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

AMENDMENT NO. 1
TO
FORM 10-K

Q ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT         

For the transition period from _________ to ________

Commission file number  000-24018

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

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

                        NONE                         
(Title of class)

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

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

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

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

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

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

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

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

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

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EXPLANATORY NOTE

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report

Management’s responsibility for financial reporting

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

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

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

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

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

Management’s report on internal control

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

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

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

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

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Report of Independent Auditors

To the Shareholders of

Zi Corporation

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

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

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

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

[signed] "Ernst & Young LLP"

Independent Registered Chartered Accountants
Calgary, Canada
March 25, 2009

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Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of Zi Corporation

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

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

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

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

[Signed] “Deloitte & Touche LLP”

Independent Registered Chartered Accountants
Calgary, Canada

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

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

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

[Signed] “Deloitte & Touche LLP”

Independent Registered Chartered Accountants
Calgary, Canada

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

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Consolidated Balance Sheets

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

See accompanying notes to audited consolidated financial statements.

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

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Consolidated Statements of Loss

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

See accompanying notes to audited consolidated financial statements.

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Consolidated Statements of Shareholders’ Equity

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

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Consolidated Statements of Cash Flow

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

See accompanying notes to audited consolidated financial statements.

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

1. Nature of Operations

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

2. Going Concern Uncertainty

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

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

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

3. Significant Accounting Policies

Basis of presentation

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

Use of estimates

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

Principles of consolidation

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

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

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

Foreign currency translation

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

Cash and cash equivalents

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

Capital assets

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

In the year of disposal, the resulting gain or loss is included in the consolidated statements of loss and the cost of assets retired or otherwise disposed and the related accumulated amortization are eliminated from these accounts.

Intangible assets

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

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

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

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

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

Impairment of long-lived assets

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

- 12 -

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

Revenue recognition

Revenues from software licensing royalties related to the sale of the product in which the Company’s technologies have been embedded are recognized in accordance with Statement of Position 97-2 (“SOP”), “Software Revenue Recognition”.

Under software licensing arrangements, the Company recognizes revenues – provided that: a non-cancellable license agreement has been signed; the software and related documentation have been delivered; there are no uncertainties regarding customer acceptance; collection of the resulting receivable is deemed probable; the fees are fixed and determinable; and no other significant vendor obligations exist. Any revenue associated with contracts having multiple elements is deferred and recognized once clear evidence exists with respect to the fair value of each separate element of the contract. In addition, contracts involving significant modifications or customization of the software sold are accounted for under the guidelines of contract accounting.

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

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

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

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

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

Allowance for doubtful accounts

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

Income taxes

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

Leases

Leases are classified as capital or operating leases. A lease that transfers to the lessee substantially all the benefits and risks incidental to ownership is classified as a capital lease. At inception, a capital lease is recorded as if it were an acquisition of an asset and the incurrence of an obligation. Assets recorded as capital leases are amortized on a basis consistent with that of accounting for capital assets. Operating lease costs are expensed as incurred.

- 13 -

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

Share issue costs

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

Loss per share

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

Comprehensive income (loss)

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

Financial instruments

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

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

Stock-based compensation

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

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

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

Recent accounting pronouncements

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

- 14 -

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

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

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

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

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

4. Restricted Cash

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

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

5. Dispositions

Disposition of Archer Education Group Inc. (“Archer”)

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

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

- 15 -

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

6. Capital Assets

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

7. Intangible Assets

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

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

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

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

- 16 -

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

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

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

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

8. Bank Indebtedness

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

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

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

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

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

9. Share Capital

Private Placement

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

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

- 17 -

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

Nasdaq Listing

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

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

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

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

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

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

Stock-based Compensation

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

- 18 -

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

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

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

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

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

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

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

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

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

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

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

- 19 -

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

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

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

	2008					2007
	Shares under			Weighted average		Shares under			Weighted average
	options, and RSUs			grant date fair value		options, and RSUs			grant date fair value
Unvested, beginning of period	2,253,670		$	0.72		404,499		$	0.50
Granted	1,030,000			0.29		2,361,700			0.73
Vested	(1,066,513	)		(0.53	)	(463,697	)		(0.74	)
Forfeited	(161,288	)		(0.49	)	(48,832	)		(1.03	)
Unvested, end of period	2,055,869		$	0.52		2,253,670		$	0.72

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

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

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

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

- 20 -

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

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

10. Income Taxes

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

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

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

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

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

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

- 21 -

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

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

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

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

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

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

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

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

11. Impairment of Note Receivable.

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

- 22 -

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

12. Contingent Liabilities

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

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

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

Commencing on March 11, 2005, the Board of Regents of the University of Texas System (“U of T”) filed federal lawsuits against numerous alleged infringers of U.S. Patent No. 4,674,112 in the U.S. District Court for the Western District of Texas, Austin Division. Of the named parties, the majority are customers of the Company’s principal competitor in the text input market and a few are customers of the Company.

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

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

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

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

13. Related Party Transactions

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

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

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

- 23 -

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

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

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

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

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

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

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

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

15. Segmented Information

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

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

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

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

- 24 -

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

								Impairment of				Operating profit
								software		Other		(loss) before
								development		operating		interest and
		Revenues		Amortization		VAT		costs		expenses		other income
2008
Zi Technology	$	13,323,492	$	1,535,182	$	621,100	$	1,429,670	$	13,040,536	$	(3,302,996	)
Corporate		–		75,888		–		–		3,788,682		(3,864,570	)
Total	$	13,323,492	$	1,611,070	$	621,100	$	1,429,670	$	16,829,218	$	(7,167,566	)
Interest expense and interest
and other income												17,725
Loss before income taxes												(7,149,841	)
2007
Zi Technology	$	13,111,002	$	1,601,040	$	787,632	$	–	$	11,820,707	$	(1,098,377	)
Corporate		–		106,512		–		–		3,799,460		(3,905,972	)
Total	$	13,111,002	$	1,707,552	$	787,632	$	–	$	15,620,167	$	(5,004,349	)
Interest expense and interest
and other income												153,677
Note receivable recovery												130,931
Loss before income taxes											$	(4,719,741	)
2006
Zi Technology	$	11,836,217	$	1,534,027	$	595,157	$	–	$	13,453,283	$	(3,746,250	)
Corporate		–		173,185		–		–		5,025,213		(5,198,398	)
Total	$	11,836,217	$	1,707,212	$	595,157	$	–	$	18,478,496	$	(8,944,648	)
Interest expense and interest
and other income												209,556
Loss before income taxes											$	(8,735,092	)

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

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

- 25 -

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

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

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

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

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

- 26 -

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

16. Supplemental Financial Information

Accrued liabilities

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

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

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

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

Loss per share

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

17. Economic Dependence

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

18. Discontinued Operations

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

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

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

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

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

- 27 -

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

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

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

19. Employee Terminations

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

20. Subsequent Events

Tender Purchase Offer

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

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

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

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

Option Cancellation

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

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

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

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SIGNATURES

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

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

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

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