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

This discussion and analysis of financial condition and results of operations for the three month and six month periods ended June 30, 2005, should be read in conjunction with the unaudited interim consolidated financial statements and related notes in this report.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") has been prepared with reference to Zi Corporation's (the "Company" or "Zi") unaudited interim consolidated financial statements and notes which have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and reconciled to Canadian generally accepted accounting principles ("Canadian GAAP"). All financial information herein is presented in United States of America dollars ("US Dollars") except as otherwise indicated. Historically, the primary consolidated financial statements of Zi Corporation have been prepared in accordance with Canadian GAAP and Canadian Dollars with an annual reconciliation of the Company's financial position and results of operations to US GAAP. In order to provide information on a more comparable basis with its industry peers and to better assist with the understanding of the financial statements to the majority of their users, who are in the United States, for the period ending December 31, 2003, the Company initiated reporting its financial position, results of operations and cash flows under US GAAP in its consolidated financial statements. Effective March 31, 2004, the Company initiated reporting its consolidated financial statements in US dollars, with comparative periods restated to US dollars. Other revisions to disclosures throughout the Company's consolidated financial statements and notes have been made to comply with US GAAP requirements, including comparative disclosures. The effects on net loss arising from differences in GAAP between the US and Canada are outlined in note 12 to the consolidated financial statements. Forward Looking Information This MD&A contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward looking statements when you see us using words such as "expect", "anticipate", "estimate", "believe", "may", "potential", "intends", "plans" and other similar expressions or statements that an action, event or result "will", "may", "could" or "should" be taken, occur or be achieved, or the negative thereof or other similar statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. These factors include, among others, those listed in "Risk Factors" below. Forward-looking statements are based on the beliefs, opinions and expectations of our management on the date the statements are made. Although we believe that the forward-looking statements presented in this document are reasonable, we do not guarantee that they accurately or completely predict, reflect or state future results, levels of activity, performance, achievements or occurrence and we do not assume responsibility for failure to do so. We do not promise to update forward-looking information to reflect actual results, new information, occurrence of future events, or changes in management's beliefs, opinions or expectations. No undue reliance should be placed on such forward-looking statements.

Summary of Results of Operations
	Three Months Ended June 30,						Six Months Ended June 30,
(thousands of US$ except per share amounts) (unaudited)			2005			2004			2005			2004
Revenue	$	3,144		$	3,414		$	6,014		$	6,443
Gross margin		3,008			3,281			5,725			6,194
Net income (loss)		(181)			254			(1,695)			(1,203)
Total assets	$	21,526		$	9,745		$	21,526		$	9,745
Net income (loss) per share - basic and diluted	$	(0.00)		$	0.01		$	(0.04)		$	(0.03)
Outstanding shares, weighted average		46,237,322		39,492,560			46,038,432			39,394,876
Outstanding shares, end of period		46,239,168		39,492,560			46,239,168			39,492,560

All dollar amounts are in US dollars and in conformity with US GAAP. This information should be read in conjunction with the Company's unaudited interim financial statements and notes.

     Zi Corporation 2005     3

Overview Zi Corporation is incorporated under the Business Corporations Act of Alberta. Principally, Zi develops software designed to enhance the usability of mobile and consumer electronic devices. Through its e-Learning business unit which includes Oztime, English Practice and an equity interest in Magic Lantern Group, Inc. ("MLG"), the Company is also involved in e-Learning technology, content and customer service as well as educational content and distribution channels to offer learning management systems, interactive online courses and network education solutions to meet diverse client requirements. Zi Corporation is a global technology company that delivers intelligent interface solutions to enhance the user experience of wireless and consumer technologies. Zi's product innovations are available on mobile phones, PDAs, gaming devices and set-top boxes. Zi solutions are designed to dramatically improve the usability of these devices and the applications on them; including, SMS, MMS, e-mail and Internet browsing. The Company provides device manufacturers and network operators with a full range of intuitive and easy-to-use solutions, including: eZiText® for one-touch predictive text entry; eZiTap™ for intelligent multi-tap entry, Decuma® for natural handwriting recognition and the recently announced Qix™ service discovery engine to enhance the user experience and drive service usage and adoption. Zi's product portfolio includes 48 different language databases, 70 additional language interfaces and the ability to meet user needs in more than 130 countries. With over 125 handset manufacturing customers, Zi's technologies can be found in the handsets of manufacturers from around the world, including Nokia, Sony, Sony Ericsson, Samsung, LG Electronics, Flextronics, HP, Sanyo, Fujitsu, Kyocera and others. In early 2005, Zi acquired Decuma handwriting recognition and announced the Qix service discovery engine to Zi's core predictive text solutions of eZiText and eZiTap. With this expanded portfolio of products, Zi is focused on making mobile devices smarter and easier to use with software products that simplify data entry and interaction on a communications device. The combination of the technologies is expected to further bolster Zi's competitive advantage and enable Zi to deliver an expanded suite of innovative products to customers.   Critical Accounting Policies and Estimates The preparation of these consolidated financial statements and related disclosures in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of these financial statements, and revenue and expenses during the period reported. Estimates include allowance for doubtful accounts, valuation of the note receivable, estimated useful life of intangible assets, deferred costs and capital assets; provisions for contingent liabilities; measurement of stock-based compensation; valuation allowance for future tax assets; and revenue from other product revenue using the percentage of completion method, and reflect management's best estimates. By their nature, these estimates are subject to uncertainty and the effect on the financial statements of changes in estimates in future periods could be significant. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. The allowance for doubtful accounts reflects estimates of doubtful amounts in accounts receivable. The allowance is based on specifically identified accounts, historical experience and other current information. The Company has identified the following critical accounting policies that affect the more significant estimates and judgments used in preparation of its consolidated financial statements. Software Development Costs All research and development costs are expensed as incurred except those that qualify under the Financial Accounting Standards Board Statement ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed". Research and development costs incurred prior to the establishment of the technological feasibility of a particular software project are expensed as incurred. Software development costs, including costs associated with coding and testing of project related software, are capitalized subsequent to when the technological feasibility of a project is established. Capitalized costs are amortized commencing in the period of the product's commercial release. The determination of whether a project is technically feasible involves establishing, at a minimum, that the Company has a detailed, documented and consistent product and program design, including high risk development issues related to the project, with the necessary resources to complete the project. If a detailed program design is not used, technological feasibility will be established when a product design or working model of the software model, consistent with the product design, is complete and tested.

4 SECOND QUARTER REPORT

Revenue Recognition The Company recognizes revenue when it is earned and realized in a manner consistent with interpretations in Staff Accounting Bulletin ("SAB") No. 104 of the US Securities and Exchange Commission as further described in note 2 to the Company's annual consolidated financial statements. Revenue from licensed software is recognized in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition". Revenues from software licensing royalties related to the sale of the product in which the Company's technologies have been embedded are recorded as earned. Software licensing royalties are included in fees from licensing and implementation. Under software licensing arrangements, the Company recognizes revenues provided that: a license agreement has been signed and fees are non-refundable; the software and related documentation have been delivered; there are no uncertainties regarding customer acceptance; collection of the resulting receivable is deemed probable; the fees are fixed and determinable; and no other significant vendor obligations exist. Any revenue associated with contracts having multiple elements is deferred and recognized ratably over the period of the contract unless clear evidence exists with respect to the fair value of each separate element of the contract. Fair value for each separate element is evidenced by existing customer contract which stipulate rates associated with separate yet similar services or deliverables. In addition, contracts involving significant modifications or customization of the software sold are accounted for under the guidelines of contract accounting. Customer support revenues consist of revenue derived from contracts to provide post contract support, such as maintenance and service support, to license holders. The revenues are recognized ratably over the term of the contract. Revenue from Oztime product contracts recorded in other product revenue is recognized using the percentage of completion method, whereby revenue is recorded at the estimated realizable value of work completed to date and costs incurred to date are compared to total estimated contract costs to determine whether a loss will be realized. Amounts received in advance are recorded as deferred revenue. Estimated losses on contracts are recognized when they become known. Other product revenue recorded by the Company is mainly comprised of revenue for the e-Learning business segment and this revenue is recognized through the percentage of completion method as previously described. Stock-based Compensation Plan As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", regarding the accounting for the grant of employee and director stock options, the Company has elected to use the intrinsic value method, following Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under APB No. 25, companies are not required to record any compensation expense relating to the grant of options to employees or directors where the awards are granted upon fixed terms with an exercise price equal to fair value at the date of grant and the only condition of exercise is continued employment. The Company accounts for restricted stock units ("RSU's") in accordance with SFAS No. 123, whereby the intrinsic value method is used and the related compensation expense is recognized over the vesting period. The Company has a stock-based compensation plan, which is further described in note 9 to the Company's annual consolidated financial statements. The Company has elected to account for stock options by measuring compensation expense as the excess, if any, of the quoted market value of the stock at the date of grant over the exercise price. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. If stock or stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the stock or stock option cancelled is charged to retained earnings. Three Months Ended June 30, 2005 Revenue Total revenue for the three-months ended June 30, 2005 was $3.1 million, a decrease of eight percent or $0.3 million over second quarter revenue a year earlier. Revenue from Zi Technology and its text input applications was $2.9 million compared to $3.3 million for the same period a year ago. Revenue decreases from two customers represented a decline of $0.5 million on a year over year basis. Both customers face a shrinking market for a particular mobile technology. Otherwise, the Company's royalty revenue from all other customers (total Zi Technology revenue excluding professional services, maintenance & support, language fees and licensing fees) increased by 14%. Other product revenue from e-Learning was $0.2 million for the quarter compared to $0.1 million a year earlier. In this quarter, Zi earned royalties from 57 eZiText licensees compared to 43 in the same period a year earlier. In the three months ended June 30, 2005, 70 new handset models embedded with eZiText were released into the market, bringing the total as of that date to 930 compared to 572 a year earlier.

      Zi Corporation 2005 5

Gross margin on revenue was $3.0 million for the second quarter of 2005, a decrease of eight percent from last year's level of $3.3 million. Gross margin this quarter is relative unchanged at 96 percent compared to the second quarter of the prior year. Operating costs and expenses Selling, general and administrative expense ("SG&A") in the three months ended June 30, 2005 increased by $0.1 million to $2.3 million from the same period a year earlier. This increase is mainly due to costs associated with the new Decuma Handwriting Recognition technology. Product research and development expense increased by $0.9 million year over year to $1.2 million. Gross expenditures on product development before capitalization increased period over period by $0.1 million from $1.2 million to $1.3 million. The Company has continued to invest in new product features and enhancements to soft language databases along with continued investment in Decuma handwriting recognition software. In the three month period ended June 30, 2005, the Company capitalized $32,000 in software development costs. In the second quarter of 2004, the Company capitalized $0.9 million in software development costs related to developing dramatically new and improved language database software. Depreciation and amortization increased by $43,000 in the second quarter of 2005 compared to the same period a year earlier. The increase in depreciation and amortization was due to higher levels of unamortized software development costs related to new software language databases. Also, depreciation related to capital assets decreased due to lower levels of undepreciated capital assets. In the second quarter of 2005, other interest expense decreased to nil from $12,000 in the prior period. On December 19, 2003, the Company borrowed $1.0 million through the issuance of a demand note payable and repaid this note July 20, 2004. Other interest in the three months ended June 30, 2004 is effectively interest on the $1 million loan. The net loss was $0.2 million for the three-month period end June 30, 2005 compared to net income of $0.3 million a year earlier. The increase in quarterly loss from year to year of $0.4 million was due to: lower revenue and gross margin of $0.3 million; higher SG&A of $0.1 million (primarily as a result of an acquired business); an increase in product research & development expense of $0.9 million (as a result of an acquired business and, more significantly, lower levels of capitalization of product development costs); impairment of a note receivable of $0.3 million; a tax provision related to a Chinese subsidiary of $0.3 million; offset by a settlement of litigation against prior counsel of   $1.4 million. In the second quarter of 2005, the loss by segment and principal item was: $0.2 million operating loss from the Zi Technology business segment; $0.2 million loss from the e-Learning business segment; a $0.5 million in operating income for other corporate costs (which includes a gain of $1.4 million realized on settlement of litigation against prior legal counsel) and income tax expense of $0.3 million associated with a Chinese subsidiary. Six Months Ended June 30, 2005 Revenue Total revenue for the six-months ended June 30, 2005 was $6.0 million, a decrease of seven percent or $0.4 million over the same period a year earlier. Revenue from Zi Technology and its text input applications was $5.6 million compared to $6.3 million for the same period a year ago. The decline in revenue is due principally to two customer accounts as discussed in the three months ended June 30, 2005 discussion above. Other product revenue from e-Learning was $0.4 million for the six month period ended June 30, 2005 compared to $0.2 million a year ago. In the six month period ended June 30, 2005, Zi earned royalties from 59 eZiText licensees compared to 49 in the same period a year earlier. In the six months ended June 30, 2005, 126 new handset models embedded with eZiText were released into the market, bringing the total as of that date to 930 compared to 572 a year earlier. Gross margin on revenue was $5.7 million for the six month period ended June 30, 2005, a decrease of eight percent from last year's level of $6.2 million. Gross margin for the six month period ended June 30, 2004 decreased slightly to 95 percent of revenue compared to 96 percent in the same period of the prior year. Operating costs and expenses SG&A in the six months ended June 30, 2005 decreased $0.4 million to $5.1 million from the same period a year earlier. Selling and marketing related costs increased by $0.7 million in the first six months of 2005 compared to the same period in the prior year principally as a result of costs to introduce Qix to the market. SG&A also includes $0.2 million of cost associated with operations of the recently acquired Decuma Handwriting Recognition technology, costs associated with SOX compliance and realized foreign exchange losses. In the first six months of 2004, $1.5 million in non-cash compensation expense was recognized upon issuance of restricted stock units and non-employee stock options. There were no non-cash compensation expenses incurred in the first six

6 SECOND QUARTER REPORT

months of 2005. Product research and development expense increased by $1.2 million to $2.2 million, year over year. Gross expenditures on product development (expenditures before capitalization of costs related to new product development) increased by $0.7 million to $2.6 million. The Company has continued to invest in new product features and enhancements to language databases along with continued investment in Decuma handwriting recognition software. In the six month period ended June 30, 2004, the Company capitalized $0.9 million in software development costs related to developing dramatically new and improved language database software. In the six month period ended June 30, 2005, the Company capitalized $0.4 million of software development costs. Depreciation and amortization increased by $0.1 million in the first six months of 2005 compared to the same period a year earlier. The increase in depreciation and amortization was due to increased levels of unamortized software development costs. Also, depreciation related to capital assets decreased due to lower levels of undepreciated capital assets. On December 19, 2003, the Company borrowed $1.0 million through the issuance of a demand note payable and repaid this note July 20, 2004. Other interest in the three months ended June 30, 2004 is principally interest on the $1 million loan. The net loss was $1.7 million for the six-month period end June 30, 2005 compared to $1.2 million a year earlier. The increase in loss for the six month period year to year of $0.5 million was due to: lower revenue of $0.4 million and a lower gross margin of $0.5 million; increase in product research & development expense of $1.2 million (as a result of an acquired business and, more significantly, lower levels of capitalization of product development costs); impairment of a note receivable of $0.3 million; a tax provision related to a Chinese subsidiary of $0.3 million; offset by a settlement of litigation against prior counsel of $1.4 million and a decrease in SG&A of $0.4 million. For the six month period ended June 30, 2005, the loss by segment and principal item was: $0.8 million operating loss from the Zi Technology business segment; $0.5 million loss from the e-Learning business segment; a $0.3 million in operating loss for other corporate costs (which includes a gain of $1.4 million realized on settlement of litigation against prior legal counsel) and income tax expense of $0.3 million associated with a Chinese subsidiary.   Liquidity and Capital Resources At June 30, 2005 Zi had cash and cash equivalents of $13.1 million. The objective of Zi's investment policy for funds is to preserve capital and maintain short-term liquidity while earning reasonable investment returns. During the past three years, our cash requirements have been met through revenues from operations, proceeds from issuance of common shares through private placements and the exercise of common share purchase warrants and options. During the three months ended June 30, 2005, the Company had net cash outflow of $2.8 million consisting principally of: impairment of note $0.3 million; operating loss of $1.3 million (operating income (loss) before undernoted in the consolidated statements of loss with gain on settlement of litigation added back); increase in accounts receivable of $0.6 million and decrease in accounts payable of $1.3 million. During the six months ended June 30, 2005, the Company had net cash inflow of $0.2 million consisting primarily of $2.2 million in proceeds from the issuance of stock, offset by: investing activities that included an acquisition of a subsidiary for $0.5 million; product development costs of $0.4 million; purchase of capital assets for $0.1 million; operating activities use of cash of $0.6 million and other activities of $0.6 million. Cash flow used in operations for the six months ended June 30, 2005 was $0.6 million as compared to $0.3 million for the same period in 2004. Included in the $0.3 million of cash used in operations in 2004 was $0.75 million representing the final scheduled installment under a settlement agreement with AOL America Time Warner ("AOL"). Excluding the AOL final payment, cash flow from operations was $0.4 million. The net increase of $1.0 million in cash flow from operations between the two periods represents, principally, decreased gross margin of $0.5 million, increased SG&A costs of $1.1 million (the 2004 comparative period costs exclude non-cash compensation expense of $1.5 million), increased product research and development cost of $1.2 million, increased litigation and legal and depreciation and amortization of $0.1 million each and income tax expense of $0.3 million associated with a Chinese subsidiary. These are offset by a gain of $1.4 million realized on settlement of litigation against prior legal counsel, decreased non-cash working capital of $1.6 million and increased interest income of $0.2 million.

      Zi Corporation 2005 7

On January 26, 2005, the Company purchased the assets of Decuma AB, a Swedish company specializing in developing and marketing handwriting recognition software. The Company has accounted for the purchase under the purchase method of accounting. As part of the acquisition, the Company acquired Decuma's intellectual property and customer agreements. The purchase price consideration included 146,929 common shares of the Company with a value of $1.0 million, cash consideration of $175,254 to settle certain working capital related adjustments and other costs and fees related to the purchase in the amount of $281,348 for a total acquisition cost of $1,456,602. The Company incorporated Archer Education Group Inc. ("Archer") in February 2005 and with initial start-up capital and through subsequent dilution, Zi holds an approximate 26 percent interest in Archer. Transactions conducted by Archer represent a yet to be completed series of transactions, wherein Zi expects to sell its e-Learning business segment to Archer in exchange for a non-controlling equity interest. The Company will equity account for Archer upon completion of the transactions. The Company has recorded costs associated with this proposed transaction in other deferred costs. Capital requirements for the remainder of 2005 include costs to carry Oztime until its divestiture, funding of continued new product development and enhancements to existing products and funding Decuma operations. At current revenue and expense levels and with cash on hand the Company is able to fund its continued operations and meets its current obligations. Litigation/Indemnification On December 4, 2003, the Company commenced a legal action against prior counsel in respect of, among other things, their representation of the Company in a lawsuit, the outcome of which was unfavourable to the Company. As part of its defence, prior counsel filed a cross complaint against the Company for $1.1 million in unpaid legal fees and costs, which has been accrued by the Company in its financial statements. On April 6, 2005, the Company settled this litigation. The Company has recorded a gain of $1,415,616 in the three month period ended June 30, 2005.   From time to time, the Company is involved in other legal claims. Management assesses such claims and where considered likely to result in a material exposure and where the amount of the claim is quantifiable, provisions for loss are made based on management's assessment of the probable outcome. The Company does not provide for claims that are not probable to result in a significant loss, claims for which the outcome is not determinable or claims where the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable. Although we do not anticipate or foresee at this time any new intellectual proceedings being instigated by other parties against us or by us against other parties, there is no assurance that our legal costs or legal actions will significantly diminish in the future. We do not view the legal expenses on the current legal actions and indemnities as being of a recurring nature and anticipate that these legal matters will eventually come to a resolution; however, our legal costs in respect of these actions may increase or maintain current levels if any judgement or determination is appealed or otherwise progresses though the legal process. Moreover, given the extremely competitive nature of our eZiText business and the wide scope of intellectual property covering the text input space, there can be no assurance that in the future, we, or any of our licensees, will not be subject to allegations concerning the status or validity of our intellectual property. Related Party Transaction In April 2005, the Company advanced $250,000 under a secured loan agreement to MLG. The terms of the agreement require repayment on demand and provide the Company with a security interest in the assets of MLG. At June 30, 2005, the Company evaluated the note receivable for impairment and determined that subject to SFAS no. 114 "Accounting by Creditors for Impairment of Loan" using a projected discounted cash flow model at the loan's effective interest rate, the full amount of the note receivable including accrued interest was impaired and was provided for. MLG is currently under a going concern qualification and subject to ongoing operating cash requirements, continued operating losses and other debt, to which the Company is subordinate. Due to these factors and the directive by Zi's Board of Directors to not provide further funding to MLG, it is probable that MLG will not have the necessary funds available to meet the requirements under the note, including accrued interest. Interest due on the note will not be accrued but will be recognized only upon payment by MLG of such interest.

8 SECOND QUARTER REPORT

Risk Factors Important risk factors that could cause actual results, performance or achievements to be materially different from those expressed or implied by these forward-looking statements include: > our history of operating losses and uncertainty of future
   profitability;

> uncertainty as to the degree of and continuing market
   acceptance of our products and services;

> uncertainties relating to product development;

> risks associated with the number, amount and timing of
   new product introductions;

> uncertainty regarding patents, proprietary rights and
   software piracy;

> variability in customer demand;

> our dependence on third party performance under
   marketing and licensing arrangements;

> risks associated with the contingent nature of continued
   performance under major sales contracts;

> rapid technological change and competition;

> uncertainty regarding the pricing, reporting and
   collection of accounts;

> uncertainties related to dependence on third-party
   suppliers;

> risks associated with dependence on sales in foreign
   countries;

> the potential for adverse developments in pending
   litigation;

> risks related to indemnity claims from third parties;

> risks associated with the terms of settlement agreement
   and permanent injunction in respect of a US patent
   infringement lawsuit;

> fluctuations in foreign exchange rates; > uncertainties associated with changes in government
   policy and regulation, particularly in the People's
   Republic of China ("PRC" or "China");

> adverse changes in general political, economic,
   business, regulatory and legal conditions in any of
   the countries in which we do business;

> changes in our size and structure;

> risks associated with mergers, acquisitions and
   dispositions;

> risks of dilutive future financings;

> the effectiveness of our management and our strategic
   relationships;

> investment risks associated with our e-Learning
   investments;

> the negative publicity generated by the Lancer
   proceedings or general market concerns about
   the possible actions by the receiver with
   respect to portfolio securities held by Lancer;

> other risks and uncertainties that may be disclosed in
   the Company's various corporate disclosure documents
   from time to time, and;

> other risk factors detailed from time to time in the
   Company's periodic reports filed with the US
   Securities and Exchange Commission and other
   regulatory authorities.

      Zi Corporation 2005 9