Zi Corporation reported results for its third quarter and nine months ended September 30, 2005. (Unless otherwise indicated, all monetary amounts in this news release are in U.S. dollars).

Total revenue for this year's third quarter was $2.5 million with a net loss of $1.5 million, or a loss per basic and diluted share of $0.03, compared to total revenue in the 2004 third quarter of $3.7 million and net income of $0.7 million, or $0.02 per basic and diluted share. Gross margin as a percentage of revenue in the 2005 third quarter was 93 percent compared to 97 percent for the 2004 third quarter.

Chairman and CEO Michael Lobsinger said, "While this year's third quarter financial results were disappointing, we believe they reflect the impact of a major shift we are seeing in the global mobile phone market. As often occurs in a vast and maturing global market, the major players are asserting their dominance while a number of the mid-tier companies are beginning to either consolidate or leave the market altogether. At the same time many of the smaller innovative OEMs, especially those in China, Korea and Japan, continue to grow. When you break down our revenue, you see that our revenue base is changing with the shift in the market. Revenue in this year's third quarter from our mid-tier customers is down year-over-year, while revenue from all of our other customers is up compared to last year's third quarter. Also, revenue in the third quarter was not impacted by the launch of our new product, Qix, even though we expect an agreement in the near future, nor was there any substantial revenue from our latest acquisition, Decuma, which announced its first major contract, to be embedded on Motorola smart phones with distribution by NTT DoCoMo in Japan and the recently announced Nintendo agreement.

"The entire management and new sales team is committed to effecting a rapid recovery in our financial results and is focused on increasing revenue and reducing non-essential expenditures," Lobsinger added. "We are optimistic about returning to a period of sustained growth and profitability and firmly believe we have the products, resources and talent to do so."

Lobsinger said that the Company is working closely with its existing and new customers to increase revenue by expanding the use of Zi products and technologies in new models and for new applications and added that Zi's sales pipeline has never been better. At the same time, the Company is continuing to invest in Qix(TM) and in the enhancement and expansion of its predictive text and handwriting recognition solutions as these products will create important new customer and revenue opportunities.

"An excellent example of one such opportunity," Lobsinger commented, "is the recently announced license agreement with Nintendo for use of Decuma(R) handwriting recognition technology in games for the Nintendo DS handheld video game system. This represents an important strategic expansion of our market opportunities as it gives us an excellent entree into the video game market with the world leader."

Zi Corporation total revenue for this year's first nine months was $8.5 million compared to total revenue of $10.2 million for the first nine months of 2004. The net loss for the 2005 first nine months was $3.2 million, or a loss per basic and diluted share of $0.07, compared to a net loss of $0.5 million, or a loss per basic and diluted share of $0.01 for the year-earlier period. Revenue from the Zi Technology business unit for the first nine months of this year was $7.9 million compared to $9.9 million for the same period a year ago. During the first nine months of this year other product revenue from e-Learning was $0.6 million compared to $0.3 million a year earlier. Gross margin as a percentage of revenue in the first nine months of this year was 95 percent compared to 96 percent in the prior year period.

The Company's balance sheet as of September 30, 2005 showed cash and cash equivalents of $10.6 million, total assets of $20 million, total liabilities of $4.3 million, including just $46,172 in long term debt, a current ratio of 3.68:1, and shareholders' equity of $15.7 million.

Chief Operating Officer Milos Djokovic remarked, "We began offering our customers packaged suites of Zi products during the 2005 third quarter, which encourages broader adoption of a range of the Company's products by our customers and provides an important platform for future revenue. And, in early October, we released directly to consumers the Zi Predictive Text Suite download for Series 60 phones enabling users, for the first time, to get all of Zi's advanced predictive text features in a single package. The download is available for Series 60 phone users through Handango and its more than 100 download portals."

The Company believes that significant shifts in market share are occurring within the mobile phone market. Consolidation of OEMs and ODMs, together with certain participants abandoning the industry altogether, are resulting in the major OEMs gaining greater global market share. Historically, Zi's customers have been predominantly smaller, Asia-based OEMs. During the past several years the Company added three larger OEM and ODM customers. And notably, Zi added one major customer at the end of last year that represents more than 30 percent global market share. While Zi has made important progress towards increasing its penetration in the major customer accounts, it is still at an early stage. In the third quarter of 2004, revenue from three customers, constituted 38 percent of the Company's revenue. All other customers, which numbered 37, generated 62 percent of total revenue.

As a result of market share changes and Zi's customer mix, the Company's revenue for the 2005 third quarter reflects the majority of its accounts reporting a favorable 31 percent growth rate while three larger accounts and professional services revenue reflect a 74 percent decline in revenue year over year.

The increase in the year-over-year loss for the 2005 third quarter was due to the lower revenue and gross margin; higher selling, general and administrative expense ("SG&A"); an increase in product research and development expense; an increase in legal fees; and a tax provision related to a Chinese subsidiary. These increases were partially offset by an increase in interest income of $0.1 million.

For the first nine months of 2005, the increase in the year-over-year loss was due to lower revenue and gross margin; an increase in product research and development expense; impairment of a note receivable; increased legal and litigation; increased depreciation and amortization; and a tax provision related to a Chinese subsidiary. These increases were offset by a favourable settlement of litigation against prior counsel; a decrease in SG&A and an increase in interest income and other items.

During the third quarter and first nine months of 2005, Zi earned royalties from 51 and 67 eZiText(R) licensees, respectively, compared to a respective 40 and 57 in the same periods a year earlier. There were 30 new handset models embedded with eZiText released into the market in the 2005 third quarter, and for the first nine months of 2005 there were 156 new models released into the market, bringing the total at the end of the first nine months of 2005 to 960 compared to 677 at the end of the 2004 first nine months.

SG&A in the third quarter of 2005 was relatively unchanged compared to the third quarter of 2004 at $2.1 million, and SG&A expense in the first nine months of this year decreased to $7.2 million from $7.6 million in the prior year period. In the first nine months of 2004, $1.4 million in non-cash compensation expense was recognized upon issuance of restricted stock units and non-employee stock options. There was no non-cash compensation expense incurred in the first nine months of 2005.

Product research and development expense for the 2005 third quarter and first nine months were $0.8 million and $3.1 million, respectively, compared to $0.4 million and $1.4 million in the respective year-earlier periods. Gross expenditures on product research and development before capitalization increased by $0.4 million to $1.2 million for the third quarter and $1.1 million to $3.8 million for the first nine months.

The Company continues to invest in new product features and enhancements to software language databases along with continued investment in Decuma handwriting recognition software. In the three month period ended September 30, 2005, the Company capitalized $0.3 million in software development costs. In the third quarter of 2004, the Company capitalized $0.4 million in software development costs related to developing new and improved language database software. In the nine-month period ended September 30, 2005, the Company capitalized $0.7 million of software development costs. In the nine-month period ended September 30, 2004, the Company capitalized $1.3 million in software development costs related to developing dramatically new and improved language database software.