue		53			15			14
Research and development		122			40			1,227
Sales and marketing		136			34			296
General and administrative		720			63			141
Restructuring charges (note 16(a))		—			993			50
Write-down of goodwill, intangible and other assets (note 16(b))		—			—			9,097
Total operating expenses		23,466			22,710			41,719
Loss from operations		(5,201	)		(7,638	)		(28,864	)
Interest income (expense), net		(709	)		(396	)		254
Loss on settlement of liability		(165	)		—			—
Gain on sale of investments		—			—			283
Loss for the year	$	(6,075	)	$	(8,034	)	$	(28,327	)
Basic and diluted loss per share	$	(1.01	)	$	(1.34	)	$	(4.73	)
Weighted average number of shares used in computing basic and diluted loss per share (in thousands)		6,034			5,984			5,983

See accompanying notes to consolidated financial statements.

F-3

724 SOLUTIONS INC.
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
(In thousands of U.S. dollars, except number of shares)

Years ended December 31, 2005, 2004 and 2003

					Additional paid in capital		Deferred stock-based compensation related to stock options			Accumulated deficit			Accumulated other comprehensive income (loss)			Total shareholders’ equity
	Common shares
	Number		Amount
Balances December 31, 2002		5,983,349	$	764,508	$	—	$	(1,616	)	$	(721,560	)	$	(43	)	$	41,289
Loss for the year		—		—		—		—			(28,327	)		—			(28,327	)
Cumulative translation adjustment		—		—		—		—			—			76			76
Total comprehensive loss																	(28,251	)
Amortization of deferred stock-based compensation		—		—		—		1,616			—			—			1,616
Paid in capital		—		—		62		—			—			—			62
Balances, December 31, 2003		5,983,349	$	764,508	$	62	$	—		$	(749,887	)	$	33		$	14,716
Loss for the year		—		—		—		—			(8,034	)		—			(8,034	)
Cumulative translation adjustment		—		—		—		—			—			174			174
Total comprehensive loss																	(7,860	)
Issuance on exercise of options		5,951		22		—		—			—			—			22
Stock-based compensation expense		—		—		217		—			—			—			217
Balances, December 31, 2004		5,989,300	$	764,530	$	279	$	—		$	(757,921	)	$	207		$	7,095
Loss for the year		—		—		—		—			(6,075	)		—			(6,075	)
Issuance on exercise of options		16,595		61		—		—			—			—			61
Issuance of common shares		33,549		268		—		—			—			—			268
Stock-based compensation expense		—		—		1,033		—			—			—			1,033
Balances, December 31, 2005		6,039,444	$	764,859	$	1,312	$	—		$	(763,996	)	$	207		$	2,382

See accompanying notes to consolidated financial statements.

F-4

724 SOLUTIONS INC.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

Years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Cash flows from (used in) operating activities:
Loss for the year	$	(6,075	)	$	(8,034	)	$	(28,327	)
Items not involving cash:
Accretion on convertible notes payable to related parties		22			12			—
Depreciation and amortization		597			595			4,376
Amortization of deferred charges		119			66			—
Stock-based compensation		1,031			152			1,678
Loss on settlement of liability		165			—			—
Other non-cash items		—			21			56
Gain on sale of investments		—			—			(283	)
Write-down of goodwill, intangible and other assets		—			—			9,097
Change in operating assets and liabilities:
Accounts receivable		360			(534	)		(86	)
Prepaid expenses and other receivables		61			65			171
Accrued interest on short-term investments		—			40			18
Accounts payable		(255	)		202			(842	)
Interest payable to related parties		5			103			—
Long-term liabilities		(92	)		92			—
Long-term interest payable to related parties		425			343			—
Accrued liabilities		(479	)		(1,301	)		(6,490	)
Deferred consideration		—			—			(1,415	)
Deferred revenue		116			(237	)		(807	)
Net cash flows from (used in) operating activities		(4,000	)		(8,415	)		(22,854	)
Cash flows from (used in) financing activities:
Issuance (principal repayment) of notes payable		—			—			(600	)
Issuance of convertible notes payable to related parties		—			8,000			—
Deferred charges		—			(352	)		—
Issuance of common shares on exercise of options		61			22			—
Net cash flows from (used in) financing activities		61			7,670			(600	)
Cash flows from (used in) investing activities:
Purchase of fixed assets, net		(345	)		(1,017	)		(100	)
Maturity of short-term investments		14,402			7,233			21,010
Purchases of short-term investments		(10,415	)		(13,490	)		(4,196	)
Restricted cash		—			—			764
Proceeds on sale of investments		—			—			283
Net cash flows from (used in) investing activities		3,642			(7,274	)		17,761
Effect of exchange rate changes on cash		152			—			—
Net decrease in cash and cash equivalents		(145	)		(8,019	)		(5,693	)
Cash and cash equivalents, beginning of year		5,417			13,436			19,129
Cash and cash equivalents, end of year	$	5,272		$	5,417		$	13,436

Supplemental disclosure of cash flow information (note 15)

See accompanying notes to consolidated financial statements.

F-5

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

1.	Organization of the Company:
	724 Solutions Inc. designs, develops, markets and supports software products for use by mobile network operators worldwide. Mobile network operators are telecommunications companies that provide a range of mobile voice and data communications services to their consumer and business customers.
	The Company was incorporated in 1997 and introduced its first products in 1999.  Initially, the Company focused on creating wireless software products that would assist financial services companies in making their traditional services available to their customers wirelessly from mobile phones and other handheld computing devices.  In January 2001, the Company acquired Tantau Software with a view to expanding its customer base, and utilizing Tantau’s software products to strengthen its products offered to financial services customers, and also to expand its sales to the mobile network operator market.  In 2001, the Company began offering its mobile alerting software products and mobile Internet gateway product (software that enables internet connectivity to mobile devices) to mobile network operators.  In October 2002, the Company’s products and solutions for mobile network operators and other customers were re-branded as the X-treme Mobility Suite of products (“XMS”).  The Company no longer offers products developed specifically for financial institutions, although it continues to provide services to a small number of financial services customers and continues to support earlier sales to these customers.
2.	Significant accounting policies:
	These consolidated financial statements are expressed in U.S. dollars and are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
	During 2003, the Company completed a 10-for-1 reverse split of its common stock.  All share and per share data in the consolidated financial statements presented herein reflect the split.

(a)	Basis of consolidation:
	These consolidated financial statements include the accounts of 724 Solutions Inc. and its subsidiaries, all of which are wholly owned.  All intercompany balances and transactions have been eliminated.

F-6

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

(b)	Revenue recognition:
	The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants (“AICPA”) in October 1997 as amended by SOP 98-9 issued in December 1998.
	The Company derives revenue from licensing its products and providing related services, including installation, integration, maintenance and managed alerts services.

(i)	License revenue:
	The Company recognizes product revenue when it has an executed license agreement with the customer, the software product has been delivered, the amount of the fees to be paid by the customer is fixed and determinable, and collection of these fees is deemed probable.  The Company considers fees related to arrangements with significant payments due beyond its normal trading terms not to be fixed or determinable.  If the fee is not fixed or determinable, revenue is recognized as the payments become due from the customer.  If collectibility is not considered probable, revenue is recognized when the fee is collected.
	The Company enters into software license agreements that provide for future license payments to be made based on the number of users or the level of transaction capacity.  Transaction capacity is typically measured as the average number of transactions per second processed by the licensed software.  Customers who exceed their licensed fixed level of users or transaction capacity are required to pay additional license fees to increase their licensed user or transaction capacity. Revenue associated with additional users or additional capacity is recognized when the amount becomes determinable, generally on a quarterly basis.

F-7

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

	The Company enters into arrangements with original equipment manufacturers (“OEM”) and resellers.  Under these arrangements, the Company grants the OEM or reseller rights to sell products, which incorporate the Company’s products, for a specific period of time.  The Company’s primary obligation to the OEM and reseller is to deliver a product master and any bug fixes under warranty provisions in order to maintain the product master in accordance with published specifications.  Under these arrangements, the Company’s revenue is not contingent, in any manner, on the OEM or reseller’s subsequent activities.  In some arrangements, the Company receives prepaid, non-refundable minimum license fees from the OEM or reseller.  As the Company’s primary obligation to an OEM or reseller is fulfilled upon delivery of the product master, the Company recognizes the prepaid, non-refundable minimum license fees as revenue upon delivery of the product master and upon meeting all other product revenue recognition criteria.
(ii)	Service revenue:
	Typically, software license agreements are multiple element arrangements as they also include consulting, related maintenance and/or implementation services fees.  Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangements. The Company’s software products are generally fully functional upon delivery and implementation and do not require any significant modification or alteration for customer use, however, for larger customers, customization services may be significant.  Customers generally purchase consulting services to facilitate the adoption of the Company’s technology and may contract with the Company to have dedicated personnel to participate in the services being performed, but the customer may also decide to use their own resources or appoint other professional service organizations to provide these services.

F-8

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

In determining whether the services are essential to the functionality of its software, the Company applies the criteria in SOP 97-2. When the services are considered essential to the functionality of the software, the Company recognizes both the software product revenue and services revenue under the percentage of completion method using the input method based on the ratio of direct labor hours incurred to date to total projected labor hours. When services are not considered essential, the entire arrangement fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence (“VSOE”) of the fair value of each element.  VSOE used in determining the fair value of license revenue is based on the price charged by the Company when the same element is sold in similar quantities to a customer of similar size and nature.  VSOE used in determining fair value for installation, integration and training is based on the standard daily rates for the type of service being provided multiplied by the estimated time to complete the task.  VSOE used in determining the fair value of maintenance and technical support is based on the annual renewal rates.  The revenue allocable to the software license is recognized when the product revenue criteria are met.  The revenue allocable to the consulting services is recognized as the services are performed.  In instances where VSOE exists for undelivered elements but does not exist for delivered elements of a software arrangement, the Company uses the residual method of allocation of the arrangement fees for revenue recognition purposes.

Consulting, implementation and training revenues are recognized as the services are performed, generally on a time and materials basis. Consulting revenues attributed to fixed price arrangements are recognized using the proportional performance method based on direct labor costs incurred to date as a percentage of total estimated direct labor costs to complete the project as this better reflects the pattern in which the Company’s obligations to its customers are fulfilled and revenue is earned.  When total cost estimates exceed revenues in a fixed price arrangement, the estimated losses are recognized immediately based upon an average fully burdened daily cost rate applicable to the consulting individuals delivering the services.  Maintenance and support revenues paid in advance are non-refundable and are recognized ratably over the term of the agreement, which typically is twelve months.

F-9

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2.	Significant accounting policies (continued):
		(iii)	Maintenance revenue:
			The Company provides upgrade rights only as part of Post-contract Customer Support (“PCS” or “maintenance”) arrangements.  Maintenance generally includes the right to receive unspecified updates and upgrades, determined solely by the Company, after the software license period begins.  These unspecified update and upgrade rights generally provide for the customer to receive bug fixes and future enhancements, respectively, to the existing software.  The Company does not enter into arrangements that provide for “specified” upgrade rights. “Unspecified” updates and upgrades are included in maintenance revenue.  Maintenance revenue is recognized ratably over the term of the maintenance contract.
		(iv)	Managed Alerts Services:
			The Company provides managed alerts services which can include revenue from voice alerts, short message service (SMS) alerts, multimedia message (MMS) alerts, fraud alerts and collection alerts.  Under these arrangements, the Company recognizes revenue based on the number of alerts delivered.  Under certain customer arrangements, the customers are subject to minimum monthly fees.
		(v)	Deferred revenue:
			Product and services revenues that have been prepaid but do not yet qualify for recognition as revenue under the Company’s revenue recognition policy are reflected as deferred revenue on the consolidated balance sheets.
	(c)	Research and development expenses:
		Costs related to research, design and development of software products are charged to research and development expense as incurred.  Software development costs are capitalized beginning when a product’s technological feasibility has been established, which generally occurs upon completion of a working model, and ending when a product is available for general release to customers.  All subsequent costs are expensed as incurred.  To date, the completion of working models of the Company’s products has substantially coincided with the general release of the products.  As a result, the Company has not capitalized any software development costs since such costs have not been significant.

F-10

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

(d)	Financial instruments:
	The carrying value of financial instruments, including cash and cash equivalents, short-term investments, restricted cash, accounts receivable, accounts payable, interest payable and accrued liabilities, approximates fair value due to the short-term nature of these financial instruments. The Company determines the fair values of its financial instruments based on quoted market values or discounted cash flow analyses.
	It was not practicable to estimate the fair value of the convertible notes carrying an interest rate of 10% per annum since they are not publicly traded and they were issued to a related party. Additional information pertinent to the value of an unquoted investment is provided in Note 8 to the consolidated financial statements.
	Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, restricted cash and accounts receivable.  Cash and cash equivalents and restricted cash consist primarily of deposits with major commercial banks, corporate debt and government treasury bills, the maturities of which are three months or less from the date of purchase.  Short-term investments and restricted cash consist of corporate debt and government treasury bills with maturities of more than three months but less than one year.  The Company performs periodic credit evaluations of the financial condition of its customers.  Allowances are maintained for potential credit losses consistent with the credit risk of specific customers.
(e)	Investment tax credits:
	The Company is entitled to Canadian federal and provincial investment tax credits, which are earned as a percentage of eligible research and development expenditures incurred in each taxation year.  Investment tax credits are accounted for as a reduction of the related expenditure for items of a current nature and a reduction of the related asset cost for items of a long-term nature, provided that the Company has reasonable assurance that the tax credits will be realized.

F-11

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

(f)	Stock-based compensation:
	Effective January 1, 2003, the Company prospectively adopted fair value accounting for employee stock-based awards as prescribed by SFAS 123, Accounting for Stock-based Compensation.  Prior to January 1, 2003, the Company elected not to apply fair value accounting to stock-based awards to employees, other than for direct awards of stock and awards settleable in cash, which required fair value accounting.  Prior to January 1, 2003, for awards not elected to be accounted for under the fair value method, the Company accounted for stock-based compensation in accordance with Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB 25”).  APB 25 is based upon an intrinsic value method of accounting for stock-based compensation.  Under this method, compensation cost is measured as the excess, if any, of the quoted market price of the stock issuance at the measurement date over the amount to be paid by the employee.
	The Company adopted fair value accounting for stock-based awards using the prospective application transitional alternative available in SFAS 148, Accounting for Stock-based Compensation - Transition and Disclosure.  Accordingly, the fair value method is applied to all awards granted, modified or settled on or after January 1, 2003.  Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed on a straight-line basis over the service period, that is the award’s vesting period.  When awards are exercised, share capital is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when compensation costs were charged against income or acquisition consideration.
	Stock-based awards that are settled in cash or may be settled in cash at the option of employees are recorded as liabilities.  The measurement of the liability and compensation cost for these awards is based on the intrinsic value of the award, and is recorded into operating income over the service period, that is the vesting period of the award.  Changes in the Company’s payment obligation subsequent to vesting of the award and prior to the settlement date are recorded as compensation cost over the service period in operating income.

F-12

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

Stock-based awards that are settleable in cash or equity at the option of Company are recorded at fair value on the date of grant and recorded as additional paid-in capital.  The fair value measurement of the compensation cost for these awards is based on the Black-Scholes option pricing model, and is recorded into operating income over the service period, that is the vesting period of the award.  When awards are exercised, share capital is credited with the related portion previously credited to additional paid-in capital.

During the year ended December 31, 2005, the Company recorded stock-based compensation expense of $1,031,000 (2004, - $152,000; 2003 - $1,678,000).  The 2003 amount primarily relates to the amortization of the deferred stock-based compensation arising on prior year business acquisitions.

The Black-Scholes option pricing model was used to estimate the fair value of the options at grant date based on the following assumptions:

	2005			2004			2003
Volatility		76	%		58	%		60	%
Risk-free interest rate		3.64	%		3.79	%		3.73	%
Expected life in years		5			5			5
Dividend yield		—			—			—

The Company has assumed no forfeiture rate and recognizes adjustments for actual forfeitures in the year they occur.  The weighted average grant date fair value of options issued in the year ended December 31, 2005 was $5.64 (2004 - $1.84; 2003 - $1.62).

For options issued prior to January 1, 2003, the Company is required to disclose the pro forma information as if it had accounted for stock options issued from inception on July 28, 1997 to December 31, 2002 under the fair value method.  The following table presents the required disclosure of pro forma loss and basic and diluted loss per share.

	2005			2004			2003
Loss for the year	$	(6,075	)	$	(8,034	)	$	(28,327	)
Compensation expense related to the fair value of stock options in excess of amounts recognized		(228	)		(580	)		(2,155	)
Pro forma loss for the year	$	(6,303	)	$	(8,614	)	$	(30,482	)
Pro forma loss per share:
Basic and diluted	$	(1.04	)	$	(1.44	)	$	(5.09	)

F-13

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2. Significant accounting policies (continued):

(g)	Fixed assets:
	Fixed assets are stated at cost, net of accumulated depreciation, and are depreciated over their estimated useful lives except for leasehold improvements, which are depreciated over the lesser of their useful lives and the term of the related lease.  Expenditures for maintenance and repairs are expensed as incurred.  Depreciation is computed using the straight-line method as follows:

Computer equipment	3 years
Computer software	1 year
Office furniture and equipment	5 years

(h)	Long-lived assets:
	In accordance with the SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets, a long-lived asset or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group.  If this comparison indicates that there is a potential impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable.  The discount rate applied to these cash flows is based on the Company’s weighted average cost of capital, risk adjusted where appropriate.
(i)	Goodwill:
	In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is periodically tested for impairment.  Additionally, in accordance with SFAS 141, Business Combinations, the cost of an acquired entity is allocated to the assets acquired and liabilities assumed based on their estimated fair values, including other identifiable intangible assets, as applicable, such as trade names, customer relationships and client lists.

F-14

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2.	Significant accounting policies (continued):
	(j)	Intangible assets:
		In accordance with SFAS 142, Goodwill and Other Intangible Assets, intangibles with a definite life, other than goodwill, acquired as a result of a business combination are subject to amortization.  The method of amortization selected reflects the pattern in which the economic benefit of the specific intangible asset is consumed or otherwise used up.  If that pattern cannot be reliably determined, a straight-line amortization method is used.  Intangible assets that are subject to amortization are reviewed for potential impairment in accordance with SFAS 144 at least annually or whenever events or circumstances indicate that carrying amounts may not be recoverable.  The Company amortizes its intangible assets on a straight-line basis over their expected useful lives, which has generally been a period of three years.
	(k)	Foreign currency translation:
		The Company’s functional currency is the U.S. dollar.  Transactions of the Canadian parent company and fully integrated foreign subsidiaries denominated in currencies other than the U.S. dollar are translated using the temporal method. Monetary items denominated in foreign currencies are translated into U.S. dollars at rates of exchange in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred.  Revenue and expenses are translated at rates in effect at the time of the transactions.  Foreign exchange gains and losses are included in income.  Transactions of foreign subsidiaries that are considered self-sustaining are translated using the current rate method.  Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the balance sheet dates, and the results of operations at the average rate for the year.  The resulting gains or losses are included in cumulative translation adjustment, which is presented as a separate component of shareholders’ equity. The Company considered its offices in Europe as self-sustaining through 2004 but determined that due to structural changes, these entities should be considered fully integrated as of January 1, 2005. Therefore, foreign exchange gains and losses related to these entities in 2005 have been included in the consolidated statement of operations.
		The aggregate foreign currency gain (loss) included in determining loss for the three years ended December 31, 2005 are as follows:  2005 – ($260,000); 2004 - $2,000 and 2003 - $(200,000).

F-15

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2.	Significant accounting policies (continued):
	(l)	Income taxes:
		The Company provides for income taxes under the asset and liability method.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the date of enactment.  To the extent that the recoverability of deferred tax assets is not considered to be more likely than not, a valuation allowance is provided.
	(m)	Loss per share:
		Basic loss per share is computed using the weighted average number of common shares outstanding, including contingently issuable shares where the contingency has been resolved.  Diluted loss per share is computed using the weighted average number of common shares and stock equivalents (using the treasury stock method) outstanding during the year. At December 31, 2005, convertible notes and options to purchase 5,303,639 shares of common stock (2004 – 4,372,351, 2003 – 724,189) were not included in the computation of diluted earnings per share because doing so would have had an anti-dilutive effect.
	(n)	Deferred charges:
		Deferred charges consists of costs incurred related to the issuance of the secured convertible notes payable to related parties.  The amounts are being amortized over the term of the notes, being three years.
	(o)	Comprehensive income:
		Comprehensive income includes loss for the year, unrealized gains (losses) on available for sale securities and foreign currency translation adjustments.  Tax effects of comprehensive income have not been material.  The Company recorded the components of comprehensive income on its consolidated statements of shareholders’ equity.

F-16

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2.	Significant accounting policies (continued):
	(p)	Guarantees:
		Guarantees granted (or modified) by the Company to third parties after January 1, 2003 are generally recognized, at the inception of a guarantee, as a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur.  The initial measurement of that liability is the fair value of the guarantee at its inception.  The recognition of the liability is required even if it is not probable that payments will be required under the guarantee.  The Company’s liability associated with guarantees is insignificant as of December 31, 2005. (See also Note 13.)
	(q)	Use of estimates:
		The preparation of consolidated financial statements requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, investments, restructuring charges, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances.  Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated.  Many of the conditions impacting these assumptions and estimates are outside of the Company’s control.

F-17

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

2.	Significant accounting policies (continued):
	(r)	Recently issued accounting pronouncements:
		(i)	Accounting for share based payments:
			In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment,” or SFAS 123R, which requires companies to expense the fair value of employee stock options and other forms of share based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account for share based compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R, the Company is required to determine the appropriate fair value model to be used for valuing share based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The Company currently uses the Black Scholes option pricing model to value options. The use of a different model to value options may result in a different fair value than the use of the Black Scholes option pricing model. The Company is required to adopt SFAS 123R in the first quarter of fiscal 2006. The Company is evaluating the requirements of SFAS 123R to assess the impact its adoption will have on the Company’s financial position and results of operations.
		(ii)	Exchanges of non-monetary assets:
			In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,” which addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of assets exchanged.  The standard is effective for 2006.  The Company does not expect the adoption of this standard to have a material impact on its results.
		(iii)	Accounting changes and error corrections:
			In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” replacing APB Opinion No. 20 and SFAS No. 3, which applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement where no specific transition provisions are included.  SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle.  This standard also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error.  The standard is effective for 2006.  Early adoption is permitted.  The Company does not anticipate the adoption of this standard will have a material impact on its results.

F-18

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

3.	Cash and cash equivalents and short-term investments:
	All short-term investments are classified as held-to-maturity because the Company has the positive intent and ability to hold the securities to maturity.  Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion discounts to maturity. Short-term investments include corporate bonds and government T-bills.  The Company owns no short-term investments that are considered to be trading securities or available-for-sale securities.
	The Company has entered into a letter of credit in the amount of $219,000 (2004 - $210,000) to guarantee future payments.  Letters of credit are secured by segregated instruments and disclosed as restricted cash on the consolidated balance sheets.
4.	Accounts receivable:

	2005		2004
Invoiced	$	1,383	$	1,487
Unbilled		1,088		1,344
	$	2,471	$	2,831

	Unbilled accounts receivable arise when revenues have been recorded but the amounts are not yet invoiced to the customer due to timing of invoicing or contractual terms. These amounts are recoverable from the customer upon invoicing for amounts currently due, achievement of certain milestones, completion of specified units or completion of the contract.
5.	Fixed assets:

	2005		2004
Computer equipment	$	6,765	$	6,910
Computer software		7,285		7,245
Office furniture and equipment		332		341
Leasehold improvements		338		371
		14,720		14,867
Less accumulated depreciation		13,884		13,732
	$	836	$	1,135

F-19

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

6.	Investments:
	The Company has investments in several private companies that are accounted for under the cost method as the Company owns less than a 20% interest and does not exert significant influence over the entities. The total cost of approximately $15,243,000 has been fully provided for in prior years as the impairment was considered other than temporary.
	During the year ended December 31, 2003, the Company recorded a gain of $283,000 on the sale of its equity interest in Dexit, which had been previously been written down to nil.  The Company purchased its interest in Dexit on November 29, 2001 for consideration of $79,000.
7.	Goodwill and other intangible assets:
	Goodwill represents the excess of the purchase price over the fair value of net assets acquired and until January 1, 2002, had been amortized on a straight-line basis over varying periods of up to five years.  For the year ended December 31, 2003, the Company recorded an impairment charge of $9,097,000 related to goodwill (Note 16(b)). The Company recorded amortization of acquired technology of nil in 2005, nil in 2004 and $3,468,000 in 2003.
8.	Convertible notes payable to related parties:
	On May 14, 2004, the Company entered into a series of agreements, including a Secured Convertible Note Purchase Agreement (the “Purchase Agreement”) between 724 Solutions Inc. and its wholly owned subsidiary, 724 Solutions Software Inc., and Austin Ventures VI, L.P. (“AV VI”), Austin Ventures VI Affiliates Fund, L.P. (“AV VI A”), and Austin Ventures VIII, L.P. (“AV VIII”), (collectively, the “Lenders” or “Austin Ventures”) in connection with the private placement of up to $8,000,000 of Secured Convertible Promissory Notes (the “Notes”) for cash.  The non-brokered private placement of secured convertible promissory notes was completed in two tranches.  The first tranche of the financing involved the issuance of $3,044,000 of convertible notes and was completed on May 14, 2004.  The second tranche of the financing involved the issuance of $4,956,000 of convertible notes and was completed on June 29, 2004, after the Company obtained shareholder approval of the transactions.
	The Notes have a three-year term and accrue interest at a rate of 2.5% per quarter, of which 1.25% is payable in arrears at the beginning of each quarter starting in the first quarter of 2005 and the remainder of which is due at maturity.  The principal amounts of the Notes and all interest owing at maturity are convertible at the option of the Lenders into common shares at a conversion price of $3.07 per share. The interest payable quarterly is convertible at the option of the Company into common shares at a conversion price of $3.07 per share. The conversion price was based on the volume weighted average trading price of the Company’s common shares on the TSX for the five trading days prior to May 14, 2004. If the Company issues any

F-20

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

common shares or securities convertible into common shares at a price that is less than the conversion price of the Notes then in effect, then such conversion price shall be subject to a weighted average anti-dilution adjustment, whereby the conversion price will be reduced based on the weighted average price of the additional securities issued. The conversion price will not be lowered by more than 15% of the initial conversion price of $3.07.

In accordance with FASB EITF No. 00-27, Application of EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, the Company has determined that a beneficial conversion feature existed for the second tranche of its convertible notes.  On the date the required shareholder approval was obtained, the Company’s common shares closed at a premium of $0.04 per share to the conversion price of $3.07, resulting in a beneficial conversion feature on that date of approximately $65,000.  Under issue 6 of EITF 00-27, this conversion feature is to be amortized over the period to the stated redemption date being May 14, 2007.  The amortization in 2005 was $22,000 (2004 – $12,000).

The Company also analyzed the arrangement to determine whether any accounting was required for the contingent beneficial conversion feature that may arise if the Company where to issue additional shares in the future at a price less than $3.07.  The Company considered EITF 00-27, Issue 7, and concluded that since the terms of the contingent conversion option do not permit the Company to compute the additional number of shares that it would need to issue upon conversion of the Notes if the contingent event occurs and the conversion price is adjusted, the Company should compute any additional beneficial conversion feature only if the contingent event occurs.

Austin Ventures is the Company’s largest beneficial shareholder. Assuming that all of the Notes are converted into common shares at the lowest possible conversion price on the maturity date, all accrued interest on the Notes is paid with common shares, and that no additional common shares are issued, Austin Ventures could be deemed to beneficially own up to 44.23% of the Company’s issued and outstanding common shares.

Joseph C. Aragona is currently a member of the Company’s Board of Directors.  He is also a general partner of AV Partners VI, L.P., which serves as the general partner of both AV VI and AV VI A.  In addition, Mr. Aragona is a general partner of AV Partners VIII, L.P., which serves as the general partner of AV VIII.  As a general partner of AVP VI and AVP VIII, Mr. Aragona may have a limited pecuniary interest in the Private Placement Transactions.  Mr. Aragona did not participate in the deliberations or voting of the Company’s Board with respect to the approval of the Private Placement Transactions.

As part of the financing arrangement between Austin Ventures and the Company, the Company agreed to appoint a nominee of Austin Ventures to the Board of Directors and to include two nominees of Austin Ventures in any slate of directors submitted to shareholders for approval. In July 2004, the Company appointed Ben Scott to the Board of Directors as Austin Venture’s nominee. He is associated with Austin Ventures as a venture partner.

F-21

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

The Company and its material subsidiaries granted the Lenders a blanket security interest in all of their assets to secure the timely payment and performance in full of all of the obligations under the Notes.  The security interest ranks senior to all indebtedness of the Company other than fully-funded indebtedness of up to $1,500,000.

The Notes are subject to customary events of default, including the failure to pay interest or principal, and specified types of bankruptcy events. Additional events of default include the issuance of certain capital securities that, if not for the limitation noted above, would cause the conversion price of the notes to be lowered by more than 15% of the initial conversion price and the Company engaging in specified types of merger or acquisition transactions.  An event of default would require the Company to repay all amounts owing under the Notes.

Total interest expense recorded during the year ended December 31, 2005 was $851,000 (2004 – $446,000). At December 31, 2005, interest payable to Austin Ventures was $876,000.

In January 2005, the Company issued 33,549 Common Shares to Austin Ventures in connection with the repayment of interest owing on the Notes. The Company recorded a loss on settlement of liability of $165,000 in the first quarter of 2005 related to this transaction.

In January 2006, the Company issued 35,259 Common Shares to Austin Ventures in connection with the repayment of interest owing on the Notes. The Company will record a loss on settlement of liabilities of $19,000 in the first quarter of 2006 related to this transaction.

Subsequent to December 31, 2005, the Company received a proposal from Austin Ventures to acquire all of the outstanding common shares not owned by Austin Ventures.  (see note 19)

F-22

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

9.	Shareholders’ equity:
	During 2003, the Company effected a 10-for-1 share consolidation.  The historic common share numbers have been adjusted to reflect this consolidation.
	(a)	Stock option plans:
		(i)	Description of the Plans:
			The Company currently has a Canadian stock option plan, a U.S. stock option plan, a 2000 stock option plan and a 2005 stock option plan (the “Plans”), each of which is intended to attract, retain and motivate employees, officers, directors and consultants.  The Company also has two option plans that were adopted upon the completion of prior acquisitions.  The stock option committee, in conjunction with the compensation committee, determines, among other things, the eligibility of individuals to participate in the Plans and the term, vesting periods and the exercise price of options granted under the Plans.
			The 2000 stock option plan was adopted in December 1999 and replaced, on a prospective basis, the Canadian and U.S. stock option plans. The 2005 stock option plan was adopted in April 2005 and replaced, on a prospective basis, the 2000 stock option plan.  The options granted under the 2005 and 2000 plans have a maximum term of 10 years and an exercise price no less than the fair market value of the common shares on the date of the grant as determined by the Board of Directors or a duly authorized committee at the date of the grant.  Options held by any person under the new plan, together with any other options granted to that person may not at any time exceed 5% of the aggregate number of common shares outstanding.  If a shareholder acquires more than 50% of the Company’s common shares or the Company sells all or substantially all of its assets, all options granted under this plan will become vested and exercisable one year from the date of the relevant transaction, or earlier in some circumstances.  Since the approval of the 2005 stock option plan in April of 2005, the Company has issued options only under this plan. The Company has reserved 775,000 common shares for issuance under this plan.  The Company has reserved 1,050,000 common shares for issuance under the 2000 plan.

F-23

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

9.	Shareholders’ equity (continued):
			In order to increase the number of options available to be issued under the 2000 stock option plan, in 2003, the Company elected to exercise its call right to repurchase 93,931 options issued under the Pre-IPO Canadian stock option plan held by departed employees having an average exercise price of  $45.17 per share (ranging from $4.00 to $200.00 per share).  Prior to the 2003 repurchase, approximately 103,000 options were outstanding under this plan.  All of the options repurchased were out-of-the-money as the market price of the Company’s shares at the time of the repurchase was $3.07.  The Company paid each of the option holders $0.001 per option (with a minimum of $1.00) to represent legal tender for the transaction. The Company recorded the total amount paid of $198 as compensation expense. The remaining 8,323 options outstanding under the Pre-IPO Canadian option plan are held by individuals who were employed by the Company at the time of the repurchase.  It is not the Company’s intent to repurchase these options.
			The U.S. stock option plan was adopted in October 1999. There are 226 options outstanding under this plan.
		(ii)	2004 grant to executives and directors:
			In December 2004, the Company granted 427,000 options to certain executives, officers and directors of the Company conditional on the Company obtaining shareholder approval at the its annual general meeting held in April 2005. At the meeting, the Company’s shareholders approved the grant.
			These stock options have an exercise price of $5.84 and, subject to certain conditions, vest over four years from the December 2004 grant date. The total fair value at April 28, 2005 was calculated to be $2.8 million using the Black-Scholes option pricing model. The fair value related to those options that remain outstanding will be expensed as stock-based compensation over the vesting period. During the year ended December 31, 2005, the Company recorded approximately $687,000 of stock compensation expense relating to these options.

F-24

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

9.	Shareholders’ equity (continued):
	The following table summarizes the status of the Company’s outstanding options at December 31, 2005:

Exercise price ranges				Number of options		Weighted average exercise price		Weighted average remaining contractual life (years)		Number of options exercisable		Weighted average exercise price
$	—	$	3.50		279,496	$	3.14		8.0		106,650	$	3.10
	3.51		5.00		507,329		4.08		8.5		149,262		4.01
	5.01		6.50		495,053		5.75		8.5		191,778		5.52
	6.51		10.00		104,771		7.44		8.0		43,933		7.37
	10.01		50.00		23,242		17.20		6.3		14,454		20.96
	50.01		550.00		24,557		189.18		5.0		20,682		186.44
					1,434,448	$	8.10		8.2		526,759	$	12.28

The following table summarizes the continuity of options issued:

	Year ended December 31, 2005					Year ended December 31, 2004					Year ended December 31, 2003
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
Outstanding, beginning of year		929,915		$	9.07		724,189		$	24.62		748,408		$	37.70
Granted		613,063			5.89		484,438			3.60		268,800			3.12
Exercised		(16,595	)		3.69		(5,951	)		3.63		—			—
Canceled		(91,935	)		4.98		(272,761	)		40.75		(293,019	)		45.57
Outstanding, end of year		1,434,448		$	8.10		929,915		$	9.07		724,189		$	24.62
Options exercisable, end of year		526,759		$	12.28		236,920		$	17.82		212,670		$	41.43

F-25

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

10.	Income taxes:
	The provision for income taxes differs from the amount computed by applying the combined Canadian Federal and Provincial statutory income tax rate of 36% (2004 – 36%, 2003 – 37%) to loss before income taxes. The sources and tax effects of the differences are as follows:

	2005			2004			2003
Basic rate applied to loss before provision for income taxes	$	(2,187	)	$	(2,889	)	$	(10,481	)
Adjustments resulting from:
Effect of enacted tax rates on deferred tax asset		—			—			(5,509	)
Foreign losses affected at (higher) lower rates		(183	)		(299	)		(619	)
Expiry of tax losses		5,597			—			2,302
Effect of change in foreign exchange rates on deductibles for tax		(600	)		(2,835	)		(6,469	)
Stock-based compensation not deductible for tax		372			55			582
Other non-deductible expenses		413			228			12
Adjustments to fixed assets, tax losses and reserves		2,086			(2,681	)		1,590
Amortization and write-down of intangibles		—			—			3,514
Other		97			36			921
		5,595			(8,385	)		(14,157	)
Change in valuation allowance		(5,595	)		8,385			14,157
Income taxes	$	—		$	—		$	—

Significant components of the Company’s deferred tax asset are as follows:

	2005			2004
Research and development expenses deferred for income tax purposes	$	3,127		$	3,018
Net operating losses carried forward		68,965			74,737
Capital losses carried forward		6,506			6,465
Fixed assets		7,474			7,342
Reserves		576			681
Deferred tax asset		86,648			92,243
Less: valuation allowance		(86,648	)		(92,243	)
	$	—		$	—

F-26

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

	The net operating losses carried forward are subject to expiry if the Company does not utilize the losses prior to the taxation imposed date at which the losses expire.  The year in which the losses expire depends upon the year in which the losses arose and the jurisdiction in which the losses were incurred.  Of the approximately $68,965,000 in deferred tax assets related to operating losses carried forward, the majority of the asset of $48,253,000 does not begin to expire until 2019.  The remaining balance of $20,712,000 expires as to approximately $1,876,000 in 2006, $7,820,000 in 2007, $1,960,000 in 2008, $3,641,000 in 2009, $4,439,000 in 2010, $972,000 in 2011 and $4,000 in 2015.
	A subsidiary discontinued its operations during the year and as a result can no longer utilize its net operating loss carry forwards.  In prior years, these operating loss carry forwards were described as “not subject to expiry”.
	In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the years in which those temporary differences become deductible.  The Company considers projected taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment.  In order to fully realize the deferred tax assets, the Company will need to generate taxable income of approximately $225,350,000 prior to the expiration of the net operating losses carried forward.  Due to the uncertainties related to the industry in which the Company operates, the tax benefit of the above carried forward amounts has been completely offset by a valuation allowance.
11.	Lease commitments:
	Future minimum lease payments under non-cancelable operating leases for premises and equipment at December 31, 2005 are as follows:

2006	$	344
2007		135
2008		108
2009		113
2010		119
2011 and thereafter		—
	$	819

Rent expense for the year ended December 31, 2005 was $429,000 (2004 - $468,000; 2003 - $850,000).  The Company is also responsible for certain common area costs at various leased premises.

As part of the restructuring charge, the Company has recorded a liability of $93,000 (2004 - $93,000) for future lease commitments for vacated premises.  The commitments for these leases have been excluded from the amounts in the table above.  The liability has been estimated as the amount the Company is contractually obligated to pay related to vacated leased premises, less an estimated amount for sublease arrangements.

F-27

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

12.	Contingent liabilities:
	In June 2001, 724 Solutions, Inc. (“the Company”) was named as a defendant in a securities class action filed in United States District Court for the Southern District of New York related to its initial public offering (“IPO”) in January 2000.  The lawsuits also named certain of the underwriters of the IPO, including Credit Suisse First Boston Corporation and FleetBoston Robertson Stephens, as well as certain former officers and directors of the Company as defendants.  Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York (the “IPO Litigation”).  The complaints allege that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Company’s stock.  A consolidated amended complaint was filed April 19, 2002.  The Company and its former officers and directors are named in the suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and other related provisions.  The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.
	On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss the IPO Litigation, including the action involving the Company.  On July 15, 2002, the Company, along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation.  On February 19, 2003, the Court ruled on the motions.  The Court denied the Company’s motion to dismiss the claims against it under Rule 10b-5.  The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including the Company.  In addition, the individual defendants in the IPO Litigation signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.
	In June 2003, a proposed settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies.  On or about July 2, 2003, a committee of the Company’s Board of Directors conditionally approved the proposed partial settlement. The settlement would provide, among other things, a release of the Company and of the individual defendants for the conduct alleged to be wrongful in the amended complaint.  The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters.  Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurance carriers.

F-28

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

	In June 2004, an agreement of settlement was submitted to the court for preliminary approval.  The court requested that any objections to preliminary approval of the settlement be submitted by July 14, 2004, and the underwriter defendants formally objected to the settlement.  The plaintiffs and issuer defendants separately filed replies to the underwriter defendants’ objections to the settlement on August 4, 2004.  The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications.
	On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes.  The court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005 and completed by January 15, 2006.  The settlement fairness hearing has been set for April 26, 2006.  Following the hearing, if the court determines that the settlement is fair to the class members, the settlement will be approved. There can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all.
	If the proposed settlement is not consummated, the Company intends to continue to vigorously defend itself against these claims.  However, due to the inherent uncertainties of litigation the Company cannot accurately predict the ultimate outcome of the IPO Allocation Litigation. No amount is accrued at December 31, 2005, as a loss is not considered probable and estimable.
13.	Guarantees:
	(a)	General indemnities:
		In the normal course of operations, the Company provides indemnification agreements to counterparties in transactions such as purchase contracts, service agreements and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based upon the contract. The nature of the indemnification agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties.  Historically, the Company has not made any significant payments under such indemnification.  No amount has been accrued in the consolidated financial statements with respect to these indemnification agreements.
	(b)	Product warranties:
		The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if its software products infringe a third party’s intellectual property rights.  To date, the Company has not incurred any material costs as a result of such indemnification provisions and has not accrued any liabilities related to such obligations in its consolidated financial statements.

F-29

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

		The Company’s software license agreements also generally include a warranty that its software products will substantially operate as described in the applicable program documentation for a specified period after delivery.  The Company also warrants that services it performs will be provided in a manner consistent with industry standards and in accordance with applicable specifications for a specified period from performance of the service.  To date, the Company has not incurred any material costs associated with these warranties.
14.	Segmented information:
	The Company operates in a single reportable operating segment, that is, the design and delivery of software products for use by mobile network operators and other customers.  The single reportable operating segment derives its revenue from the sale of software and related services.  Information about the Company’s geographical net revenue and assets is set forth below.
	Net revenue by geographic location:

	2005		2004		2003
Canada	$	—	$	—	$	207
United States		8,966		10,604		10,408
Europe		7,923		4,257		1,417
Asia Pacific		1,376		211		823
	$	18,265	$	15,072	$	12,855

Fixed assets by geographic location:

	2005		2004
Canada	$	621	$	784
United States		74		135
Europe		133		214
Asia Pacific		8		2
	$	836	$	1,135

For the year ended December 31, 2005, three customers accounted for 32%, 19% and 18% of revenue. For the year ended December 31, 2004, three customers accounted for 51%, 16% and 12% of revenue. For the year ended December 31, 2003, one customer accounted for 52% of revenue.

At December 31, 2005, three customers accounted for 23%, 14% and 14% of the accounts receivable balance.  At December 31, 2004, one customer accounted for 63% of the accounts receivable balance.  At December 31, 2003, two customers accounted for 50% and 17% of the accounts receivable balance.

F-30

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

15.	Supplemental disclosure of cash flow information:
	The following table presents the supplemental disclosure of cash flow information:

	2005		2004		2003
Supplemental cash flow information:
Interest paid	$	317	$	—	$	7
Interest received		288		107		281

16.	Restructuring and other charges:
	For the years ended December 31, 2004 and 2003, the Company recorded charges for restructuring activities and goodwill. There were no charges in the year ended December 31, 2005.
	At December 31, 2005, included in accrued liabilities is the remaining restructuring provision of $93,000, which relates to a restructuring activity undertaken in 2002, specifically to costs associated with an office in Europe that the Company has vacated. Although the space was sublet, the Company is obligated to refurbish the space at the end of the lease. The Company expects to pay out the remaining balance by the end of the first quarter of 2006.
	(a)	Restructuring charges:
		(i)	Activities in 2004

	Severance			Lease exit costs			Total
Restructuring charges	$	1,600		$	500		$	2,100
Reversals		(926	)		—			(926	)
Cash payments		(674	)		(500	)		(1,174	)
Provision, December 31, 2004	$	—		$	—		$	—

In the first quarter of 2004, the Company completed a plan to reduce its overall operating costs and to realign its operating expenses and investments by reducing its worldwide workforce by approximately 40 people and consolidating facilities.  As a result of these decisions, the Company recorded $2,100,000 in restructuring charges related to severance and lease exit costs. Due to the asset purchase completed in the three months ended June 30, 2004, the Company determined that it would not carry out some employee terminations planned as of the end of the prior quarter.  Therefore, in the three months ended June 30, 2004, the Company reversed $900,000 in severance costs included in restructuring charges.  This amount had been part of the restructuring charge of $2,100,000 recognized in the first quarter of 2004. Employee terminations not related to the asset purchase and the consolidation of facilities proceeded as planned in 2004.  The Company reversed $26,000 in the fourth quarter when it determined that certain cost estimates related to terminations were too high.  All amounts provided for were settled or reversed in the year.

F-31

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

(ii) Activities in 2003:

	Severance			Lease exit costs			Total
Restructuring charges	$	775		$	175		$	950
Cash payments		(483	)		(175	)		(658	)
Provision, December 31, 2003		292			—			292
Activity during 2004
Cash payments		(292	)		—			(292	)
Provision, December 31, 2004	$	—		$	—		$	—

During 2003, the Company reduced its worldwide workforce by approximately 40 people and closed redundant facilities in an effort to reduce its overall operating costs and to realign operating expenses and investments with a view to achieving operational profitability. The restructuring activities were completed within the year shortly after the reduction in the workforce occurred in the second and fourth quarters of the year.  All amounts provided for were settled in the year except for severance amounts that were provided for in December 2003.  The remaining severance amounts were paid out in the first half of 2004.

(iii)

Activities in 2002:

	Severance			Lease exit costs			Hosting exit costs			Total
Restructuring charges	$	7,991		$	2,472		$	7,438		$	17,901
Cash payments		(7,024	)		(364	)		(4,951	)		(12,339	)
Non-cash charges		—			(580	)		—			(580	)
Provision, December 31, 2002		967			1,528			2,487			4,982
Activity during 2003:
Restructuring charge reversal		—			—			(900	)		(900	)
Cash payments		(967	)		(1,388	)		(996	)		(3,351	)
Provision, December 31, 2003		—			140			591			731
Activity during 2004:
Restructuring charge reversal		—			—			(181	)		(181	)
Cash payments		—			(47	)		(410	)		(457	)
Provision, December 31, 2004 and 2005	$	—		$	93		$	—		$	93

F-32

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

	During 2002, the Company reduced its worldwide workforce by approximately 198 people, closed redundant facilities, wrote down inventory assets that were no longer part of its future strategy and wrote down unused fixed assets.  The Company realigned its workforce following this reduction to allow it to focus on delivering software applications and infrastructure software to MNO’s while servicing its global installed base of financial services clients.  In addition, as part of the restructuring, the Company formalized a three-year arrangement with Computer Sciences Corporation (“CSC”), an unrelated party, whereby CSC will provide application hosting services to support the Company’s current hosting agreements until such time as the agreements expire or are assigned to CSC.  The Company does not intend to enter into any further hosting agreements and will promote CSC as its preferred supplier of such services.
	The restructuring activities undertaken in 2002 were completed within the year, shortly after the reductions in the workforce occurred in the first and fourth quarters of the year. All amounts provided for were settled in the year except for: (i) severance in the amount of $967,000 which was settled in the first half of 2003; (ii) lease exit costs related to abandoned premises in the amount of $1,528,000, $1,388,000 of which was settled in 2003 and $47,000 of which was settled in 2004 leaving $93,000 at December 31, 2004 and December 31, 2005 that the Company expects will be settled by the end of the first quarter of 2006; and (iii) hosting exit costs in the amount of $2,487,000, $996,000 of which was paid out in 2003, $900,000 of which was reversed in 2003 upon the re-negotiation of certain agreements, $410,000 of which was paid out in 2004 and $181,000 of which was reversed in 2004 because certain costs were lower than the Company had estimated.  The Company has now fully exited all hosting arrangements related to legacy customers.
(b)	2003 write-down of goodwill:
	As required by generally accepted accounting principles, the Company performed an annual impairment review of goodwill.  The annual impairment review was performed on December 31, 2003, resulting in a reduction of $9,097,000 in the carrying value of goodwill.
	As the Company operates in one business segment and has designated this business segment as its only reporting unit, the Company used a trailing average of its market capitalization to determine if there was an indication of impairment.  As the trailing average market capitalization was less than the carrying value of its net assets, the Company performed a second test to assess the amount of the impairment.  For purposes of performing this second step, the estimated fair value of the Company was allocated to all the assets and liabilities of the Company including those assets that may not have an accounting carrying value such as customer relationships, customer contracts, technology and other intellectual property.  This fair value allocation is performed in a manner similar to a business acquisition purchase price allocation.  As a result of this assessment, the Company determined that the excess of its estimated fair value over the carrying value of its net assets was attributable to its intangible assets, leaving no remaining value to be allocated to goodwill.  As a result, the remaining goodwill was written down to nil.

F-33

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

17. Accrued liabilities:

	2005		2004
Compensation and benefits	$	694	$	787
Professional and consulting fees		572		717
Travel		116		137
Other		240		460
	$	1,622	$	2,101

18.	Related parties:
	The Company obtains legal services relating to corporate, commercial and securities matters from Torys LLP, a law firm with offices in Toronto, Canada and New York.  Barry Reiter, a member of the Board of Directors, is a partner of that firm. The Board of Directors of the Company has determined that legal services provided by Torys LLP to us do not interfere with Mr. Reiter’s ability to act in the Company’s best interests.
	During the year ended December 31, 2005 the Company recorded approximately $55,000 in legal expenses related to work performed by Torys (2004 – $91,000, 2003 – $178,000). At December 31, 2005, $11,000 is due to Torys LLP (2004 – $12,000, 2003 – nil).
19.	Subsequent events:
	(a)	Proposal from Austin Ventures:
		On February 28, 2006 the Company received a proposal from Austin Ventures to acquire all of its outstanding common shares not owned by Austin Ventures for cash consideration of $3.07 per common share.
		Austin Ventures proposed that the transaction be effected by way of a court-approved plan of arrangement.  In addition to court approval, the transaction would require the approval of the Company’s shareholders, including by way of a majority of the votes cast by holders other than Austin Ventures and related parties.  Options to purchase our common shares would also acquired as part of the acquisition.
		Prior to the Austin Ventures proposal, the Board of Directors had formed a Special Committee composed entirely of directors who are independent of management and independent of Austin Ventures to consider potential value enhancing strategic transactions for our shareholders.  This Special Committee, in consultation with the Company’s financial and legal advisors, reviewed and considered the Austin Ventures proposal, as well as other potential means to maximize shareholder value.

F-34

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

		On March 9, 2006, Austin Ventures submitted a revised non-binding proposal to acquire all of the Company’s outstanding common shares not owned by Austin Ventures for cash consideration of $3.34 per common share.  The Company accepted the revised proposal after careful consideration and evaluation by its Special Committee of independent directors in conjunction with its financial and legal advisors.
		The arrangement is also dependent upon receipt of a satisfactory fairness opinion and valuation report and completion by Austin Ventures of its due diligence.  The revised and accepted proposal is set to terminate on April 6, 2006 in the event a definitive arrangement agreement is not reached by that date.
	(b)	Nasdaq notice of non-compliance:
		On March 8, 2006 the Company received a Nasdaq Staff Deficiency Letter indicating that it fails to comply with the Nasdaq’s Marketplace Rule 4310(c)(2)(B).  Marketplace Rule 4310(c)(2)(B) requires companies listed on the Nasdaq Capital Market to have a minimum of $2,500,000 in stockholders’ equity, or $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.
		The Company submitted a response to Nasdaq and Nasdaq staff is reviewing its eligibility for continued listing on the Nasdaq Capital Market. If Nasdaq is not satisfied with the Company’s proposal, they will issue a delisting notice, which can be appealed. In the event such an appeal was not successful, the Company’s shares would be delisted from Nasdaq.
20.	Reconciliation to Canadian GAAP:
	Under Canadian securities requirements, the Company is required to provide a reconciliation setting out differences between U.S. and Canadian GAAP as applied to the Company’s financial statements.  This note sets out the differences between U.S. and Canadian GAAP for the years ended December 31, 2005 and 2004.  There were no differences between the Company’s financial statements as prepared under U.S. and Canadian GAAP for the year ended December 31, 2003.
	The consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP, which conform in all material respects with Canadian generally accepted accounting principles (“Canadian GAAP”), except for the treatment of the secured convertible notes to related parties.
	Under U.S. GAAP, the secured convertible notes payable to related parties are classified entirely as debt except for the beneficial conversion feature, which was recorded as additional paid-in capital. The difference between the amounts allocated to the liability and the principal amount of the notes of $8,000,000 is being amortized as non-cash imputed interest expense over the period to maturity and the liability is being accreted up to its maturity value.

F-35

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

Under Canadian GAAP, the secured convertible notes to related parties are considered compound instruments that are required to be separated into liability and equity components. The Company has calculated the liability component of the secured convertible notes as the present value of the future obligation using a discount rate of 15%, representing the estimated rate that it would be required to pay for similar borrowings with no conversion feature. The liability component amounted to $7,067,000. The residual amount of $933,000 represents the estimated equity component for the conversion option and is included under Canadian GAAP in “equity portion of convertible notes payable to related parties”.  In addition, under Canadian GAAP the issue costs of $352,000 are allocated between equity and liability components on a proportionate basis while under U.S. GAAP the entire amount is treated as deferred charge. Accordingly, $41,000 of the deferred charge has been shown as an offset to equity for Canadian GAAP purposes, therefore the net “equity portion of convertible notes payable to related parties” is $892,000. The difference between the amounts allocated to the liability and the principal amount of the notes of $8,000,000 is being amortized as non-cash imputed interest expense over the period to maturity and the liability is being accreted up to its maturity value.

For U.S. GAAP purposes, the costs related to the issuance of the secured convertible notes payable was recorded as a long-term asset and are being amortized over the term of the Notes.  For Canadian GAAP purposes, these costs have been allocated on a pro rata basis between the debt and equity components of the compound instruments.  The amount allocated to the debt component has been recorded as a long-term asset and amortized over the term of the notes and the amount allocated to the equity component has been recorded as a reduction to shareholders’ equity.

F-36

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

20.	Reconciliation to Canadian GAAP (continued):
	The following tables present the adjustments required to reconcile the 2005 and 2004 consolidated financial statements presented under U.S. GAAP to Canadian GAAP.
	Balance sheet at December 31, 2005

	U.S. GAAP			Adjustments			Canadian GAAP
Assets
Current assets:
Cash and cash equivalents	$	5,272		$	—		$	5,272
Short-term investments		4,009			—			4,009
Restricted cash		219			—			219
Accounts receivable, net of allowance		2,471			—			2,471
Prepaid expenses and other receivables		522			—			522
Total current assets		12,493			—			12,493
Deferred charges		167			(19	)		148
Fixed assets		836			—			836
Total assets	$	13,496		$	(19	)	$	13,477
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	358		$	—		$	358
Accrued liabilities		1,622			—			1,622
Interest payable to related parties		108			—			108
Deferred revenue		289			—			289
Total current liabilities		2,377			—			2,377
Convertible notes payable to related parties in 2007		7,969			(422	)		7,547
Long-term interest payable to related parties in 2007		768			—			768
Total liabilities		11,114			(422	)		10,692
Shareholders’ equity:
Common shares		764,859			—			764,859
Additional paid-in capital		1,312			(65	)		1,247
Equity portion of convertible notes payable to related parties		—			892			892
Accumulated deficit		(763,996	)		(424	)		(764,420	)
Accumulated other comprehensive income		207			—			207
Total shareholders’ equity		2,382			403			2,785
Total liabilities and shareholders’ equity	$	13,496		$	(19	)	$	13,477

F-37

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

20.	Reconciliation to Canadian GAAP (continued):
	Balance sheet at December 31, 2004

	U.S. GAAP			Adjustments			Canadian GAAP
Assets
Current assets:
Cash and cash equivalents	$	5,417		$	—		$	5,417
Short-term investments		8,005			—			8,005
Restricted cash		210			—			210
Accounts receivable, net of allowance		2,831			—			2,831
Prepaid expenses and other receivables		583			—			583
Total current assets		17,046			—			17,046
Deferred charges		286			(33	)		253
Fixed assets		1,135			—			1,135
Total assets	$	18,467		$	(33	)	$	18,434
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	613		$	—		$	613
Accrued liabilities		2,101			—			2,101
Interest payable to related parties		103			—			103
Deferred revenue		173			—			173
Total current liabilities		2,990			—			2,990
Long-term liabilities		92			—			92
Convertible notes payable to related parties in 2007		7,947			(711	)		7,236
Long-term interest payable to related parties in 2007		343			—			343
Total liabilities		11,372			(711	)		10,661
Shareholders’ equity:
Common shares		764,530			—			764,530
Additional paid-in capital		279			(65	)		214
Equity portion of convertible notes payable to related parties		—			892			892
Accumulated deficit		(757,921	)		(149	)		(758,070	)
Accumulated other comprehensive income		207			—			207
Total shareholders’ equity		7,095			678			7,773
Total liabilities and shareholders’ equity	$	18,467		$	(33	)	$	18,434

F-38

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

20.	Reconciliation to Canadian GAAP (continued):
	Statement of operations for the year ended December 31, 2005:

	U.S. GAAP			Adjustments			Canadian GAAP
Revenue:
Product	$	7,445		$	—		$	7,445
Services		10,820			—			10,820
		18,265			—			18,265
Operating expenses:
Cost of product revenue, other		28			—			28
Cost of service revenue		7,430			—			7,430
Research and development		6,982			—			6,982
Sales and marketing		4,036			—			4,036
General and administrative		3,362			—			3,362
Depreciation		597			—			597
Stock-based compensation:
Cost of revenue		53			—			53
Research and development		122			—			122
Sales and marketing		136			—			136
General and administrative		720			—			720
Total operating expenses		23,466			—			23,466
Loss from operations		(5,201	)		—			(5,201	)
Interest expense, net		(709	)		(275	)		(984	)
Loss on settlement of liability		(165	)		—			(165	)
Loss for the year	$	(6,075	)	$	(275	)	$	(6,350	)
Basic and diluted loss per share	$	(1.01	)	$	(0.04	)	$	(1.05	)
Weighted average number of shares used in computing basic and diluted loss  per share (000’s)		6,034			6,034			6,034

F-39

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

20.	Reconciliation to Canadian GAAP (continued):
	Statement of operations for the year ended December 31, 2004:

	U.S. GAAP			Adjustments			Canadian GAAP
Revenue:
Product	$	8,844		$	—		$	8,844
Services		6,228			—			6,228
		15,072			—			15,072
Operating expenses:
Cost of product revenue, other		26			—			26
Cost of service revenue		6,614			—			6,614
Research and development		6,271			—			6,271
Sales and marketing		4,985			—			4,985
General and administrative		3,074			—			3,074
Depreciation		595			—			595
Stock-based compensation:
Cost of revenue		15			—			15
Research and development		40			—			40
Sales and marketing		34			—			34
General and administrative		63			—			63
Restructuring charges		993			—			993
Total operating expenses		22,710			—			22,710
Loss from operations		(7,638	)		—			(7,638	)
Interest expense, net		(396	)		(149	)		(545	)
Loss for the year	$	(8,034	)	$	(149	)	$	(8,183	)
Basic and diluted loss per share	$	(1.34	)	$	(0.03	)	$	(1.37	)
Weighted average number of shares used in computing basic and diluted loss  per share (000’s)		5,984			5,984			5,984

F-40

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

20.	Reconciliation to Canadian GAAP (continued):
	Cash flows from operating activities for the year ended December 31, 2005:

	U.S. GAAP			Adjustments			Canadian GAAP
Cash flows from (used in) operating activities:
Loss for the year	$	(6,075	)	$	(275	)	$	(6,350	)
Items not involving cash:
Accretion on convertible notes payable to related parties		22			289			311
Depreciation and amortization		597			—			597
Amortization of deferred charges		119			(14	)		105
Stock-based compensation		1,031			—			1,031
Loss on settlement of liability		165			—			165
Changes in operating assets and liabilities:
Accounts receivable		360			—			360
Prepaid expenses and other receivables		61			—			61
Accounts payable		(255	)		—			(255	)
Interest payable to related parties		5			—			5
Long-term liabilities		(92	)		—			(92	)
Long-term interest payable to related parties		425			—			425
Accrued liabilities		(479	)		—			(479	)
Deferred revenue		116			—			116
Net cash flows (used in) operating activities		(4,000	)		—			(4,000	)
Cash flows from (used in) financing activities:
Issuance of common shares on exercise of options		61			—			61
Net cash flows from financing activities		61			—			61
Cash flows used in investing activities:
Purchase of fixed assets, net		(345	)		—			(345	)
Maturity of short-term investments		14,402			—			14,402
Purchases of short-term investments		(10,415	)		—			(10,415	)
Net cash flows (used in) investing activities		3,642			—			3,642
Effect of exchange rate changes on cash		152			—			152
Net decrease in cash and cash equivalents		(145	)		—			(145	)
Cash and cash equivalents, beginning of year		5,417			—			5,417
Cash and cash equivalents, end of year	$	5,272		$	—		$	5,272

F-41

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)

Years ended December 31, 2005, 2004 and 2003

20.	Reconciliation to Canadian GAAP (continued):
	Cash flows from operating activities for the year ended December 31, 2004:

	U.S. GAAP			Adjustments			Canadian GAAP
Cash flows from (used in) operating activities:
Loss for the year	$	(8,034	)	$	(149	)	$	(8,183	)
Items not involving cash:
Accretion on convertible notes payable to related parties		12			157			169
Depreciation and amortization		595			—			595
Amortization of deferred charges		66			(8	)		58
Stock-based compensation		152			—			152
Other non-cash items		21			—			21
Changes in operating assets and liabilities:
Accounts receivable		(534	)		—			(534	)
Prepaid expenses and other receivables		65			—			65
Accrued interest on short-term investments		40			—			40
Accounts payable		202			—			202
Interest payable		103			—			103
Long-term liabilities		92			—			92
Long-term interest payable		343			—			343
Accrued liabilities		(1,301	)		—			(1,301	)
Deferred revenue		(237	)		—			(237	)
Net cash flows used in operating activities		(8,415	)		—			(8,415	)
Cash flows from (used in) financing activities:
Issuance of convertible notes payable to related parties		8,000			—			8,000
Note payable issue costs		(352	)		—			(352	)
Issuance of common shares on exercise of options		22			—			22
Net cash flows from financing activities		7,670			—			7,670
Cash flows used in investing activities:
Purchase of fixed assets, net		(1,017	)		—			(1,017	)
Maturity of short-term investments		7,233			—			7,233
Purchases of short-term investments		(13,490	)		—			(13,490	)
Net cash flows used in investing activities		(7,274	)		—			(7,274	)
Net decrease in cash and cash equivalents		(8,019	)		—			(8,019	)
Cash and cash equivalents, beginning of year		13,436			—			13,436
Cash and cash equivalents, end of year	$	5,417		$	—		$	5,417

F-42

EX-10.2.7

EXHIBIT 10.2.7

October 7, 2004

Michael E. Luna

6009 Ames Lake Road

Carnation, WA, 98014

Dear Michael:

It is our pleasure to offer you employment with 724 Solutions Inc. (“724” or “724 Solutions”) in the position of Chief Technology Officer.  This position reports to the Chief Executive Officer. Your first date of employment will be October 25, 2004.  The other principal terms of your employment are set out on the attached Schedule “A”.

This letter (including all attached Schedules) constitutes the terms and conditions of your employment with 724, and supersedes and replaces any previous offers, oral or written. This offer is contingent on you signing agreements related to Confidential Information and Assignment of Inventions to 724 in the attached form prior to beginning employment. It is also contingent on you providing us with documentation of U.S. citizenship or authorized alien work status prior to beginning employment.

Please note that, as a condition of your employment, you are required to sign and execute a copy of this agreement and all accompanying documentation and return it to us by October 7^th, 2004.  If you are in agreement with the terms of this letter, please indicate such agreement by signing in the space provided. We have included a second copy of the letter for your files.

We are looking forward to you joining 724.  If you have any questions regarding this letter or any other matter, please feel free to contact me at any time.

Yours truly,

John J Sims

Chief Executive Officer

I accept the offer of employment as described herein.

Michael E. Luna
Signature	Date

Schedule “A”

COMPENSATION AND BENEFITS OF
Michael E. Luna

1.	Salary. Your salary will be $220,000 USD per annum and your variable annual compensation will be $110,000 USD, for a target income of $330,000 USD. You acknowledge and agree that in the event you are eligible to earn any variable pay or bonus payments, only such variable pay or bonus payments actually earned by you as of the date your employment ceases shall be paid to you.
2.	Vacation.  You will be entitled to a vacation of 4 weeks in each full calendar year.  Your vacation for the remainder of the calendar year in which your employment commences shall be pro-rated at the rate of 1.67 days per month of employment.  If your employment commences after the 15th of the month, no vacation days will be earned for that month.  Your vacations shall be taken at such time as 724 may from time to time approve, having regard to the operations of 724.  A maximum of 5 unused vacation days may be carried forward into the next calendar year.
3.	Benefits.  You will be eligible to participate in any plans generally maintained from time to time by 724 for the benefit of 724’ employees, including, but not limited to, those pertaining to group life, accident, dental, prescription, sickness and medical, and long term disability insurance on the same terms and conditions as other employees holding similar positions, provided that premiums for such coverages are reasonable, as determined by 724 in its sole discretion.  Upon your beginning full-time employment with 724 you will also be eligible to participate in the company’s 401(k), medical and dental insurance plans, as well as its group life and long-term disability plans on the same terms and conditions as other employees holding similar positions. Your share of premiums under these plans, if any, can be deducted automatically from your paycheck on a pre-tax basis.
4.	Options to Purchase Shares.  Subject to approval of the Board of Directors, 724 hereby grants to you:
	(a)	the option to purchase 18,750 common shares of 724 (or the group of companies that forms 724 Solutions), at their Market Price (as defined in the Stock Option Plan) on the date of the grant (your first day of employment with 724), which option vests on and continues from the first anniversary of your employment; and
	(b)	the option to purchase an additional 18,750common shares of 724 (or the group of companies that forms 724), at their Market Price (as defined in the Stock Option Plan) on the date of the grant (your first day of employment with 724), which option vests on and continues from the second anniversary of your employment; and

	(c)	the option to purchase an additional 18,750 common shares of 724 (or the group of companies that forms 724), at their Market Price (as defined in the Stock Option Plan) on the date of the grant (your first day of employment with 724), which option vests on and continues from the third anniversary of your employment; and
	(d)	the option to purchase an additional 18,750 common shares of 724 (or the group of companies that forms 724), at their Market Price (as defined in the Stock Option Plan) on the date of the grant (your first day of employment with 724), which option vests on and continues from the forth anniversary of your employment.
	This statement of Compensation and Benefits supersedes all other prior and contemporaneous agreements and statements, whether written or oral, express or implied pertaining in any manner to your compensation and benefits, and it may not be contradicted by evidence of any prior or contemporaneous statements or agreements.
6.	Termination.
	(a)	Termination of Employment. Neither 724 nor you make any representation to the other that employment will continue for a set period of time or that employment will be terminated only under particular circumstances.  Both 724 and you may terminate your employment at any time or for any reason, subject to the provisions of this agreement.
	(b)	Termination Obligations.  You agree as follows:
			(i)	All property, including, without limitation, all equipment, tangible proprietary information (including confidential data), documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by you in the course of or incident to your employment, belongs to 724 or its affiliates and shall be returned promptly to 724 upon termination of your employment by either 724, for any reason (and whether for Cause or not), or you.
			(ii)	All benefits to which you are otherwise entitled shall cease upon your termination for any reason (and whether for Cause or not), unless explicitly continued either under this agreement, under any specific written policy or benefit plan of 724 or its affiliates, or as may be required by statute.
			(iii)	Upon termination of employment for any reason (and whether for Cause or not) under this agreement, you shall be deemed to have resigned from all offices and directorships then held with 724 or any

			subsidiary.  You shall sign any document or do such things that are reasonably required by 724 to give effect to any such resignation.  Should you fail to do so, any director of 724 is hereby irrevocably authorized in your name and on his or her behalf to sign any document or do any thing that is required to give effect thereto.
		(iv)	Your obligations under this section  “Termination” shall survive the termination of this agreement and the termination of employment for any reason (and whether for Cause or not).
		(v)	Following any voluntary termination of employment or termination for Good Reason by you, you shall, where reasonably requested by 724, reasonably cooperate with 724 for a reasonable period of time after such termination of employment in the orderly transition of duties and work assignments to other employees of 724 and its affiliates, provided that 724 continues to pay you compensation on a per diem basis, at a rate equal to your base salary in effect at your date of termination, during any such reasonable period of time that your cooperation is requested.  You shall also reasonably cooperate, at 724’s expense, in the defense of any action brought by any third party against 724 and its affiliates that relates in any way to your acts or omissions while employed by 724 and its affiliates.
(c)	Termination upon Death.  If you die during your employment, this agreement shall automatically terminate.
(d)	Termination upon Disability. If during your employment, you shall become physically or mentally incapacitated and as a result thereof you are unable to perform the essential functions of your position with or without a reasonable accommodation, for a continuous period of more than 120 days, then 724 and you specifically agree that this agreement has been frustrated, and therefore 724 is entitled to terminate your employment on one month’s notice or grant you one month’s salary in lieu of notice.
(e)	Termination of Employment Term Without Cause. Subject to Section (g), 724 reserves the right to terminate your employment without Cause at any time upon paying to the you a lump sum amount (the “Severance Amount”) equal to the sum of the following:
			(i)	Nine (9) months of your then current base salary; and
			(ii)	the product of  nine (9) multiplied by your Average Monthly Bonus

	less statutory deductions and withholdings, which amount the parties agree is pay-in-lieu of reasonable notice. You agree to release 724 and its affiliates from any action, cause of action, claim or demand against 724 or any other person, which may arise as a consequence of such termination and to sign a waiver and release to this effect in a form satisfactory to 724 as a condition to receiving payment under this Section (e). For purposes of this agreement, “Average Monthly Bonus” means an amount equal to the quotient obtained by dividing the total amount of bonus earned by you in the twelve (12) months immediately prior to the date of your termination by twelve (12).
(f)	Termination for Good Reason.  You may terminate your employment for Good Reason at any time.  Upon such termination for Good Reason, 724 shall pay you the Severance Amount.  You agrees to release 724 and its affiliates from any action, cause of action, claim or demand against 724 or any other person, which may arise as a consequence of such termination and to sign a waiver and release to this effect in a form satisfactory to 724 as a condition to receiving payment under this Section (f).  For purposes of this agreement, “Good Reason” will exist at any time following the occurrence of one or more of the following events without your written consent:
		(i)	subject to Section (g), the assignment to you of any duties materially inconsistent with your position, authority, duties or responsibilities pursuant to this agreement or any other action by 724 that results in a material diminution in such position, authority, duties or responsibilities;
		(ii)	a reduction of greater than five percent in your total target income as set forth in Schedule “A”; or
		(iii)	relocation, without your consent of your place of employment by more than fifty (50) miles; provided, however, that you shall not terminate your employment hereunder unless you first give notice of your intention to terminate and the grounds for such termination, and 724 has not, within thirty (30) days following receipt of such notice, cured such Good Reason.
(g)	Special Considerations on Change of Control. Notwithstanding Section (e) and Section (f)(i), you acknowledge and agree that if a Change of Control has occurred, and in connection with that Change of Control, (i) the acquirer (or its affiliate) offers you employment or continues your employment in a position that is, when taken as a whole, comparable in all significant respects to your position, authority, duties and responsibilities with 724 prior to such Change of Control (it being understood that your title or reporting relationship may change as a result of the Change of Control), and (ii) your employment is not terminated by the

	acquirer (or its affiliate) within twelve (12) months of the Change of Control, then 724 shall not be obligated to pay you the Severance Amount. For purposes of the foregoing, “Change of Control” means any one person, corporation or other entity acquires directly or indirectly (i) 50% or more of 724’s voting securities, or (ii) all or substantially all of 724’s assets.
(h)	Termination of Employment Term for Cause. 724 may at any time and without notice immediately terminate your employment for Cause and you shall have no right to receive any compensation or benefit hereunder (with the exception of compensation earned but unpaid as of the termination date).  For purposes of this agreement, “Cause” will exist at any time following the occurrence of one or more of the following events:
		(i)	any willful act of personal dishonesty, fraud or misrepresentation taken by you in connection with your responsibilities as an employee which was intended to result in your substantial gain or personal enrichment at the expense of  724 or its affiliates;
		(ii)	your conviction of a felony (other than driving-related offenses), or the equivalent in a jurisdiction other than the United States, on account of any act which was materially injurious to 724 or any of its affiliates, or the reputation of 724 or any of its affiliates, as reasonably determined by the Board of Directors of 724;
		(iii)	your willful and continued failure to substantially perform your principal duties and obligations of employment (other than any such failure resulting from incapacity due to physical or mental illness;
provided, that for purposes of this Section (g), no act or failure to act shall be considered “willful” unless done or omitted to be done by you in bad faith and without reasonable belief that the act or omission was in or not opposed to the best interests of  724; provided, further, that 724 shall not terminate your employment under clause (iii) of this Section (g) unless 724 first gives notice of its intention to terminate and the grounds for such termination, and you have not, within thirty (30) days following receipt of such notice, cured such failure.
(i)	Voluntary Termination Period.  You may terminate this agreement upon giving of 12 weeks’ prior notice to 724 (or such lesser period of time as the parties may agree upon), in which case this agreement shall terminate at the expiration of such 12 week period without any other notice or any payment of salary or benefit plan contributions subsequent to the termination of this agreement.

	(k)	Treatment of Stock Options, Restricted Stock and Other Securities.  Notwithstanding any other provisions of this agreement, upon any termination of you for any reason and whether for Cause or not, any options, restricted stock or other securities held by you but subject to vesting which is contingent upon continued employment with 724 or its affiliates shall be governed by the provisions of the applicable stock plans and repurchase and award agreements.”
7.	General. You agree that you will, in the performance of your duties, promote the interest, business and reputation of 724 and perform all such duties as are essential or conducive to the efficient management of the company in accordance with its rules and policies. Without limiting the foregoing, you agree to execute and abide by 724’s code of ethics, insider trading policy and other applicable company policies.

Schedule “B”

724 Solutions Inc.

Confidentiality and Non-Compete Agreement

                    In consideration of my employment by 724 Solutions, Inc. (the “Company”), the Company’s promise to disclose to me confidential and proprietary information and trade secrets of the Company, the Company’s promise to provide me with immediate specialized training, and the compensation now and hereafter paid to me, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned hereby agrees with the Company as follows:

          1.       Recognition of Company’s Rights; Nondisclosure.   At all times during the term of my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon, or publish any of the Company’s Proprietary Information (defined below), except as such disclosure, use, or publication may be required in connection with my work for the Company, or unless the President or the Board of Directors of the Company expressly authorizes such in writing.  The term “Proprietary Information” shall mean trade secrets, confidential knowledge, data, or any other proprietary information of the Company and each of its subsidiaries or affiliated companies.  By way of illustration but not limitation, “Proprietary Information” includes (a) inventions, foreign and domestic patent rights, copyrights, sui generis rights, trade secrets, mask work rights, ideas, processes, formulas, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs, and techniques (hereinafter, such included Proprietary Information is collectively referred to as “Works”); (b) information regarding plans for research, development, new products and services, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers, and customers; and (c) information regarding the skills and compensation of other employees of the Company.  However, I shall not be obligated under this paragraph with respect to information I can document is or becomes readily publicly available without restriction through no fault of mine.

          2.       Third Party Information.  I understand, in addition, that the Company may from time to time receive from third parties confidential or proprietary information (“Third Party Information”) subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes.  During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose (to anyone other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an executive officer of the Company in writing.

          3.       Assignment of Works. 

                              (a)  Company shall own and I hereby assign to the Company all my right, title, and interest in and to any and all Works (and all Proprietary Rights with respect thereto), whether or not patentable or registrable under copyright or similar statutes, that were made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company to the fullest extent allowable by law, and I will promptly disclose such Works to Company.  If I use or disclose my own or any third party’s confidential information or intellectual property when acting within the scope of my employment or otherwise on behalf of Company, Company will have and I hereby grant Company a perpetual, irrevocable, worldwide royalty-free, non-exclusive, sublicensable right and license to exploit and exercise all such confidential information and intellectual property rights.

                              (b)  I acknowledge that all original works of authorship that are made by me (solely or jointly with others) during the term of my employment with the Company and that are within the scope of my employment and protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act (17 U.S.C. § 101).  Works assigned to the Company by this paragraph 3 are hereinafter referred to as “Company Works.”

                              (c)  To the extent allowable by law, Company Works includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights,” “artist’s rights,” droit moral rights,” or the like (collectively “Moral Rights”).  To the extent I retain any such Moral Rights under applicable law, I hereby waive such Moral Rights and consent to any action with respect to such Moral Rights by or authorized by Company and specifically grant Company the right to alter such Company Works.  I will confirm any such waivers and consents from time to time as requested by Company.

          4.       Enforcement of Proprietary Rights.  I will assist the Company in every proper way to obtain and from time to time enforce United States and foreign Proprietary Rights relating to Company Works in any and all countries.  To that end I will execute, verify, and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining, and enforcing such Proprietary Rights and the assignment thereof.  In addition, I will execute, verify, and deliver assignments of such Proprietary rights to the Company or its designee.  My obligation to assist the Company with respect to Proprietary Rights relating to such Company Works in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company’s request on such assistance.

                     In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalf to execute, verify, and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph thereon with the same legal force and effect as if executed by me.  I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, that I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

          5.       Obligation to Keep Company Informed.  During the period of my employment, I will promptly disclose to the Company fully and in writing and will hold in trust for the sole right and benefit of the Company any and all Works.  In addition, I will disclose all patent applications filed by me during the three (3) years after termination of my employment with the Company.

          6.       Prior Inventions.  Inventions, if any, patented or unpatented, that I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement.  To preclude any possible uncertainty, I have set forth on Exhibit A attached hereto a complete list of all inventions that I have, alone or jointly with others, conceived, developed, or reduced to practice or caused to be conceived, developed, or reduced to practice prior to commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement.  If disclosure of any such invention on Exhibit A would cause me to violate any prior confidentiality agreement, I understand that I am not to list such inventions in Exhibit A but am to inform the Company that all inventions have not been listed for that reason.

          7.        Other Activities; Non-Competition; Non-Solicitation.

          (a)          During the term of my employment with the Company, I will not, directly or indirectly, participate in the ownership, management, operation, financing or control of, or be employed by or consult for or otherwise render services to, any person, corporation, firm, or other entity that competes in the State of Texas, or in any other state in the United States, or in any country in the world with the Company in the conduct of the business of the Company as conducted or as proposed to be conducted, nor shall I engage in any other activities that conflict with my obligations to the Company.

          (b)          In consideration of the premises hereof and in further consideration of the Company’s promise to disclose to me confidential and proprietary information and trade secrets of the Company and the Company’s promise to provide me with immediate specialized training, and the experience I will gain throughout my employment with the Company, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, I hereby agree that for a period of six (6) months after the date that my employment with the Company is terminated, for any reason, I will not, directly or indirectly, (i) compete in the state of Texas, or in any other State of the United States, or in any country in the world where the Company engages in business, or proposes to engage in business, on the date of the termination of my employment with the Company, or (ii) participate in the ownership, management, operation, financing, or control of, or be employed by or consult for or otherwise render services to, any person, corporation, firm, or other entity that competes in the state of Texas, or in any other State of the United States, or in any country in the world with the Company in the conduct of the business of the Company as conducted and as proposed to be conducted on the date of termination of my employment.  Notwithstanding the foregoing, I am permitted to own up to 5% of any class of securities of any corporation that is traded on a national securities exchange or through Nasdaq.

          (c)          During the term of my employment and for a period of six (6) months after my employment with the Company is terminated for any reason, I will not, directly or indirectly, individually or on behalf of any other person, firm, partnership, corporation, or business entity of any type, hire, solicit, assist or in any way encourage any current employee or consultant of the Company or any subsidiary of the Company to terminate his or her employment relationship or consulting relationship with the Company or subsidiary nor will I hire or solicit the employment services of any former employee of the Company or any subsidiary of the Company whose employment has been terminated for less than six (6) months.

          8.        No Improper Use of Materials.  I understand that I shall not use the proprietary or confidential information or trade secrets of any former employer or any other person or entity in connection with my employment with the Company.  During my employment by the Company I will not improperly use or disclose any proprietary or confidential information or trade secrets, if any, of any former employer or any other person or entity to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person or entity to whom I have an obligation of confidentiality unless consented to in writing by that former employer, person, or entity.

          9.        No Conflicting Obligation.  I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement between me and any other employer, person or entity.  I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith.

          10.        Return of Company Documents.  When I leave the employ of the Company, I will deliver to the Company all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Company Works, Third Party Information, or Proprietary Information of the Company.  I further agree that any property situated on the Company’s premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice.

          11.        Legal and Equitable Remedies. Because my services are personal and unique and because I will have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance, or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement.

          12.        Authorization to Notify New Employer.  I hereby authorize the Company to notify my new employer about my rights and obligations under this Agreement following the termination of my employment with the Company.

          13.         Notices.  Any notices required or permitted hereunder shall be given to the appropriate party at the address specified in the Employment Agreement between me and the Company.  Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three days after the date of mailing.

          14.         General Provisions.

                              14.1     Governing Law.  This Agreement will be governed by and construed according to the laws of the State of New York without regard to conflicts of law principles.

                              14.2     Exclusive Forum.  I hereby irrevocably agree that the exclusive forum for any suit, action, or other proceeding arising out of or in any way related to this Agreement shall be in the state or federal courts in Texas, and I agree to the exclusive personal jurisdiction and venue of any court in Travis County, Texas.

                              14.3     Entire Agreement.  This Agreement sets forth the entire agreement and understanding between the Company and myself relating to the subject matter hereof and supercedes and merges all prior discussions between us.  No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the party to be charged.  Any subsequent change or changes in my duties, salary, or compensation will not affect the validity or scope of this Agreement.  As used in this Agreement, the period of my employment includes any time during which I may be retained by the Company as a consultant.

                              14.4     Assignment. You acknowledge that 724 Solutions may assign this agreement and the benefits of your covenants and obligations under this agreement to any person who purchases all or substantially all the assets of 724 Solutions.  In addition, this agreement and the rights and obligations of 724 Solutions may be assigned at any time by 724 Solutions to an affiliate of 724 Solutions.  Subject to the forgoing, neither this agreement nor any rights or obligations hereunder shall be assignable by any party without the prior written consent of the other party.  Subject thereto, this agreement shall ensure to the benefit of and be binding upon the parties and their respective heirs, executors, administrators, legal personal representatives, successors (including any successor by reason of amalgamation or statutory arrangement of any party) and permitted assigns.

                              14.5     Severability.

                               (a)  I acknowledge and agree that each agreement and covenant set forth herein constitutes a separate agreement independently supported by good and adequate consideration and that each such agreement shall be severable from the other provisions of this Agreement and shall survive this Agreement.

                               (b)  I understand and agree that Section 7 of this Agreement is to be enforced to the fullest extent permitted by law.  Accordingly, if a court of competent jurisdiction determines that the scope and/or operation of Section 7 is too broad to be enforced as written, the Company and I intend that the court should reform such provision to such narrower scope and/or operation as it determines to be enforceable, provided, however, that such reformation applies only with respect to the operation of such provision in the particular jurisdiction with respect to which such determination was made.  If, however, Section 7 is held to be illegal, invalid, or unenforceable under present or future law, and not subject to reformation, then (i) such provision shall be fully severable, (ii) this Agreement shall be construed and enforced as if such provision was never a part of this Agreement, and (iii) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance.

                              14.6     Successors and Assigns.

                     This Agreement will be binding upon my heirs, executors, administrators, and other legal representatives and will be for the benefit of the Company, its successors and assigns.

                              14.7     Survival.  The provisions of this Agreement shall survive the termination of my employment for any reason and the assignment of this Agreement by the Company to any successor in interest or other assignee.  I further understand and agree that the phrase “term of employment” contained herein shall include any period of time during which I am retained by the Company as a consultant and/or independent contractor.

                              14.8     Employment.  I agree and understand that my employment with the Company is at will, which means that either I or the Company may terminate the employment relationship at any time, with or without prior notice and with or without cause.  I further agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company’s right to terminate my employment at any time, with or without cause.

                              14.9     Waiver.  No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach.  No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right.  The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement.

                              14.10    Headings.  The headings to each section or paragraph of this Agreement are provided for convenience of reference only and shall have no legal effect in the interpretation of the terms hereof. 

                     This Agreement shall be effective as of the first day of my employment with the Company, namely:____________________, 20__.

                     I UNDERSTAND THAT THIS AGREEMENT AFFECTS MY RIGHTS TO INVENTIONS I MAKE DURING MY EMPLOYMENT, RESTRICTS MY RIGHT TO DISCLOSE OR USE THE COMPANY’S PROPRIETARY INFORMATION DURING OR SUBSEQUENT TO MY EMPLOYMENT, AND PROHIBITS ME FROM COMPETING WITH THE COMPANY AND/OR FROM SOLICITING EMPLOYEES AND CUSTOMERS OF THE COMPANY FOR ONE (1) YEAR AFTER MY EMPLOYMENT WITH THE COMPANY IS TERMINATED FOR ANY REASON.

[Signature Page to Confidentiality and Non-Compete Agreement Follows]

                     I HAVE READ THIS CONFIDENTIALITY AND NON-COMPETE AGREEMENT  CAREFULLY AND UNDERSTAND ITS TERMS.  I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT.

Dated: ___________________ 20___.
	Signature
	Michael E. Luna
	Address
ACCEPTED AND AGREED TO:
John Sims
Chief Executive Officer

EXHIBIT A

_________________________________

_________________________________

Ladies and/or Gentlemen:

                   1.     The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by ___________________ (the “Company”) that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my employment by the Company that I desire to remove from the operation of the Company’s Confidentiality and Non-Compete Agreement.

_________ No inventions or improvements.

_________ See below:

_________ Additional sheets attached.

                   2.     I propose to bring to my employment the following materials and documents of a former employer:

_________ No materials or documents.

_________ See below:

Signature

Date

INVENTION DISCLOSURE

Invention Disclosure #_________

Inventors:          1. _________________

                           2. _________________

                           3. _________________

Title of Invention: _______________________________________________________

Problem solved by invention: _______________________________________________

Invention Description: _____________________________________________________

Add additional signed, witnessed, and dated sheets and drawings if necessary.

Has this invention been disclosed outside of the Company? Yes____ No____

Inventor Signature: _____________________________	Date: _________________
Witness Signature: _____________________________	Date: _________________

EX-10.2.8

Exhibit 10.2.8

          THIS INDEMNIFICATION AGREEMENT (the “Agreement”) is made as of this           day of                                    , 2005, between 724 SOLUTIONS INC. (the “Corporation”) and [Insert Name of Director or Officer] (the “Indemnified Party”).

RECITALS:

The Board of Directors of the Corporation (the “Board”) and the Governance, Nomination, Human Resources and Compensation Committee of the Board have determined that the Corporation should act to assure the Indemnified Party of reasonable protection through indemnification against risks of claims and actions arising out of service to and activities on behalf of the Corporation and its subsidiaries, to the extent permitted by law.

NOW THEREFORE the parties agree as follows:

1.	Indemnification.  The Corporation will indemnify and save harmless the Indemnified Party to the fullest extent permitted by applicable law:
	1.1	from and against all Expenses (as defined below) reasonably sustained or incurred by the Indemnified Party in respect of any civil, criminal, administrative, investigative or other Proceeding (as defined below), whether or not brought by the Corporation, to which the Indemnified Party is made a party by reason of being or having been a director or officer of the Corporation; and
	1.2	from and against all Expenses reasonably sustained or incurred by the Indemnified Party as a result of serving as a director or officer of the Corporation in respect of any act, matter, deed or thing whatsoever made, done, committed, permitted or acquiesced in by the Indemnified Party as a director or officer of the Corporation, whether before or after the effective date of this Agreement and whether or not related to a Proceeding brought by the Corporation.
	1.3	Except and to the extent limited by applicable law, this indemnity will apply without reduction regardless of whether the Indemnified Party committed any fault or omitted to do anything that the Indemnified Party ought to have done.  The Corporation hereby agrees to indemnify the Indemnified Party to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of this Agreement, the Corporation’s organizational documents or by statute.  In the event of any change after the date of this Agreement in any applicable law, statute or rule that expands the right of the Corporation to indemnify a member of its Board of Directors or an officer, it is the intent of the parties hereto that the Indemnified Party shall enjoy by this Agreement the greater benefits afforded by such change.  In the event of any change after the date of this Agreement in any applicable law, statute or rule that narrows the right of the Corporation to indemnify a member of its Board of Directors or an officer, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder except as specifically limited by the terms hereof.

	1.4	The indemnification provided by this Agreement shall be in addition to and shall not diminish any rights to which the Indemnified Party may be entitled under the Corporation’s organizational documents, any agreement, any vote of shareholders or disinterested directors, applicable law, or otherwise.  The indemnities in this Agreement also apply to the Indemnified Party in respect of his or her service at the Corporation’s request as (a) an officer or director of another corporation, or (b) a similar role with another entity, including a partnership, trust, joint venture or other unincorporated entity, in each case, whether or not a subsidiary of the Corporation.  The indemnification provided under this Agreement shall continue as to the Indemnified Party for any action such Indemnified Party took or did not take while serving in an indemnified capacity even though the Indemnified Party may have ceased to serve in such capacity.
	1.5	Any other provision herein to the contrary notwithstanding, the Corporation shall not be obligated pursuant to the terms of this Agreement to indemnify the Indemnified Party for expenses and the payment of profits arising from the purchase and sale by the Indemnified Party of securities in violation of Section 16(b) of the U.S. Securities Exchange Act of 1934, as amended, the Securities Act (Ontario), or any similar successor statute.
	1.6	The Corporation and the Indemnified Party acknowledge that in certain instances, the federal state or provincial laws of the U.S. or Canada, or applicable public policy, may prohibit the Corporation from indemnifying its directors under this Agreement or otherwise.  The Indemnified Party understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the U.S. Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation’s rights under public policy to indemnify the Indemnified Party.
	“Expenses” means all costs, charges, damages, awards, settlements, liabilities, fines, penalties, statutory obligations, professional fees and other expenses of whatever nature or kind.
	“Proceeding” will include a claim, demand, suit, proceeding, inquiry, hearing, discovery or investigation, of whatever nature or kind, whether anticipated, threatened, pending, commenced, continuing or completed, and any appeal or appeals therefrom.
2.	Presumptions/Knowledge.
	2.1	For purposes of any determination hereunder, the Indemnified Party will be deemed, subject to compelling evidence to the contrary, to have acted in good faith and in the best interests of the Corporation.  For purposes of this Agreement, the termination of any Proceeding by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the Indemnified Party did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.  In connection with any determination by the Corporation or otherwise as to whether the Indemnified Party is entitled to be indemnified hereunder, the burden of proof shall be on the Corporation to establish that the Indemnified Party is not so entitled.
	2.2	The knowledge and/or actions, or failure to act, of any other director, officer, agent or employee of the Corporation or any other entity will not be imputed to the Indemnified Party for purposes of determining the right to indemnification under this Agreement.
	2.3	The Corporation will have the burden of establishing that any Expense it wishes to challenge is not reasonable.

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3.	Notice by Indemnified Party.  As soon as is practicable, upon the Indemnified Party becoming aware of any Proceeding which may give rise to indemnification under this Agreement, the Indemnified Party will give written notice to the Corporation.  Failure to give notice in a timely fashion will not disentitle the Indemnified Party to any rights provided hereby.
4.	Investigation by Corporation.  The Corporation may conduct any investigation it considers appropriate of any Proceeding of which it receives notice under section 3, and will pay all costs of that investigation.  The Indemnified Party will, acting reasonably, co-operate fully with the investigation provided that the Indemnified Party will not be required to provide assistance that would materially prejudice his or her defense.  As compensation therefor, the Indemnified Party will be compensated by the Corporation at the rate of $2,000 (U.S.) per day (or partial day) plus reasonable out-of-pocket Expenses actually incurred, provided that the Indemnified Party will not be entitled to the per diem if he/she is employed as an officer of the Corporation when co-operation is provided.
5.	Payment for Expenses of a Witness or Named Party.  Notwithstanding any other provision of this Agreement, to the extent that the Indemnified Party is, by reason of the fact that the Indemnified Party is or was a director or officer of the Corporation or of another entity at the Corporation’s request, a witness, participant or a named party in a Proceeding, the Corporation will pay to the Indemnified Party all out-of-pocket Expenses actually and reasonably incurred by the Indemnified Party or on the Indemnified Party’s behalf in connection therewith.  As compensation therefor, the Indemnified Party will also be compensated by the Corporation at the rate of $2,000 (U.S.) per day (or partial day) provided that the Indemnified Party will not be entitled to the per diem if he/she is employed as an officer of the Corporation when co-operation is sought.
	In circumstances where the Indemnified Party is a named Party in a Proceeding, the Indemnified Party will repay to the Corporation, all such per diem compensation paid to him or her to the extent that it is determined, by a court of competent jurisdiction, that the Indemnified Party is not entitled to indemnification under this Agreement.
6.	Expense Advances.  To the fullest extent permitted by applicable law, the Corporation will, upon request by the Indemnified Party, make advances (“Expense Advances”) to the Indemnified Party of all Expenses incurred by the Indemnified Party for which the Indemnified Party seeks indemnification under this Agreement before the final disposition of the relevant Proceeding.  In connection with such requests, the Indemnified Party will provide the Corporation with a written affirmation of the Indemnified Party’s good faith belief that the Indemnified Party is legally entitled to indemnification, along with sufficient particulars of the Expenses to be covered by the proposed Expense Advance to enable the Corporation to make an assessment of its reasonableness, and whether it is required by the terms of this Agreement.  The Indemnified Party’s entitlement to such Expense Advances will include those Expenses incurred in connection with any Proceeding by the Indemnified Party against the Corporation seeking an adjudication or award pursuant to this Agreement.  The Corporation will make payment to the Indemnified Party within 20 days after the Corporation has received the foregoing information from the Indemnified Party.  All Expenses for which indemnification is sought must be reasonable.
	The Indemnified Party will repay to the Corporation, all Expense Advances not actually required, and all Expense Advances if and to the extent that it is determined, by a court of competent jurisdiction, that the Indemnified Party is not entitled to indemnification under this Agreement.

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7.	Indemnification Payments.  With the exception of Expense Advances which are governed by section 6, the Corporation will pay to the Indemnified Party any amounts to which the Indemnified Party is entitled hereunder promptly upon the Indemnified Party providing the Corporation with reasonable details of the claim.
8.	Selection of Legal Counsel.  In the event the Corporation shall be obligated hereunder to pay the Expenses in connection with a Proceeding, the Corporation shall be entitled to assume the defense of such Proceeding, with counsel approved by the Indemnified Party (which such approval shall not be unreasonably withheld), upon the delivery to the Indemnified Party of written notice of its election to do so.  After delivery of such notice, approval of such counsel by the Indemnified Party and the retention of such counsel by the Corporation, the Corporation will not be liable to the Indemnified Party under this Agreement for any fees of counsel subsequently incurred by the Indemnified Party with respect to the same Proceeding; provided that, (i) the Indemnified Party shall have the right to employ the Indemnified Party’s counsel in any such Proceeding at the Indemnified Party’s expense and (ii) if (A) the employment of counsel by the Indemnified Party has been previously authorized in writing by the Corporation, (B) the Indemnified Party shall have reasonably concluded that there is a conflict of interest between the Corporation and the Indemnified Party in the conduct of any such defense, or (C) the Corporation shall not continue to retain such counsel to defend such Proceedings, then the fees and expenses of the Indemnified Party’s counsel shall be at the expense of the Corporation.  However, in no event will the Corporation be liable hereunder for the expenses of more than one counsel representing the Indemnified Party.  The Corporation shall have the right to conduct such defense as it sees fit in its sole discretion.  A conflict of interest will be deemed to exist if the Indemnified Party reasonably believes that his or her legal position or reputation could be adversely affected without independent representation.
9.	Settlement.  The parties will act reasonably in pursuing the settlement of any Proceeding.  The Corporation may not negotiate or effect a settlement of claims against the Indemnified Party without the consent of the Indemnified Party, acting reasonably.  The Indemnified Party may negotiate and effect a settlement without the consent of the Corporation, but the Corporation will not be liable for any settlement agreed upon without its prior written consent.
10.	Directors’ & Officers’ Insurance.  The Corporation shall obtain and maintain a directors’ and officers’ liability insurance policy that has been approved by the Board.  The Corporation will provide to the Indemnified Party a copy of each policy of insurance providing the coverages contemplated by this section promptly after coverage is obtained, and will promptly notify the Indemnified Party if the insurer cancels, makes material changes to coverage or refuses to renew coverage (or any part of the coverage).
11.	Arbitration.  All disputes, disagreements, controversies or claims arising out of or relating to this Agreement, including, without limitation, with respect to its formation, execution, validity, application, interpretation, performance, breach, termination or enforcement will be determined by arbitration before a single arbitrator under the Arbitration Act, 1991 (Ontario).
12.	Tax Adjustment.  Should any payment made pursuant to this Agreement, including the payment of insurance premiums or any payment made by an insurer under an insurance policy, be deemed to constitute a taxable benefit or otherwise be or become subject to any tax or levy, then the Corporation will pay any amount necessary to ensure that the amount received by or on behalf of the Indemnified Party, after the payment of or withholding for tax, fully reimburses the Indemnified Party for the actual cost, expense or liability incurred by or on behalf of the Indemnified Party.

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13.	Cost of Living Adjustment.  The $2,000 (U.S.) per diem payable pursuant to sections 4 and 5 will be adjusted to reflect changes from January 1, 2006 in the All-items Cost of Living Index for Toronto prepared by Statistics Canada or any successor index or government agency.
14.	Subrogation.  In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnified Party, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights.
15.	Governing Law.  This Agreement will be governed by the laws of [Ontario][New York].
16.	Survival.  The obligations of the Corporation under this Agreement will continue until the later of (a) six years after the Indemnified Party ceases to be a director or officer of the Corporation or any other entity in which he or she serves in a similar capacity at the request of the Corporation and (b) one year after the final termination of all Proceedings with respect to which the Indemnified Party is entitled to claim indemnification hereunder.
17.	No Construction as Employment Agreement.  Nothing contained in this Agreement shall be construed as giving the Indemnified Party any right to be retained in the employ of the Corporation or any of its subsidiaries.
18.	Severability.  The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including, without limitation, any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law.  Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
19.	Successors and Assigns.  The Corporation shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Corporation, by written agreement in form and substance satisfactory to the Indemnified Party, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place.  This Agreement shall continue in effect with respect to any Proceeding or Expenses regardless of whether the Indemnified Party continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Corporation or of any other enterprise, including, without limitation, subsidiaries of the Corporation, at the Corporation’s request.
20.	Binding Effect.  This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including, without limitation, any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation, spouses, heirs, and personal and legal representatives.

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21. Amendment and Termination. Any term hereof may be amended (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Corporation and the Indemnified Party.  Any amendment so effected shall be binding upon the Corporation, the Indemnified Party and all of their respective successors and assigns whether or not such person or entity entered into or approved such amendment or waiver.  The observance of any term hereof may be waived by a party with respect to its own interests (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the party so waiving the observance of such term.  In no event shall such waiver of any rights hereunder constitute the waiver of such rights in any future instance unless the waiver so specifies in writing.

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          IN WITNESS WHEREOF, the parties hereto have executed this Agreement.

	724 SOLUTIONS INC.
	By:
	By:
	By:
Witness		Name of Director or Officer:
Witness Name

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EX-14.1

Exhibit 14.1

724 SOLUTIONS INC.
CODE OF ETHICS

1.	SCOPE & OBJECTIVES.
	724 Solutions Inc. and its subsidiaries (collectively, the “Company”) have adopted this Code of Ethics to apply to all directors, officers and employees of the Company. Its purpose is to promote honest and ethical conduct and compliance with the law. This Code of Ethics also includes specific provisions that are applicable to (i) the Company’s Chief Executive Officer, Chief Financial Officer, and Controller with respect to the maintenance of the Company’s financial records and the preparation of financial statements filed with the Securities and Exchange Commission and Canadian securities regulatory authorities, and (ii) the Company’s legal counsel with respect to standards of professional conduct for lawyers. The obligations of this Code of Ethics supplement, but do not replace, the code of conduct applicable to all employees as set out in the Company’s policy entitled “The Way We Do Business” or any other Company policies.
2.	ETHICS.
	The Company and each of its directors, officers and employees, wherever they may be located, must conduct its and their affairs with uncompromising honesty and integrity. Business ethics are no different than personal ethics - the same high standard applies to both. Directors, officers and employees of the Company are required to adhere to the highest standards regardless of local custom. In this regard, directors, officers and employees are expected to be honest and ethical in dealing with each other, employees, customers, vendors and all other third parties.
	The rights of other directors, officers and employees and third parties must also be respected. Directors, officers and employees’ actions must be free from discrimination, libel, slander or harassment. Each person must be accorded equal opportunity, regardless of age, race, sex, sexual preference, color, creed, religion, national origin, marital status, veteran’s status, handicap or disability.
	Misconduct cannot be excused because it was directed or requested by another. In this regard, directors, officers and employees are expected to alert the Company’s Chief Financial Officer (the officer in charge of the Company’s service functions (finance, human resources, legal and compliance)), whenever an illegal, dishonest or unethical act is discovered or suspected. Directors, officers and employees will not be penalized for reporting discoveries or suspicions in good faith.

1

	The Company conducts its affairs in compliance with applicable laws and regulations of the countries where it does business. Business practices, customs and laws differ from country to country. When conflicts arise between the Company’s ethical practices, and the practices, customs, and the laws of a country, the Company seeks to resolve them consistent with its ethical beliefs. If the conflict cannot be resolved consistent with its ethical beliefs, the Company will not proceed with the proposed action that gives rise to the conflict. These ethical standards reflect who the Company is and the standards by which it chooses to be judged.
	A violation of the standards contained in this Code of Ethics will result in corrective action, including possible dismissal.
3.	CONFLICTS OF INTEREST.
	Directors, officers and employees must avoid any personal activity, investment or association that interferes or that could appear to interfere with the Company’s best interests. In this regard, directors, officers and employees may not exploit their position or relationship with the Company for personal gain.
	For example, there is a likely conflict of interest if a director, officer or employee:
		•	causes the Company to engage in business transactions with relatives or friends;
		•	uses nonpublic customer or vendor information for personal gain by the director, officer or employee or his or her relatives or friends (including securities transactions based on such information);
		•	has any financial interest in the Company’s vendors, customers or competitors;
		•	receives a loan, or guarantee of obligations, from the Company or a third party as a result of his or her position at the Company; or
		•	competes, or prepares to compete, with the Company while still employed by the Company.
	There are other situations in which a conflict of interest may arise. If a director, officer or employee has concerns about any situation, the director, officer or employee should discuss the matter with the Company’s Chief Financial Officer (the officer in charge of the Company’s service functions (finance, human resources, legal and compliance) or its Chairman in order to determine whether a conflict of interest has occurred or may occur as a result of the situation.
4.	GIFTS, BRIBES AND KICKBACKS.
	Other than for modest gifts given or received in the normal course of business, no director, officer or employee or his or her relatives may give gifts to, or receive gifts from, the Company’s customers and vendors. In no event should a director, officer or employee put the Company or himself or herself in a position that would be embarrassing if the gift was made public.
	Any director, officer or employee who pays or receives bribes or kickbacks will be subject to appropriate reprimand by the Company, including termination and may be reported, as warranted, to the appropriate authorities. A kickback or bribe includes any item intended to improperly obtain favorable treatment.

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5.	LOANS.
	Directors and officers may not request or accept any loans or payroll advances from the Company.
6.	IMPROPER USE OR THEFT OF THE COMPANY PROPERTY.
	Every director, officer or employee must safeguard Company’s property from loss or theft, and may not take such property for personal use. The Company’s property includes confidential information, software, computers, office equipment, and supplies. Each director, officer and employee must appropriately secure all the Company’s property within his or her control to prevent its unauthorized use. Use of the Company’s electronic communications systems must conform with acceptable standards.
7.	COVERING UP MISTAKES; FALSIFYING RECORDS.
	Mistakes should never be covered up, but should be immediately fully disclosed and corrected. Falsification of any Company, client or third party record is prohibited.
8.	PROTECTION OF THE COMPANY, CLIENT OR VENDOR INFORMATION.
	Directors, officers and employees may not use or reveal Company, customer or vendor confidential or proprietary information to others. Additionally, directors, officers and employees must take appropriate steps - including securing documents, limiting access to computers and electronic media, and proper disposal methods - to prevent unauthorized access to such information. Proprietary and/or confidential information includes, among other things, business methods, pricing and marketing data, strategy, computer code, research, information about, or received from, the Company’s current, former and prospective customers and vendors.
9.	GATHERING COMPETITIVE INFORMATION.
	Directors, officers and employees may not accept, use or disclose the confidential information of our competitors. When obtaining competitive information, directors, officers and employees must not violate our competitors’ rights. Particular care must be taken when dealing with competitors’ customers, ex-customers and ex-employees. Directors, officers and employees must never ask for confidential or proprietary information or ask a person to violate a non-competition or non-disclosure agreement. If directors, officers and employees are uncertain about these obligations, the Legal Department can assist them.

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10.	SALES: DEFAMATION AND MISREPRESENTATION.
	Aggressive selling should not include misstatements, innuendo or rumors about the Company’s competition or their products and financial condition. Directors, officers and employees must not make unsupportable promises concerning the Company’s products and services.
11.	USE OF THE COMPANY AND THIRD PARTY SOFTWARE.
	Company and third party software may be distributed and disclosed only to those persons and entities authorized to use it, and to customers in accordance with terms of the Company’s agreements that are approved in accordance with Company policy.  In addition, Company and third party software may not be copied without specific authorization and may only be used to perform assigned responsibilities.
	All third-party software must be properly licensed. The license agreements for such third party software may place various restrictions on the disclosure, use and copying of the software.
12.	DEVELOPING SOFTWARE.
	Directors, officers and employees involved in the design, development, testing, modification or maintenance of the Company’s software must not tarnish or undermine the legitimacy and “cleanliness” of the Company’s products by copying or using unauthorized third party software or confidential information. Directors, officers and employees may not possess, use or discuss proprietary computer code, output, documentation or trade secrets of a third party, unless authorized by such party.
13.	FAIR DEALING.
	No director, officer or employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing practice.
14.	FAIR COMPETITION AND ANTITRUST LAWS.
	The Company must comply with all applicable fair competition and antitrust laws. These laws attempt to ensure that businesses compete fairly and honestly and prohibit conduct seeking to reduce or restrain competition. If directors, officers or employees are uncertain whether a contemplated action raises unfair competition or antitrust issues, the Legal Department can assist them.

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15.	SECURITIES TRADING.
	Directors, officers and employees must at all times comply with the Company’s Insider Trading Policy. Without limiting the terms of that policy:
		•	it is illegal to buy or sell securities using material information not available to the public; and
		•	persons who give such undisclosed “inside” information to others will also be liable.
	If directors, officers and employees are uncertain about their obligations with respect to securities trading and insider information, the Legal Department can assist them.
16.	POLITICAL CONTRIBUTIONS.
	No Company funds may be given directly to political candidates in violation of applicable laws and without the prior approval of the Company’s Board of Directors. Directors, officers and employees may, however, engage in political activity with their own resources on their own time.
17.	RETENTION OF BUSINESS RECORDS.
	The Company business records must be maintained for the periods specified in the Company’s Record Retention Policy. Records may be destroyed only at the expiration of the pertinent period. In no case may documents involved in a pending or threatened litigation, government inquiry or under subpoena or other information request, be discarded or destroyed, regardless of the periods specified in the Record Retention Policy. In addition, directors, officers and employees may never destroy, alter, or conceal, with an improper purpose, any record or otherwise impede any official proceeding, either personally, in conjunction with, or by attempting to influence, another person.
18.	ADDITIONAL PROVISIONS FOR SENIOR FINANCIAL OFFICERS.
	The following provisions of this Code of Ethics apply to the Company’s Chief Executive Officer, Chief Financial Officer, and Controller (“Senior Financial Officers”). Their purpose is to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the Company’s financial records and the preparation of financial statements filed with the Securities and Exchange Commission and Canadian securities regulatory authorities. The specific obligations of Senior Financial Officers set out in this Section supplement, but do not replace, the code of conduct applicable to all directors, officers and employees set out in this Code of Ethics.

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1.	Senior Financial Officers are expected to carry out their responsibilities honestly and with integrity, exercising at all times their best independent judgment.
2.	Senior Financial Officers should avoid, to the extent possible, situations in which their own interests conflict, or may appear to conflict, with the interests of the Company. Conflicts of interest are sometimes unavoidable, however. In any case in which a Senior Financial Officer finds himself or herself with an actual or apparent conflict of interest, he or she should promptly disclose it to the Chief Executive Officer (or if the Chief Executive Officer is involved in the matter giving rise to the conflict, then to the Chief Financial Officer) who will review the transaction or relationship. If such officer determines that a material conflict does exist, he will refer the matter to the Audit Committee of the Board of Directors, which shall determine how the situation should be resolved.
3.	Senior Financial Officers are responsible for assuring full, fair, accurate, timely and understandable disclosure of relevant financial information to shareholders and investors. In particular they are responsible for assuring that the Company complies with SEC rules and Canadian securities laws governing disclosure of financial information and for assuring that press releases and communications with investors and securities analysts are fair and accurate. Among other things, Senior Financial Officers should:
		(a)	establish and maintain internal controls and procedures and disclosure controls and procedures designed to assure that financial information is recorded, processed and transmitted to those responsible for preparing periodic reports and other public communications containing financial information so that they are complete, accurate, and timely;
		(b)	carefully review each periodic report for accuracy and completeness before it is filed with the SEC and Canadian securities regulatory authorities and carefully review each public communication containing financial information before it is released;
		(c)	promptly disclose to their superiors, and if necessary to the Audit Committee of the Board of Directors and the Company’s independent auditors, any material weaknesses in, or concerns regarding, the Company’s disclosure, disclosure controls or internal controls; and
		(d)	comply at all times with applicable governmental laws, rules and regulations.
4.	Senior Financial Officers should promptly bring to the attention of the Audit Committee or the full Board of Directors:
		(a)	any matters that could compromise the integrity of the Company’s financial reports;

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		(b)	any disagreement with respect to any material accounting matter;
		(c)	any violation of this Code of Ethics or of any law or regulation related to the Company’s accounting or financial affairs; and
		(d)	any allegation or question concerning the integrity of the Company’s reporting process.
19.	PROVISIONS FOR LEGAL COUNSEL.
	In addition to complying with all applicable aspects of this Code of Ethics, the Company’s legal counsel shall comply with all applicable standards of professional conduct for lawyers.
20.	REPORTING VIOLATIONS.
	If a director, officer or employee is powerless to stop suspected misconduct or he or she discovers it after it has occurred, the director, officer or employee must report it to the Company’s Chief Financial Officer (the officer in charge of the Company’s service functions (finance, human resources, legal and compliance)) or its Chairman.  If the reporting director, officer or employee is not satisfied with the action taken by such officer in response to the reported misconduct, he or she shall report the circumstances to the Chairman of the Audit Committee or the Chairman of the Corporate Governance, Human Resources and Compensation Committee of the Company’s Board of Directors. Directors, officers and employees reporting misconduct in good faith and in accordance with these procedures will be protected from retaliation.
	The Chief Executive Officer shall provide regular reports to the Company’s Board of Directors of any violations of this Code of Ethics.
21.	VIOLATIONS.
	All directors, officers and employees are required to read, understand and comply, as applicable, with the terms of this Code of Ethics. Any violation by an director, officer or employee of the terms of this Code of Ethics will be considered to be a breach of his or her duties and, if applicable, employment contract with the Company and such director, officer or employee will be subject to appropriate reprimand by the Company, including termination. Violations of this Code of Ethics may also be reported, as warranted, to the appropriate authorities.

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724 SOLUTIONS INC.
CODE OF ETHICS

ACKNOWLEDGEMENT FORM FOR OFFICERS AND EMPLOYEES

I have received a copy of and carefully read and understand the 724 Solutions Inc. Code of Ethics. I will follow the Code of Ethics and comply with the Company’s requirements set out in the Code of Ethics going forward. I acknowledge that the Code of Ethics forms part of the terms of my employment with 724 Solutions Inc. and its subsidiaries.

Signature of Officer or Employee

Printed name of Officer or Employee

          Date

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724 SOLUTIONS INC.
CODE OF ETHICS

ACKNOWLEDGEMENT FORM FOR SENIOR FINANCIAL OFFICERS

I have received a copy of and carefully read and understand the 724 Solutions Inc. Code of Ethics, including, without limitation, the specific provisions for senior financial officers. I will follow the Code of Ethics and comply with the Company’s requirements set out in the Code of Ethics (including, without limitation, the specific provisions for senior financial officers) going forward. I acknowledge that the Code of Ethics forms part of the terms of my employment with 724 Solutions Inc. and its subsidiaries.

Signature of Senior Financial Officer

Printed name of Senior Financial Officer

          Date

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724 SOLUTIONS INC.
CODE OF ETHICS

ACKNOWLEDGEMENT FORM FOR NON-MANAGEMENT DIRECTORS

I have received a copy of and carefully read and understand the 724 Solutions Inc. Code of Ethics. I will follow the Code of Ethics and comply with the Company’s requirements set out in the Code of Ethics going forward. I acknowledge that I am required to comply with the Code of Ethics as part of my responsibilities as a director of 724 Solutions Inc.

Signature of Director

Printed name of Director

          Date

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EX-21.1

Exhibit 21.1

SIGNIFICANT SUBSIDIARIES

724 Solutions Software Inc.

724 Solutions International Inc.

724 Solutions (US) Inc.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
724 Solutions Inc.

We consent to the incorporation by reference in the registration statements (No. 333-125011, 333-98837, 333-55760, 333-42142) on Form S-8 of 724 Solutions Inc. of our report dated March 30, 2006 relating to the consolidated balance sheets of 724 Solutions Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2005, which report appears in the December 31, 2005 annual report on Form 10-K of 724 Solutions Inc.  Our report refers to a change to the accounting for stock based compensation. 

/s/ KPMG LLP

Chartered Accountants
Toronto, Ontario
March 30, 2006.

EX-31.1

Exhibit 31.1

CERTIFICATION

	I, John J. Sims, Chief Executive Officer, certify that:
1.	I have reviewed this annual report on Form 10-K of 724 Solutions Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
	(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2006
	By:	/s/ John J. Sims
		John J. Sims
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

	I, Stephen Morrison, Chief Financial Officer, certify that:
1.	I have reviewed this annual report on Form 10-K of 724 Solutions Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
	(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2006

By:	/s/ Stephen Morrison
	Stephen Morrison
	Chief Financial Officer and Senior Vice President, Corporate Services

EX-32.1

Exhibit 32.1

CERTIFICATION

          In connection with the periodic report of 724 Solutions Inc. (the “Company”) on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”), I, John J. Sims, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

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

          The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

          This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

                         Date: March 31, 2006

By:	/s/ John J. Sims
	John J. Sims
	Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION

          In connection with the periodic report of 724 Solutions (the “Company”) on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission (the “Report”), I, Stephen Morrison, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

          This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

                    Date: March 31, 2006

By:	/s/ Stephen Morrison
	Stephen Morrison
	Chief Financial Officer and Senior Vice President, Corporate Services

EX-99.1

EXHIBIT 99.1

724 SOLUTIONS INC.

AUDIT COMMITTEE CHARTER

I.       PURPOSE

          The Audit Committee (the “Committee”) of 724 Solutions Inc. (the “Corporation”) is a committee of the Board of Directors which has responsibility under the Corporation’s governing legislation to review the financial statements, accounting policies and reporting procedures of the Corporation. 

          The primary function of the Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing: the financial reports and other financial information provided by the Corporation to any governmental body or the public; the Corporation’s systems of internal controls regarding finance, accounting, and legal compliance that management and the Board have established; and the Corporation’s auditing, accounting and financial reporting processes generally. Consistent with this function, the Committee should encourage continuous improvement of, and should foster adherence to, the Corporation’s policies, procedures and practices at all levels.

          The Committee’s primary duties and responsibilities are to:

•    Serve as an independent and objective party to monitor the Corporation’s financial reporting process and the system of internal controls.

•    Monitor the independence and performance of the Corporation’s external auditors and internal auditing.

•    Provide an open avenue of communication among the independent auditors, financial and senior management and the Board of Directors.

          The Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in Section IV of this Charter.

II.     COMPOSITION

•    The Committee shall be comprised of three or more directors, each of whom shall be independent non-management directors,  as determined by the Board of Directors.  The composition of the Committee shall adhere to all applicable laws and all requirements of the stock exchanges on which shares of the Corporation are listed.  In particular, the composition of the Committee shall be in accordance with (i) Section 10A(m)(3) of the U.S. Exchange of 1934, as amended, (ii) the Nasdaq listing standards regarding the composition of the Committee (including Nasdaq’s concept of “independence”) and the required qualifications and experience of the members of the Committee, and (iii) Multilateral Instrument 52-110 of the Canadian securities regulators, subject to any exemptions or other relief that may be granted from time to time.

•    All members of the Committee shall have a working familiarity with basic finance and accounting practices, shall be financially literate (as defined in Multilateral Instrument 52-110) and at least one member of the Committee shall be a “financial expert” in accordance with applicable laws and all requirements of the stock exchanges on which shares of the Corporation are listed.

•    Members of the Committee shall be elected by the Board at such times as shall be determined by the Boardand shall serve until their successors shall be duly elected.

•    Any member of the Committee may be removed or replaced at any time by the Board of Directors and shall cease to be a member of the Committee as soon as such member ceases to be a director.

•    The members of the Committee shall be entitled to receive such remuneration for acting as members of the Committee as the Board of Directors may from time to time determine.

III.    MEETINGS

•    The Committee may appoint one of its members to act as Chairman of the Committee.  The Chairman will appoint a secretary who will keep minutes of all meetings (the “Secretary”).  The Secretary does not have to be a member of the Committee or a director and can be changed by simple notice from the Chairman.

•    No business may be transacted by the Committee except at a meeting at which a quorum of the Committee is present or by a resolution in writing signed by all members of the Committee.  A majority of the members of the Committee shall constitute a quorum, provided that if the number of members of the Committee is an even number, one half of the number of members plus one shall constitute a quorum.

•    The Committee will meet as many times as is necessary to carry out its responsibilities but in no event will the Committee meet less than four times a year.  The Committee shall meet periodically, but at least once annually with the independent auditors, with management not present. In addition, the Committee shall meet with the independent auditors and management at least quarterly to review the Corporation’s financial statements and the related press releases.

•    The time at which, and the place where, the meetings of the Committee shall be held, the calling of meetings and the procedure in all respects of such meetings shall be determined by the Committee, unless otherwise provided for in the by-laws of the Corporation or otherwise determined by resolution of the Board of Directors.

•    The Committee may invite to, or require the attendance at, any meeting of the Committee such officers and employees of the Corporation, legal counsel or other persons as it deems necessary in order to perform its duties and responsibilities.  The internal and external auditors should also be requested or required to attend meetings of the Committee and make presentations to the Committee as appropriate.

•    Subject to the provisions of the Corporation’s governing legislation and applicable laws, regulations and stock exchange rules, if required for expediency or to prevent loss to the Corporation, the Chairman of the Committee may exercise the powers of the Committee in between meetings of the Committee.  In such event, the Chairman shall immediately report to the members of the Committee and the actions or decisions taken in the name of the Committee shall be recorded in the proceedings of the Committee.

IV.     RESPONSIBILITIES AND DUTIES

           To fulfill its responsibilities and duties the Committee shall:

Documents/ Reports Review

•    Review and recommend to the Corporation’s Governance, Nomination, Human Resources and Compensation Committee any revisions or updates to this Charter for it to then put them forward for approval by the Board. This should be done periodically, but at least annually, as conditions dictate.

•    Prior to public disclosure, review the interim quarterly financial statements and the annual audited financial statements (including the Corporation’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and the related press releases of the Corporation with the Corporation’s management and independent auditors and report thereon to the Board of Directors. As part of this review, the Committee shall review with management the risk factors and any cautionary language set out in the related filings and recommend any required or desired amendments thereto.

•    Ensure that adequate procedures are in place for the review of the Corporation’s public disclosure of financial information extracted or derived from the financial statements and periodically review the adequacy of those procedures.

•    Establish policies, procedures and guidelines, as appropriate, with respect to providing financial information and earnings guidance to analysts. Generally, the Committee will discuss with management any financial information and earnings guidance provided to analysts. These discussions, however, need not occur in advance of each provision of guidance.

•    Satisfy itself, on behalf of the Board of Directors, that the Corporation’s quarterly and annual audited financial statements are fairly presented both in accordance with generally accepted accounting principles and otherwise, and recommend to the Board of Directors whether the quarterly and annual financial statements should be approved.

•    Satisfy itself, on behalf of the Board of Directors, that the information contained in the Corporation’s quarterly financial statements, Annual Report to Shareholders and other financial publications, such as Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Annual Information Form and similar documentation required pursuant to applicable laws, rules and regulations does not contain any untrue statement of any material fact or omit to state a material fact that is required or necessary to make a statement not misleading, in light of the circumstances under which it was made.

•    Review any financial reports or other financial information of the Corporation submitted to any governmental body or the public, including any certification, report, opinion, or review rendered by the independent auditors.

•    Have the right, for the purpose of performing their duties: (i) to inspect all the books and records of the Corporation and its subsidiaries; (ii) to discuss such accounts and records and any matters relating to the financial position of the Corporation with the officers and auditors of the Corporation and its subsidiaries; (iii) to commission reports or supplemental information relating thereto; and any member of the Committee may require the auditors to attend any or every meeting of the Committee; and (iv) to engage such independent counsel and other advisors as are necessary in the Committee’s determination.

•    Permit the Board of Directors to refer to the Committee such matters and questions relating to the financial position of the Corporation and its affiliates or the reporting related thereto as the Board of Directors may from time to time see fit.

Independent Auditors

The independent auditors are ultimately accountable to the Committee and report directly to the Committee.  Accordingly, the Committee will evaluate and be responsible for the Corporation’s relationship with the independent auditors.  Specifically, the Committee will:

•    Be directly and solely responsible for recommending to shareholders the appointment of the Corporation’s independent auditors, and the retention, termination, compensation, evaluation and oversight of the work of the Corporation’s independent auditors, with such auditors being ultimately accountable to the Board and the Committee.

•    Act as the Corporation’s independent auditors’ channel of direct communication to the Corporation and directly oversee the work of the independent auditors including the resolution of disagreements between management and the independent auditors regarding financial reporting. In this regard, the Committee shall, among other things, receive and review all reports and recommendations from the Corporation’s independent auditors, including the independent auditor’s timely reports of:

	1.	all critical accounting policies and practices to be used;
	2.	all alternative treatments of financial information within generally accepted accounting principles that have been discussed with the Corporation’s management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the Corporation’s independent auditor; and
	3.	other material written communications between the independent auditor and the Corporation’s management, such as any management letter or schedule of unadjusted differences.
•    Satisfy itself, on behalf of the Board of Directors, that the Corporation’s auditors are “independent” of management, within the meaning given to such term in the rules and pronouncements of the applicable regulatory authorities and professional governing bodies.  In furtherance of the foregoing, the Committee shall request that the independent auditors, at least annually, provide a formal written statement delineating all relationships between the independent auditors and the Corporation consistent with Independence Standards Board (ISB) Standard No. 1., and request information from the independent auditors and management to determine the presence or absence of a conflict of interest.  The Committee shall actively engage the auditors in a dialogue with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditors.  The Committee shall take, or recommend that the full Board take, appropriate action to oversee the independence of the auditors.
•    Ensure that rotation of the independent auditors’ audit partners satisfies regulatory requirements, and set policies about hiring current or former employees or partners of the independent auditors.
•    Be responsible for pre-approving, at least annually, all audit and non-audit services provided by the Corporation’s independent auditors; provided, however, that the Committee shall have the authority to delegate such responsibility to one or more of its members to the extent permitted under applicable law and stock exchange rules.
•    Ensure that the Corporation’s independent auditors do not perform any non-audit services that are prohibited by law or regulation.
	•    Annually review and evaluate the performance of the Corporation’s auditors, including a review and evaluation of the lead partner, taking into account the opinions of management, and make recommendations to the Board of Directors as to whether or not to continue to engage those auditors.

		•    Determine and review the remuneration of the Corporation’s auditors and any independent advisors (including independent counsel) to the Committee.
	•    Satisfy itself, on behalf of the Board of Directors, that the audit function has been effectively carried out and that any matter which the independent auditors wish to bring to the attention of the Board of Directors (including any audit problems or difficulties encountered in the course of the audit work, and management’s responses) has been addressed and that there are no “unresolved differences” with the auditors.
Financial Reporting Processes and Risk Management
	•    Review the audit plan of the external auditors for the current year and review advice from the external auditors relating to management and internal controls and the Corporation’s responses to the suggestions made therein.
	•    Monitor the Corporation’s internal accounting controls, informational gathering systems and management reporting on internal control. In this regard, the Committee will receive regular reports from management on the Corporation’s compliance with Section 404 of the Sarbanes Oxley Act and any similar requirements under Canadian securities laws.
	•    Review with management and the auditors the relevance and appropriateness of the Corporation’s accounting policies and review and approve all significant changes to such policies.
	•    Satisfy itself, on behalf of the Board of Directors, that the Corporation has implemented appropriate systems of internal control over financial reporting and the safeguarding of the Corporation’s assets and other “risk management” functions (including the identification of significant risks and the establishment of appropriate procedures to manage those risks and the monitoring of corporate performance in light of applicable risks) affecting the Corporation’s assets, management, financial and business operations and the health and safety of its employeesand that these are operating effectively.
	•    Review and approve the Corporation’s investment and treasury policies and monitor compliance with such policies.
	•    Establish procedures for the receipt and treatment of (i) complaints received by the Corporation regarding accounting, controls, financial reporting or auditing matters and (ii) confidential, anonymous submissions by the Corporation’s employees of concerns regarding questionable accounting or auditing, or with respect to internal or disclosure controls or financial reporting.

Legal and Regulatory Compliance
	•    Satisfy itself, on behalf of the Board of Directors, that all material statutory deductions have been withheld by the Corporation and remitted to the appropriate authorities.
	•    Review, with the Corporation’s General Counsel, and if appropriate, principal external counsel, any legal matter that could have a significant impact on the Corporation’s financial statements.
	•    Satisfy itself, on behalf of the Board of Directors, that all regulatory compliance issues have been identified and addressed and identifying those that require further work.
Code of Business Conduct and Ethics
	•    Periodically review and assess the Corporation’s Code of Business Conduct and Ethics (the “Code”) and the Corporation’s Whistleblower Policy;
	•    Approve any waivers of the Code sought by directors or executive officers; and
	•    Confirm that any waivers of the Code for directors or executive officers are promptly disclosed if required by applicable law or stock exchange requirements
Budgets
	•    Assist the Board of Directors in the review and approval of operational, capital and other budgets proposed by management.
General
	•    Perform any other activities consistent with this Charter, the Corporation’s By-laws and governing law and stock exchange rules, as the Committee or the Board of Directors deems necessary or appropriate.