MDSI MOBILE DATA SOLUTIONS INC /CAN/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2003

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _________ to __________.

Commission file number 0-28968

MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)

CANADA NOT APPLICABLE
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)

10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(604) 207-6000
(Address and telephone number of registrant's principal executive offices)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of outstanding shares of the Registrant's
common stock, no par value, at November 13, 2003 was 8,206,914.

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MDSI Mobile Data Solutions Inc.

INDEX TO THE FORM 10-Q
For the quarterly period ended September 30, 2003

Page

Part I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (AS RESTATED)

Condensed Consolidated Balance Sheets...................1

Condensed Consolidated Statements of Operations.........2

Condensed Consolidated Statements of Cash Flows.........3

Notes to the Condensed Consolidated Financial
Statements..........................................4

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................32

ITEM 4. CONTROLS AND PROCEDURES ...............................33

Part II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS .....................................34

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................35

SIGNATURES .................................................................37

INTRODUCTORY NOTE

We issued a press release on November 17, 2003, included as an exhibit to a Form
8-K filed with the Securities and Exchange Commission ("SEC") on the same date,
relating to our intention to restate our consolidated financial statements for
fiscal year 2002, the third and fourth quarters of fiscal 2002 and the first and
second quarters of fiscal 2003. The effects of this restatement on the condensed
consolidated statement of operations for the three months and nine months ended
September 30, 2002, the consolidated balance sheet as at December 31, 2002 and
the consolidated statement of cash flow for the three and nine months ended
September 30, 2003 are presented in Item 1 (Condensed Consolidated Financial
Statements) and Item 2 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) in Part I of this Form 10-Q for the
quarterly period ended September 30, 2003. At the earliest possible time in the
fourth quarter of 2003, the Company expects to file with the SEC an amended
Annual Report on Form 10-K/A for the year ended December 31, 2002. In addition,
the condensed consolidated statements of operations and the condensed
consolidated statements of cash flows for the three months and six months ended
March 31, 2003 and June 30, 2003, respectively as reflected in the statements
for the nine months ended September 30, 2003 were restated. At the earliest
possible time in the fourth quarter of 2003, the Company expects to file with
the SEC amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended
September 30, 2002, March 31, 2003 and June 30, 2003.

See Notes 1(a) and 9 to the Condensed Consolidated Financial Statements for
discussion of the details surrounding the restatement and reconciliation of
previously reported amounts.

Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MDSI MOBILE DATA SOLUTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
(Unaudited)

As at
September 30, December 31,
-----------------------------------
2003 2002
(As restated,
see note 9)
--------------- ---------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,700,688 $ 11,016,945
Accounts receivable, net
Trade (net of allowance for doubtful accounts $2,593,789;
2002 - $2,506,614) 6,127,073 6,705,088
Unbilled 4,554,609 4,778,865
Prepaid expenses and other assets 1,400,014 1,552,236
--------------- ---------------
26,782,384 24,053,134

CAPITAL ASSETS, NET 8,472,227 9,798,087

LONG TERM RECEIVABLE (note 6(a)) 2,749,860 2,749,860

DEFERRED INCOME TAXES 535,375 705,375
--------------- ---------------
TOTAL ASSETS $ 38,539,846 $ 37,306,456
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,710,904 1,777,465
Accrued liabilities (note 5) 4,683,480 3,300,113
Income taxes payable 480,922 602,717
Deferred revenue 9,161,741 7,503,613
Current obligations under capital lease 1,594,703 2,073,906
--------------- ---------------
17,631,750 15,257,814

OBLIGATIONS UNDER CAPITAL LEASES 1,006,281 1,913,538
--------------- ---------------
18,638,031 17,171,352
STOCKHOLDERS' EQUITY
Common stock 44,288,411 44,208,511
Additional paid-up capital 2,222,128 2,222,128
Deficit (25,918,620) (25,605,431)
Accumulated other comprehensive loss (690,104) (690,104)
--------------- ---------------
19,901,815 20,135,104
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,539,846 $ 37,306,456
=============== ===============

Commitments and Contingencies (note 6)

See Notes to Condensed Consolidated Financial Statements

-1-

MDSI MOBILE DATA SOLUTIONS INC.
Condensed Consolidated Statements of Operations
(Expressed in United States dollars)
(Unaudited)

Three months ended September 30, Nine months ended September 30,
------------------------------------- ------------------------------------
2003 2002 2003 2002
(As restated, (As restated,
see note 9) see note 9)
---------------- ---------------- ---------------- ----------------

REVENUE
Software and services $ 7,692,584 $ 6,303,947 $ 23,461,715 $ 16,996,102
Maintenance and support 3,130,842 2,604,604 9,001,973 8,028,155
Third party products and services 1,474,247 1,608,091 3,938,929 2,123,912
---------------- ---------------- ---------------- ----------------
12,297,673 10,516,642 36,402,617 27,148,169

DIRECT COSTS 6,102,959 5,001,027 17,669,419 12,122,089
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 6,194,714 5,515,615 18,733,198 15,026,080
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Research and development 1,324,314 1,277,972 4,022,265 4,236,955
Sales and marketing 2,436,260 3,029,914 8,268,439 9,355,984
General and administrative 1,865,251 1,485,729 5,048,174 4,679,736
Provision for doubtful accounts 110,000 - 110,000 -
Strategic expenses (note 8) - - 825,120 -
---------------- ---------------- ---------------- ----------------
5,735,825 5,793,615 18,273,998 18,272,675
---------------- ---------------- ---------------- ----------------
OPERATING INCOME (LOSS) 458,889 (278,000) 459,200 (3,246,595)
OTHER (EXPENSE) INCOME (81,283) 70,509 (542,393) 232,773
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAX PROVISION 377,606 (207,491) (83,193) (3,013,822)

INCOME TAX EXPENSE (RECOVERY) FROM
CONTINUING OPERATIONS 113,374 (53,795) 229,996 (868,414)
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS 264,232 (153,696) (313,189) (2,145,408)

INCOME FROM DISCONTINUED OPERATIONS
(note 2) - 12,419 - 121,031
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) FOR THE PERIOD 264,232 (141,277) (313,189) (2,024,377)

DEFICIT, BEGINNING OF PERIOD (26,182,852) (25,674,881) (25,605,431) (23,791,781)
---------------- ---------------- ---------------- ----------------
DEFICIT, END OF PERIOD $(25,918,620) $(25,816,158) $(25,918,620) $(25,816,158)
=============== ================ ================ ================
Earnings (Loss) per common share
Earnings (Loss) from continuing operations
Basic $ (0.03) $ (0.02) $ (0.04) $ (0.25)
=============== ================ ================ ================
Diluted $ (0.03) $ (0.02) $ (0.04) $ (0.25)
=============== ================ ================ ================

Net Earnings (Loss)
Basic $ (0.03) $ (0.02) $ (0.04) $ (0.24)
=============== ================ ================ ================
Diluted $ (0.03) $ (0.02) $ (0.04) $ (0.24)
=============== ================ ================ ================

See Notes to Condensed Consolidated Financial Statements

-2-

MDSI MOBILE DATA SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
(Unaudited)

Three months ended September 30, Nine months ended September 30,
------------------------------------- ------------------------------------
2003 2002 2003 2002
(As restated, (As restated,
see note 9) see note 9)
---------------- ---------------- ---------------- ----------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 264,232 $ (153,696) $ (313,189) $ (2,145,408)
Items not affecting cash:
Depreciation 647,405 512,543 2,150,019 1,949,747
Deferred income taxes - (93,235) 170,000 (263,235)
Changes in non-cash operating working
capital items (note 7) 875,639 1,923,499 3,807,632 1,747,432
---------------- ---------------- ---------------- ----------------
Net cash provided by operating activities 1,787,276 2,189,111 5,814,462 1,288,536
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Shares 2,867 38,142 79,900 277,218
Repayment of capital leases (596,988) (550,733) (1,386,460) (1,525,629)
---------------- ---------------- ---------------- ----------------
Net cash used by financing activities (594,121) (512,591) (1,306,560) (1,248,411)
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (198,083) (677,208) (824,159) (1,362,618)
---------------- ---------------- ---------------- ----------------
Net cash used in investing activities (198,083) (677,208) (824,159) (1,362,618)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used for) Continuing
operations 995,072 999,312 3,683,743 (1,322,493)

Net cash used for discontinued operations
(note 2) - (261,321) - (574,030)
---------------- ---------------- ---------------- ----------------
NET CASH INFLOW (OUTFLOW) 995,072 737,991 3,683,743 (1,896,523)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,705,616 10,541,566 11,016,945 13,176,080
---------------- ---------------- ---------------- ----------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,700,688 $ 11,279,557 $ 14,700,688 $ 11,279,557
================ =============== ================ ================

SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES

During the year ended December 31, 2002 the Company entered into two capital
lease arrangements for the gross amount of $2,922,078 for newly purchased
capital assets. As a result of these arrangements the Company did not incur cash
outlays to purchase these assets but will pay lease obligations with interest
accruing at interest rates of up to 9.5% over terms of up to three years. Since
these asset purchases in 2002 are non cash transactions, the gross amount of the
leases have been excluded from both the Acquisition of Capital Assets and
Proceeds from Capital Leases line items for the year ended December 31, 2002,
and instead only the principal portion of repayments are included as repayment
of capital leases in the period in which they are paid.

See Notes to Condensed Consolidated Financial Statements

-3-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of presentation

These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial reporting and pursuant to the instructions of the
United States Securities and Exchange Commission Form 10-Q and Article
10 of Regulation S-X.

As discussed in Note 9, the consolidated statements of operations for
the three and nine months ended September 30, 2002, the consolidated
balance sheet as at December 31, 2002 and the consolidated statement
of cash flows for the three and nine months ended September 30, 2002,
including the applicable notes, were restated. At the earliest
possible time in the fourth quarter of 2003, the Company expects to
file with the SEC an amended Annual Report on Form 10-K/A for the year
ended December 31, 2002. In addition, the condensed consolidated
statements of operations and the condensed consolidated statements of
cash flows for the three months and six months ended March 31, 2003
and June 30, 2003, respectively, as reflected in the statements for
the nine months ended September 30, 2003 were restated. At the
earliest possible time in the fourth quarter of 2003, the Company
expects to file with the SEC amended Quarterly Reports on Form 10-Q/A
for the quarterly periods ended September 30, 2002, March 31, 2003 and
June 30, 2003.

While these financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for
fair presentation of the results of the interim period, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
Operating results for the three and nine month periods ended September
30, 2003, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further
information, refer to the financial statements and footnotes thereto
included in the Annual Report of MDSI Mobile Data Solutions Inc. (the
"Company" or "MDSI") filed on Form 10-K for the year ended December
31, 2002, subject to the restated financial information described
above and the Company's Form 10K/A.

(b) Use of estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Estimates are used for, but not limited to, the accounting
for doubtful accounts, amortization, determination of the net
recoverable value of assets, revenue recognized on long term
contracts, taxes and contingencies. Actual results could differ from
those estimates.

(c) Reporting currency and other comprehensive income

The Company changed its reporting currency to the U.S. dollar
effective January 1, 2000. The change in reporting currency was made
to improve investors' ability to compare the Company's results with
those of most other publicly traded businesses in the industry. These
consolidated financial statements and those amounts previously
reported in Canadian dollars have been translated from Canadian
dollars to U.S. dollars by translating assets and liabilities at the
rate in effect at the respective balance sheet date and revenues and
expenses at the average rate for the reporting period. Any resulting
foreign exchange gains and losses are recorded as a separate component
of shareholder equity and described as accumulated other comprehensive
income (loss). There was no other comprehensive income (loss) for any
of the periods presented in this report.

-4-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Revenue Recognition

In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in
Financial Statements which provides guidance related to revenue
recognition based on interpretations and practices followed by the
SEC. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time
of implementation in accordance with Accounting Principles Board
Opinion 20 "Accounting Changes." The Company adopted SAB 101 for the
Company's year ended December 31, 2000. Based on the Company's
interpretation of SAB 101, the Company believes its revenue
recognition policies are consistent with SAB 101 and as a result there
has been no material impact on the Company's financial position or
results of operations.

Statement of Position 97-2 (Software Revenue Recognition) (SOP 97-2),
was issued in October 1997 by the American Institute of Certified
Public Accountants (AICPA) and was amended by the Statement of
Position 98-4 (Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition) (SOP 98-4) and Statement of
Position 98-9 (Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions) (SOP 98-9). The Company adopted
SOP 97-2 effective for the Company's year ended December 31, 1998.
Based upon our interpretation of SOP 97-2, SOP 98-4 and SOP 98-9, the
Company believes its current revenue recognition policies and
practices are consistent with SOP 97-2, SOP 98-4, and SOP 98-9.

The Company's revenue is derived primarily from the following sources:

(i) Software and services

Revenue related to software and services, including software
licenses, is generally recognized on a percentage of completion
basis, representing costs incurred relative to total estimated
costs. These estimates and contracts are reviewed on a quarterly
basis and are adjusted prospectively to reflect the Company's
best estimate at the time. Where the Company has contracted to
deliver software without significant production, modification or
customization required, revenue is recognized upon delivery if
persuasive evidence of an arrangement exists, the fee is fixed
and determinable, vendor specific objective evidence exists to
allocate the total fee to elements of the arrangement and there
is reasonable assurance of collection. Provisions for estimated
losses on contracts are recorded when identifiable.

(ii) Maintenance and support

Revenue related to maintenance agreements for supporting and
maintaining the Company's products are recognized rateably over
the term of the agreement, which is generally one to three years.

(iii) Third party products and services

Revenue from sales of third party products and services is
recognized on delivery of the products and services.

(e) Recently issued accounting standards

In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 150 "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
standard did not have a material impact on the Company's financial
statements.

-5-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Recently issued accounting standards

In April 2003 FASB issued Statement No. 149 ("SFAS 149"), Amendment of
SFAS No. 133 on Derivative Instruments and Hedging Activities. The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133. In particular, it (1)
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in
SFAS No. 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to
the language used in FASB Interpretation No. 45, Guarantor Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and (4) amends certain other
existing pronouncements.

SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, subject to certain exceptions, for hedging
relationships designated after June 30, 2003.

The Company adopted provisions of SFAS 149 during the three months
ended September 30, 2003 and the adoption did not have a material
impact on its results of operations and financial condition.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an Interpretation of
ARB No. 51. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003.
The Company adopted FIN 46 during the three months ended September 30,
2003 and it did not have an material impact on the results of
operations and financial condition of the Company.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN45). FIN
45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a
guarantor in its interim and annual financial statements about the
obligations associated with guarantees issued. Although the disclosure
provisions of FIN 45 previously were adopted by the Company, the
recognition provisions of FIN 45 became effective as of January 1,
2003. The adoption of the recognition provisions of FIN 45 did not
have a material impact on the Company's results of operations or
financial position.

-6-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(f) Stock-based compensation

The Company accounts for stock-based compensation using the intrinsic
value based method whereby compensation cost is recorded for the
excess, if any, of the quoted market price of the common share over
the exercise price of the common stock option at the date granted.

The following pro forma financial information presents the net loss
for the quarter and loss per common share had the Company adopted the
fair value method pursuant to Statement of Financial Accounting
Standard No. 123 (SFAS 123) Accounting for Stock-based Compensation.

Three months ended September 30, Nine months ended September 30,
--------------------------------------- -------------------------------------
2003 2002 2003 2002
(As Restated, (As Restated,
see Note 9) see Note 9)
------------------- ------------------ ------------------ -----------------

Net income (loss) for the period $ 20,658 $ (255,902) $ (997,658) $ (2,446,886)
------------------- ------------------ ------------------ -----------------
Basic and fully diluted earnings
(loss) per common share $ 0.00 $ (0.03) $ (0.12) $ (0.29)
=================== ================== ================== =================

Using the fair value method for stock-based compensation, additional
compensation costs of approximately $243,574 would have been recorded
for the three months ended September 30, 2003 (2002 - $114,625), and
$684,469 would have been recorded for the nine months ended September
30, 2003 (2002 - $422,509). This amount is determined using an option
pricing model assuming no dividends are to be paid, an average vesting
period of four years, average life of the option of 5 years, a
weighted average annualized volatility of the Company's share price of
73% and a weighted average annualized risk free interest rate at 2.7%.

2. DISCONTINUED OPERATIONS

During June 2002, MDSI adopted a plan for sale and entered into an
agreement to sell its Hosting and IT Services business segment, Connectria
Corporation (Connectria), to former Connectria shareholders who were both
shareholders and employees of the Company. The transaction closed in July
2002. Pursuant to the terms of the agreement, the Company received from the
former Connectria shareholders 824,700 shares of MDSI that had an
approximate market value of $2.8 million and the cancellation of 103,088
previously issued stock options of MDSI as consideration for Connectria. In
addition to the share consideration, a wholly-owned subsidiary of MDSI
received a warrant allowing it to purchase up to 50,380 shares of Series A
Nonvoting Preferred Stock of Connectria at a price of $50 per share
exercisable for a period of five years. The Series A Nonvoting Preferred
Stock of Connectria has a face value of $100 per share, bears a dividend of
five percent per annum, bears a liquidation preference equal to the face
value, may be redeemed at Connectria's option at any time, and must be
redeemed by Connectria upon a capital infusion of $10 million or greater.
In addition MDSI has advanced to Connectria $500,000, consisting of a loan
in the principal amount of $250,000 with a two year term, bearing interest
at 5%, and $250,000 for prepaid hosting services. As at September 30, 2003
the entire amount of the prepaid hosting services has been amortized to
income. The Company recognized a gain of $12,419 on the disposal of
Connectria during the quarter ended June 30, 2002. Connectria represented a
significant segment of the Company's business.

-7-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

2. DISCONTINUED OPERATIONS (continued)

Summarized financial information of the discontinued operations is as
follows:

Results of discontinued operations Three months ended,
---------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------

Revenues $ - $ -
Income before income taxes - -
Income tax - -
------------------ ------------------
- -
Income on disposal
net of income taxes - 12,419
------------------ ------------------
Income from discontinued operations $ - $ 12,419
================== ==================

Results of discontinued operations Nine months ended,
---------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Revenues $ - $ 5,058,101
Income before income taxes - 108,612
Income tax - -
------------------ ------------------
- 108,612
Income on disposal
net of income taxes - 12,419
------------------ ------------------
Income from discontinued operations $ - $ 121,031
================== ==================

Cash flows of discontinued operations Three months ended,
---------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Operating activities $ - $ 2,542,658
Investing activities - -
Financing activities - (2,803,979)
------------------ ------------------
Cash used for discontinued operations $ - $ (261,321)
================== ==================

Cash flows of discontinued operations Nine months ended,
---------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Operating activities $ - $ 2,491,158
Investing activities - (43,775)
Financing activities - (3,021,413)
------------------ ------------------
Cash used for discontinued operations $ - $ (574,030)
================== ==================

-8-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

3. SEGMENTED INFORMATION

As described in Note 2, the Company has reclassified the results of
operations of Connectria Corporation as discontinued operations. The
business was previously disclosed as a separate operating segment. As a
result of discontinuing this business, the Company now only operates in a
single business segment, the Field Service business segment. The segment
data below has been restated to exclude amounts related to the discontinued
operations.

The Company earned revenue from sales to customers in the following
geographic locations:

Three months ended September 30, Nine months ended September 30,
--------------------------------------- -------------------------------------
2003 2002 2003 2002
(As Restated, (As Restated,
see Note 9) see Note 9)
------------------- ------------------ ------------------ -----------------

Canada................................. $ 439,108 $ 195,362 $ 1,265,374 $ 690,266
United States.......................... 6,691,781 7,311,997 17,980,844 19,362,030
Europe, Middle East and Africa......... 5,057,396 2,670,143 16,620,045 6,587,332
Asia and other......................... 109,388 339,140 536,354 508,541
------------------- ------------------ ------------------ -----------------
$ 12,297,673 $ 10,516,642 $ 36,402,617 $27,148,169
=================== ================== ================== =================

Major customers

During the three months ended September 30, 2003 revenue from two customers
accounted for approximately 17.9% (2002 14.4%) and 18.7% (2002 - nil),
respectively, of total revenue. During the nine months ended September 30,
2003 revenue from two customers accounted for approximately 18.2% and
21.5%, respectively, of total revenue. For the nine months ended September
30, 2002 one customer did not account for greater than 10% of total
revenue.

4. EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued. In
periods for which there is a reported net loss, potentially dilutive
securities have been excluded from the calculation, as their effect would
be anti-dilutive.

The following table reconciles the number of shares utilized in the loss
per common share calculations for the periods indicated:

Three months ended September, 30, Nine months ended September, 30,
------------------------------------ -----------------------------------
2003 2002 2003 2002
(As restated, (As restated,
see Note 9) see Note 9)
----------------- ---------------- ----------------- ----------------

Basic weighted average shares outstanding... 8,204,691 8,170,330 8,197,650 8,582,379
Effect of dilutive securities;
Stock options............................... 222,966 - -
----------------- ---------------- ----------------- ----------------

Diluted weighted average shares outstanding 8,427,657 8,170,330 8,197,650 8,582,379
================= ================ ================= ================

-9-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

5. RESTRUCTURING CHARGE

During 2001, in response to uncertain economic conditions and poor
financial performance, the Company announced a restructuring plan approved
by the Company's Board of Directors designed to reduce operating costs. In
connection with the restructuring the Company recorded a charge of $6.1
million. A breakdown of the nature of the charges and the costs incurred to
date is as follows:

Total Restructuring
Charge
-------------------
Workforce reduction $ 3,375,000
Provision for excess office space 1,861,000
Non cash writedown of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (5,153,304)
-------------------
Accrued restructuring charges included in
accrued liabilities at September 30, 2003 $ 952,623
===================

Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures
relating to these items are expected to be incurred.

The Company has recorded a $1.9 million provision relating to surplus
office space under long term lease by the Company at two locations,
including one location where the Company has entered into fixed cost lease
arrangements expiring in 2004. The Company has incurred approximately $0.9
million of cash costs relating to this provision leaving an accrual of $1.0
million remaining as at September 30, 2003. The Company expects that the
provision will be fully drawn down no later than the time the lease expires
in the fourth quarter of 2004.

6. COMMITMENTS AND CONTINGENCIES

(a) Contingency

The Company is involved in a dispute with a customer. The Company
filed suit against the customer alleging that the customer had
breached a series of contracts, and failed to pay sums due of
approximately $3.7 million. The suit sought payment of the contract
balance, plus other damages, interest and attorneys' fees. The
customer filed an answer and counterclaim alleging the Company
breached the contracts, entitling the customer to repayment of all
sums paid to the Company of approximately $3.5 million. In addition,
the customer's counterclaims alleged fraud, negligent
misrepresentation, breach of express warranty and breach of implied
warranties. The customer sought all actual, special, incidental and
consequential damages associated with these counterclaims in addition
to punitive damages, interest and attorneys' fees.

On March 5, 2003, the court granted the customer's motion for summary
judgment, dismissing the Company's claims for lack of sufficient
evidence of damages. The Company filed a motion for reconsideration of
this ruling. On March 26, 2003, the court denied the Company's motion.
On March 26, 2003, the court granted the Company's motion for partial
summary judgment, finding that the customer wrongfully terminated the
professional services agreement. On April 8, 2003,

-10-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

6. COMMITMENTS AND CONTINGENCIES (continued)

(a) Contingency (continued)

the court granted the Company's motion for summary judgment,
dismissing the customer's counterclaims for fraud and negligent
misrepresentation.

The Company tendered defense of the customer's counterclaims to its
insurance company. The insurance company accepted defense of the
counterclaims under a reservation of rights. On April 16, 2003, the
Company was informed that its insurer reached an agreement with the
customer to settle the customer's breach of contract and breach of
warranty counterclaims for $1 million. The Company is not a party to
the settlement agreement and the settlement amount is to be paid by
its insurer. The settlement agreement preserved the Company's right to
appeal the court's ruling that dismissed the Company's claims on
summary judgment for lack of sufficient evidence of damages and the
customer's right to appeal the court's ruling that dismissed the
customer's counterclaims of fraud and negligent misrepresentation. On
May 14, 2003, the Company filed its Notice of Appeal, and on May 28,
2003 the customer appealed the court's motion for summary judgment
that dismissed the customer's counterclaims for fraud and negligent
misrepresentation. Both parties are awaiting a court date as to when
the appeals will be heard.

The Company intends to expense as incurred costs in connection with
the appeal and any subsequent trial, and any amounts which may be
payable in respect to counterclaims asserted by the customer for fraud
and negligent misrepresentation. The Company believes that collection
of monies due from the customer is not likely to occur within one year
and as a result has classified the amounts due from the customer of
approximately $3.7 million as a long term receivable. Due to the
uncertain nature of the receivable the Company recorded an allowance
in a prior period of $1.0 million against the amounts due. There is
currently no provision in the Company's financial statements to
address any payment to the customer if the customer is successful in
any appeal and subsequent trial on its fraud and negligent
misrepresentation counterclaims, as the Company, after consultation
with counsel, views this to be an unlikely event. Should the Company
not be successful in its claims against the customer, the Company may
be required to take a $2.7 million dollar charge to earnings. If the
customer is successful in any fraud or negligent misrepresentation
counterclaims, the Company may be required to take an additional
charge to earnings to the extent of the judgment. Although the amount
of any such judgment against the Company for fraud or negligent
misrepresentation cannot be determined, if the customer is successful
in any appeal and subsequent trial, the Company's financial condition
and results of operations would be materially adversely affected.

From time to time, the Company is a party to other litigation and
claims incident to the ordinary course of its business. While the
results of litigation and claims cannot be predicted with certainty,
the Company believes that the final outcome of such matters will not
have a material adverse effect on the Company's business, financial
condition, operating results and cash flows.

-11-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

6. COMMITMENTS AND CONTINGENCIES (continued)

(b) Guarantee

As part of the disposition agreement with Connectria Corporation,
Connectria is to use its best efforts to terminate, or obtain the
release of MDSI from approximately $0.1 million in loan guarantees and
equipment leases made by MDSI on behalf of Connectria. To date
termination or release from these obligations has not occurred, and as
a result MDSI could potentially be liable under these obligations
should Connectria default on a payment. Based on management's
estimates, the Company does not anticipate having to make payments in
connection with these guarantees and accordingly no amounts have been
accrued as a liability in the financial statements.

(c) Commitment

The Company has entered into a significant customer contract in which
the Company has agreed to utilize a certain amount of local services
and create a certain amount of commercial activity in South Africa.
The Company is required to utilize local content or obtain credits
equivalent to approximately $7 million over a seven year period. The
Company has also furnished a performance guarantee for $356,369
payable if the Company does not fulfill its obligations within the
seven year period. The Company expects to fulfill its obligation
through a number of activities, including the establishment of a
software development center in South Africa, the provision of
technical services, and the provision of training to local systems
integrators who will be able to provide implementation and support
services with respect to the Company's software products. As the
Company expects to fulfill its obligations through the purchase of
services in the normal course of business, no liability has been
established for these future spending commitments.

(d) Indemnification

The Company typically includes indemnification provisions within
license and implementation service agreements, which are consistent
with those prevalent in the software industry. Such provisions
indemnify customers against actions arising from patent infringements
which may arise through the normal use or proper possession of the
Company's software. To date that Company has not experienced any
significant obligations under customer indemnification provisions and
accordingly, no such amounts have been accrued for such potential
indemnification obligations.

7. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS

Three months ended September, 30, Nine months ended September, 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
(As restated, (As restated,
see Note 9) see Note 9)
--------------- -------------- --------------- --------------

Accounts Receivable $ 1,725,723 3,478,577 $ 802,271 $ 4,625,145
Prepaid expenses (386,739) (138,267) 152,222 193,911
Income taxes payable (33,905) 918,672 (121,795) 702,608
Accounts payable and accrued liabilities 813,669 (452,802) 1,316,806 (1,628,736)
Deferred revenue (1,243,109) (1,882,681) 1,658,128 (2,145,496)
--------------- -------------- --------------- --------------
$ 875,639 $ 1,923,499 $ 3,807,632 $ 1,747,432
=============== ============== =============== ==============

-12-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

8. STRATEGIC EXPENSES

Strategic expenses consist of professional fees associated with
investigating a potential corporate transaction that the Company considered
and then abandoned during the nine months ended September 30, 2003.

9. RESTATEMENT

On November 17, 2003, the Company announced it would restate its
consolidated financial statements for the year ended December, 31 2002 and
for the quarters ended September 30, 2002, March 31, 2003 and June 30,
2003. Based on a comprehensive review of customer contracts, the Company's
management determined that the Company had inappropriately allocated
contracted fees between software and implementation services and
maintenance and support services such that fees allocated to maintenance
and support were understated. In accordance with Statement of Position 97-2
Software Revenue Recognition ("SOP 97-2"), contracted fees are required to
be allocated to the various elements of an arrangement based on
vendor-specific objective evidence of fair value for each element,
regardless of the prices stated within the contract. This resulted in an
error, predominantly with respect to one contract, whereby maintenance and
support services were required to be provided during the warranty period.
In accordance with SOP 97-2, the Company should have initially deferred a
portion of the contract value equal to the fair value of the maintenance
and support services to be provided during the warranty period and
recognized the related revenue ratably during the warranty period. The
Company had previously included this amount as part of the software and
implementation fee and recognized revenue under the percentage of
completion method in accordance with its stated policy. The net effect of
these adjustments was to increase the accumulated deficit at June 30, 2003
by approximately $695,000.

Restated Accumulated Deficit

The following presents the Company's accumulated deficit as previously
reported and after giving effect to the cumulative $695,000 of restatement
adjustments as at June 30, 2003, March 31, 2003, December 31, 2002 and
September 30, 2002.

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Accumulated Deficit
As previously reported $25,488,531 $24,984,753 $25,207,038 $25,598,609
As restated 26,182,852 25,499,939 25,605,431 25,816,158
--------------------------------------------------------------------------------------------------
Cumulative Adjustment $ 694,321 $ 515,186 $ 398,393 $ 217,549
--------------------------------------------------------------------------------------------------

-13-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

9. RESTATEMENT (continued)

Restated Revenues and Earnings (Loss)

The following presents the impact on revenues and earnings (loss) of the
restatements for the quarterly periods ended June 30, 2003, March 31, 2003,
December 31, 2002 and September 30, 2002.

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Software and services revenue
As previously reported $8,341,170 $7,850,659 $8,447,919 $6,614,731
Adjustments (255,905) (166,793) (258,344) (310,784)
--------------------------------------------------------------------------------------------------
As restated $8,085,265 $7,683,866 $8,189,575 $6,303,947
--------------------------------------------------------------------------------------------------

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Earnings (loss)
As previously reported $(503,778) $222,285 $391,571 $76,272
Adjustments (179,135) (116,793) (180,844) (217,549)
--------------------------------------------------------------------------------------------------
As restated $(682,913) $105,492 210,727 $(141,277)
--------------------------------------------------------------------------------------------------

Restated Balance Sheet Accounts

The following presents details by category of assets and liabilities and
related account movements resulting from the restatement adjustments as at
June 30, 2003, March 31, 2003, December 31, 2002 and September 30, 2002

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Accounts Receivable - Unbilled
As previously reported $3,415,088 $3,130,912 $5,347,993 $4,344,738
Adjustments (991,826) (735,921) (569,128) (202,784)
--------------------------------------------------------------------------------------------------
As restated $2,423,262 $2,394,991 $4,778,865 $4,141,954
--------------------------------------------------------------------------------------------------
Deferred Income Taxes
As previously reported $364,640 $534,640 $534,640 $534,640
Adjustments 170,735 170,735 170,735 93,235
--------------------------------------------------------------------------------------------------
As restated $535,375 $705,375 $705,375 $627,875
--------------------------------------------------------------------------------------------------
Deferred Revenue
As previously reported $10,404,850 $8,254,604 $7,503,613 $5,431,572
Adjustments - - - 108,000
--------------------------------------------------------------------------------------------------
As restated $10,404,850 $8,254,604 $7,503,613 $5,539,572
--------------------------------------------------------------------------------------------------
Income Taxes Payable
As previously reported $641,597 $605,531 $602,717 $336,102
Adjustments (126,770) (50,000) - -
--------------------------------------------------------------------------------------------------
As restated $514,827 $555,531 $602,717 $336,102
--------------------------------------------------------------------------------------------------
Net adjustment to accumulated
deficit end of period $(694,321) $(515,186) $(398,393) $(217,549)
--------------------------------------------------------------------------------------------------

-14-

MDSI MOBILE DATA SOLUTIONS INC.

Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)

9. RESTATEMENT (continued)

Impacts of the restatements on the accompanying unaudited condensed
consolidated financial statements

As at
December 31, 2002
---------------------------------------
As
Previously As
Reported Restated
------------------- -----------------

Unbilled Receivables $ 5,347,993 $ 4,778,865
Total Current Assets 24,622,262 24,053,134
Deferred Income Taxes 534,640 705,375
Total Assets 37,704,849 37,306,456
Deficit (25,207,038) (25,605,431)
Stockholders Equity $20,533,497 $ 20,135,104

Three months ended Nine months ended
September 30, 2002 September 30, 2002
------------------------------------- ----------------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------------- ----------------- ------------------- -----------------

Software and Services
Revenue $ 6,614,731 $ 6,303,947 $ 17,306,886 $ 16,996,102
Total Revenue 10,827,426 10,516,642 27,458,953 27,148,169
Gross Profit 5,826,399 5,515,615 15,336,864 15,026,080
Operating Income (Loss) 32,784 (278,000) (2,935,811) (3,246,595)
Income (Loss) From
Continuing Operations 103,293 (207,491) (2,703,038) (3,013,822)
Income Tax Expense
(Recovery) 39,440 (53,795) (775,179) (868,414)
Net Income (Loss) for the
period From Continuing
Operations 63,853 (153,696) (1,927,859) (2,145,408)
Net Income (Loss) for the
period 76,272 (141,277) (1,806,828) (2,024,377)
Deficit, End of Period $(25,598,609) $(25,816,158) $(25,598,609) $(25,816,158)

Earnings (Loss) per share
basic $0.01 $(0.02) $(0.21) $(0.24)
Earnings (Loss) per share
diluted $0.01 $(0.02) $(0.21) $(0.24)

At the earliest possible time in the fourth quarter of 2003, the Company
expects to file with the SEC the Company's Form 10-K/A for the year ended
December 31, 2002 and amended Quarterly Reports on Form 10-Q/A for the
quarterly periods ended September 30, 2002, March 31, 2003 and June 30,
2003 containing restated financial statements for the relevant periods.

-15-

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The management's discussion and analysis of the financial condition and
results of operations presented below reflects the effects of the restatement of
our condensed consolidated financial statement for the three and nine month
periods ended September 30, 2002. See "Restatements" below for further
discussion of this matter.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of MDSI, or developments in MDSI's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: lengthy sales cycles, the Company's
dependence upon large contracts and relative concentration of customers, the
failure of MDSI to effectively control levels of operating expenses, the failure
of MDSI to successfully execute its business strategies, the effect of slow
United States and international economies generally, as well as economic trends
and conditions in the vertical markets that MDSI serves, the effect of the risks
associated with technical difficulties or delays in product introductions and
improvements, product development, product pricing or other initiatives of
MDSI's competitors, the possibility that our potential customers will defer
purchasing decisions due to economic or other conditions or will purchase
products offered by our competitors, risks associated with litigation and the
other risks and uncertainties described in the risk factors attached as Exhibit
99.1 hereto and in other Securities and Exchange Commission filings, including
the Company's Annual Report on Form 10-K for the year ended December 31, 2002,
subject to the restated financial information as described below and in notes
1(a) and 9 of the accompanying unaudited condensed financial statements and in
the amended Annual Report on Form 10K/A for the year ended December 31, 2002 to
be filed with the SEC.

Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, United States dollars. See Item
3, "Quantitative and Qualitative Disclosures About Market Risk".

Overview

MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have substantial mobile workforces, such as utilities, telecommunications and
cable/broadband companies. MDSI's products are used by such companies in
conjunction with public and private wireless data communications networks to
provide comprehensive solutions for the automation of business processes
associated with the scheduling, dispatching and management of a mobile
workforce. The Company's products are designed to provide a cost-effective
method for companies with mobile workers to utilize data communications to
communicate with such workers, and for such workers to interface on a real-time
basis with their corporate information systems.

The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, configuration, customization and
training; (ii) maintenance and support, consisting of the provision of
after-sale support services as well as hourly, annual or extended maintenance
contracts; and (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract.

-16-

Restatements

On November 17, 2003, the Company announced it would restate its
consolidated financial statements for the year ended December 31, 2002 and for
the quarters ended September 30, 2002, March 31, 2003 and June 30, 2003. Based
on a comprehensive review of customer contracts, the Company's management
determined that the Company had inappropriately allocated contracted fees
between software and implementation services and maintenance and support
services such that fees allocated to maintenance and support were understated.
In accordance with Statement of Position 97-2 Software Revenue Recognition ("SOP
97-2"), contracted fees are required to be allocated to the various elements of
an arrangement based on vendor-specific objective evidence of fair value for
each element, regardless of the prices stated within the contract. This resulted
in an error, predominantly with respect to one contract, whereby maintenance and
support services were required to be provided during the warranty period. In
accordance with SOP 97-2, the Company should have initially deferred a portion
of the contract value equal to the fair value of the maintenance and support
services to be provided during the warranty period and recognized the related
revenue ratably during the warranty period. The Company had previously included
this amount as part of the software and implementation fee and recognized
revenue under the percentage of completion method in accordance with its stated
policy. The net effect of these adjustments was to increase the accumulated
deficit at June 30, 2003 by approximately $695,000.

Restated Accumulated Deficit

The following presents the Company's accumulated deficit as previously
reported and after giving effect to the cumulative $695,000 of restatement
adjustments as at June 30, 2003, March 31, 2003, December 31, 2002 and September
30, 2002.

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Accumulated Deficit
As previously reported $25,488,531 $24,984,753 $25,207,038 $25,598,609
As restated 26,182,852 25,499,939 25,605,431 25,816,158
--------------------------------------------------------------------------------------------------
Cumulative Adjustment $ 694,321 $ 515,186 $ 398,393 $ 217,549
--------------------------------------------------------------------------------------------------

Restated Revenues and Earnings (Loss)

The following presents the impact on revenues and earnings (loss) of the
restatements for the quarterly periods ended June 30, 2003, March 31, 2003,
December 31, 2002 and September 30, 2002.

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Software and services revenue
As previously reported $8,341,170 $7,850,659 $8,447,919 $6,614,731
Adjustments (255,905) (166,793) (258,344) (310,784)
--------------------------------------------------------------------------------------------------
As restated $8,085,265 $7,683,866 $8,189,575 $6,303,947
--------------------------------------------------------------------------------------------------

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Earnings (loss)
As previously reported $(503,778) $222,285 $391,571 $76,272
Adjustments (179,135) (116,793) (180,844) (217,549)
--------------------------------------------------------------------------------------------------
As restated $(682,913) $105,492 210,727 $(141,277)
--------------------------------------------------------------------------------------------------

-17-

Restated Balance Sheet Accounts

The following presents details by category of assets and liabilities and
related account movements resulting from the restatement adjustments as at June
30, 2003, March 31, 2003, December 31, 2002 and September 30, 2002

June 30, March 31, December 31, September 30,
2003 2003 2002 2002
--------------------------------------------------------------------------------------------------

Accounts Receivable - Unbilled
As previously reported $3,415,088 $3,130,912 $5,347,993 $4,344,738
Adjustments (991,826) (735,921) (569,128) (202,784)
--------------------------------------------------------------------------------------------------
As restated $2,423,262 $2,394,991 $4,778,865 $4,141,954
--------------------------------------------------------------------------------------------------
Deferred Income Taxes
As previously reported $364,640 $534,640 $534,640 $534,640
Adjustments 170,735 170,735 170,735 93,235
--------------------------------------------------------------------------------------------------
As restated $535,375 $705,375 $705,375 $627,875
--------------------------------------------------------------------------------------------------
Deferred Revenue
As previously reported $10,404,850 $8,254,604 $7,503,613 $5,431,572
Adjustments - - - 108,000
--------------------------------------------------------------------------------------------------
As restated $10,404,850 $8,254,604 $7,503,613 $5,539,572
--------------------------------------------------------------------------------------------------
Income Taxes Payable
As previously reported $641,597 $605,531 $602,717 $336,102
Adjustments (126,770) (50,000) - -
--------------------------------------------------------------------------------------------------
As restated $514,827 $555,531 $602,717 $336,102
--------------------------------------------------------------------------------------------------
Net adjustment to accumulated
deficit end of period $(694,321) $(515,186) $(398,393) $(217,549)
--------------------------------------------------------------------------------------------------

Impacts of the restatements on the accompanying unaudited condensed consolidated
financial statements

As at
December 31, 2002
----------------------------------------
As
Previously As
Reported Restated
------------------- -----------------

Unbilled Receivables $ 5,347,993 $ 4,778,865
Total Current Assets 24,622,262 24,053,134
Deferred Income Taxes 534,640 705,375
Total Assets 37,704,849 37,306,456
Deficit (25,207,038) (25,605,431)
Stockholders Equity $20,533,497 $ 20,135,104

Three months ended Nine months ended
September 30, 2002 September 30, 2002
------------------------------------- ----------------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------------- ----------------- ------------------- -----------------

Software and Services
Revenue $ 6,614,731 $ 6,303,947 $ 17,306,886 $ 16,996,102
Total Revenue 10,827,426 10,516,642 27,458,953 27,148,169
Gross Profit 5,826,399 5,515,615 15,336,864 15,026,080
Operating Income (Loss) 32,784 (278,000) (2,935,811) (3,246,595)
Income (Loss) From
Continuing Operations 103,293 (207,491) (2,703,038) (3,013,822)
Income Tax Expense (868,414)
(Revcovery) 39,440 (53,795) (775,179)
Net Income (Loss) for the
period From Continuing
Operations 63,853 (153,696) (1,927,859) (2,145,408)
Net Income (Loss) for the
period 76,272 (141,277) (1,806,828) (2,024,377)
Deficit, End of Period $(25,598,609) $(25,816,158) $(25,598,609) $(25,816,158)
Earnings (Loss) per share
basic $0.01 $(0.02) $(0.21) $(0.24)
Earnings (Loss) per share
diluted $0.01 $(0.02) $(0.21) $(0.24)

-18-

The following presents a summary of the impact of the restatements for the
periods presented in the accompanying unaudited condensed consolidated financial
statements.

Condensed consolidated statement of operations for the three months ended
September 30, 2002 as restated

Software and services revenue was reduced by $310,000 from $6.6 million to
$6.3 million for the three months ended September 30, 2002. After accounting for
the decrease in the associated tax provision, net income as previously reported
of $76,000 was reduced to a net loss of $141,000 for the three months ended
September 30, 2002.

Condensed consolidated statement of operations for the nine months ended
September 30, 2002 as restated

Software and services revenue was reduced by $310,000 from $17.3 million to
$17.0 million for the nine months ended September 30, 2002. After accounting for
the decrease in the associated tax provision, net loss as previously reported of
$1.8 million increased to a net loss of $2.0 million for the nine months ended
September 30, 2002.

Condensed consolidated balance sheet as at December 31, 2002 as restated

The above table illustrates the restatements identified and their impact on
the condensed consolidated balance sheet as at the end of each period presented
as restated. The impact of the restatement adjustments in each period reflect
adjustments to the amount of revenue recognized in each period and their
associated impact on unbilled receivables and/or deferred revenues. The
adjustments to the related tax provision in each period are reflected in the
restated Deferred Income Taxes and Income Taxes Payable balances.

Filing of Restated Financial Statements

At the earliest time in the fourth quarter of 2003, we expect to file with
the SEC the Company's Form 10-K/A for the year ended December 31, 2002 and
amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended
September 30, 2002, March 31, 2003 and June 30, 2003 containing restated
financial statements for the relevant periods.

For further information of the impact of the restatements on the condensed
consolidated statements of operations for the three months and nine months ended
September 30, 2002 and the balance sheet as at December 31, 2002, see notes 1(a)
and 9 of the accompanying condensed consolidated financial statements.

Strategic Alternatives

The Company has retained Bear, Stearns & Co. Inc. as financial advisor to
the Board of Directors. The Board is evaluating potential business combinations,
financing and other strategic alternatives to help the Company offer enhanced
products and services to its customers and maximize shareholder value. The
Company continues to conduct the strategic review process. The process is
ongoing, and to date the Company has not entered any transaction as a result of
the strategic review.

-19-

Restructuring

The Company believes that economic conditions and trends have adversely
affected and may continue to affect levels of capital spending by companies in a
variety of industries, including companies in the vertical markets that the
Company serves. The current excess supply of capacity in the telecommunications
industry has adversely affected the financial condition of many
telecommunications companies worldwide. In addition, economic conditions and
developments in the energy markets have had an adverse effect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company believes that these and other factors have adversely
affected demand for products and services offered by the Company, as certain
prospective and existing customers have delayed or deferred purchasing
decisions, have elected to not purchase the Company's products, or have sought
to terminate existing contracts for the Company's products and services. As a
result, the Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
factors, particularly the timing and receipt of significant orders. While the
Company believes that economic conditions in certain of its vertical markets
show signs of improvement, the Company believes that economic and political
conditions and general trends are likely to continue to affect demand for the
Company's products and services throughout the remainder of 2003, particularly
demand for software and related services. See the risk factors attached to
Exhibit 99.1 hereto and "Forward-Looking Statements". Such factors may also
increase the amount of doubtful accounts or adversely affect the likelihood of
collection of such accounts.

In order to address the uncertainties caused by these economic trends, MDSI
announced in 2001 its intention to reduce its operating expenses through
workforce reductions and other measures. These measures have been gradually
implemented with incremental reductions in costs each quarter, and were expected
to result in an estimated $2.9 million in cost reductions per quarter by the end
of 2002. A majority of the savings were realized by reduced salary and payroll
costs, and the remaining savings were realized from the subleasing of excess
space, and a reduction in discretionary spending. As a result of the sale of the
public safety operations during the second quarter of 2002, the Company exceeded
the estimated quarterly savings.

In connection with the restructuring the Company recorded a charge of $6.1
million in 2001. A breakdown of the nature of the charges and the costs incurred
to date is as follows:

Total Restructuring
Charge
-------------------
Workforce reduction $ 3,375,000
Provision for excess office space 1,861,000
Non cash writedown of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (5,153,304)
-------------------
Accrued restructuring charges included in
accrued liabilities at September 30, 2003 $ 952,623
===================

Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures for
these items are expected to be incurred.

The Company's remaining restructuring accruals relate to surplus office
space under long term lease by the Company at two locations, including one
location where the Company has entered into fixed cost lease arrangements
expiring in 2004. The Company has incurred approximately $0.9 million of cash
costs relating to this provision leaving an accrual of $1.0 million remaining as
at September 30, 2003. The Company expects that the provision will be fully
drawn down no later than the time the lease expires in the fourth quarter of
2004.

Field Service Business

The implementation of a complete mobile data solution requires a wireless
data communications network, mobile computing devices integrated with wireless
data communication modems, host computer equipment, industry

-20-

specific application software such as MDSI's Advantex products, wireless
connectivity software and a variety of services to manage and install these
components, integrate them with an organization's existing computer systems and
configure or customize the software to meet customer requirements. Frequently,
in the Company's larger contracts only a limited number of the mobile computing
devices and in-vehicle equipment are installed initially, with the balance
implemented over a rollout period that may extend up to one year or more. Where
increases in mobile workforces require or where additional departments of mobile
workers are added, additional mobile computing devices may be installed, which
may result in additional revenue for the Company. See "Forward-Looking
Statements."

Revenue for software and services has historically accounted for a
substantial portion of the Company's revenue. Typically, the Company enters into
a fixed price contract with a customer for the licensing of selected software
products and the provision of specific services, which includes a warranty
period that is generally ninety days in length. These services are generally
performed within six to twelve months. Pricing for these contracts includes
license fees as well as a fee for professional services. The Company generally
recognizes total revenue for software and services associated with a contract
using a percentage of completion method based on the total costs incurred over
the total estimated costs to complete the contract.

The Company's customers typically enter into ongoing maintenance agreements
that provide for maintenance and technical support services for a period
commencing after expiration of the initial warranty period. Maintenance
agreements typically have a term of one to three years and are invoiced either
annually, quarterly, or monthly. Revenue for these services is recognized
ratably over the term of the contract.

The Company is periodically required to provide, in addition to MDSI
products and services, certain third party products, such as host computer
hardware and operating system software, and mobile computing devices. The
Company recognizes revenue on the supply of third party hardware and software
upon transfer of title to the customer. The Company recognizes revenue on the
supply of third party services using a percentage of completion method based on
the costs incurred over the total estimated cost to complete the third party
services contract. Also included in third party revenue are reimbursements to
the Company for out of pocket expenses incurred on implementation projects
performed by the Company. EITF 01-14 "Income Statement Characterization of
Reimbursements Received for Out of Pocket Expenses" requires characterization of
these expenses as revenue. An equal and offsetting amount of expense is
recognized relating to these reimbursements as direct costs.

The Company believes that it will periodically supply third party products
and services to customers where it is successful in selling its own products and
services. There can be no assurance, however, that any contracts entered into by
the Company to supply third party software and products in the future will
represent a substantial portion of revenue in any future period. Since the
revenue generated from the supply of third party products and services may
represent a significant portion of certain contracts and the installation and
rollout of third party products is generally at the discretion of the customer,
the Company may, depending on the level of third party products and services
provided during a period, experience large fluctuations in revenue.

During 2001, MDSI decided not to continue pursuing opportunities in the
Public Safety market. These opportunities consisted of federal, state and local
agencies that provide police, fire, medical and other emergency services. The
Company had installed solutions for a limited number of customers, and this
market did not represent a material portion of MDSI's revenues. On May 24, 2002
the Company entered into an agreement with Datamaxx Applied Technologies Inc.
("Datamaxx"), granting exclusive license to Datamaxx for MDSI's Public Safety
products in North America, and non exclusive license rights for these products
outside North America. The Company also assigned its existing contracts in the
Public Safety market to Datamaxx. MDSI will receive royalty payments under the
agreement for any license and implementation revenue earned by Datamaxx in
relation to the licensed products, subject to a maximum royalty payout of
$1,500,000. As a result of this licensing agreement, the Company has now exited
the Public Safety market, and all employees related to the Public Safety market
were terminated prior to June 30, 2002.

The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. As a result, any substantial delay in the
Company's completion of a contract, the inability of the Company to obtain new
contracts or the cancellation of an existing contract by a customer could have a
material adverse effect on the Company's results of operations. Some of the
Company's contracts are cancelable upon notice by the customer. The loss of
certain contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. As a result of
these and other factors, the Company's results of operations have fluctuated in
the past and may continue to fluctuate from period-to-period.

-21-

Disposition of Hosting and Information Technology (IT) Services Business Segment

In June 2002, MDSI adopted a plan for sale and entered into an agreement to
sell its Hosting and IT Services business segment, Connectria Corporation
(Connectria), to former Connectria shareholders who were both shareholders and
employees of the Company. The transaction closed in July 2002. Pursuant to the
terms of the agreement, the Company received from the former Connectria
shareholders 824,700 shares of MDSI that had a market value of approximately
$2.8 million and the cancellation of 103,088 previously issued stock options of
MDSI as consideration for Connectria. In addition to the share consideration, a
wholly-owned subsidiary of MDSI also received a warrant allowing it to purchase
up to 50,380 shares of Series A Nonvoting Preferred Stock of Connectria at a
price of $50 per share exercisable for a period of five years. The Series A
Nonvoting Preferred Stock of Connectria has a face value of $100 per share,
bears a dividend of five percent per annum, bears a liquidation preference equal
to the face value, may be redeemed at Connectria's option at any time, and must
be redeemed by Connectria upon a capital infusion of $10 million or greater. In
addition MDSI has advanced Connectria $500,000, consisting of a loan in the
principal amount of $250,000 with a two year term, bearing interest at 5%, and
$250,000 for prepaid hosting services. On closing, the Company realized a small
gain as a result of the disposition of Connectria.

As a result of its decision to dispose of Connectria, MDSI has treated this
business segment as a discontinued operation and the results of operations,
financial position and changes in cash flow for this segment have been
segregated from those of continuing operations. The following discussion and
analysis of the Company's results of operations excludes Connectria from the
corresponding prior periods.

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Company's financial statements.

In April 2003 FASB issued Statement No. 149 ("SFAS 149"), Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities. The Statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In particular, it (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
the language used in FASB Interpretation No. 45, Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and (4) amends certain other existing pronouncements.

SFAS 149 is effective for contracts entered into or modified after June 30,
2003, subject to certain exceptions, and for hedging relationships designated
after June 30, 2003.

The Company adopted the provisions of SFAS 149 during the three months
ended September 30, 2003 and the adoption did not have a material impact on its
results of operations and financial condition.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company adopted FIN 46
during the three months ended September 30, 2003 and it did not have a material
impact on the results of operations and financial condition of the Company.

-22-

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. Although the
disclosure provisions of FIN 45 previously were adopted by the Company, the
recognition provisions of FIN 45 became effective as of January 1, 2003. The
adoption of the recognition provisions of FIN 45 did not have a material impact
on the Company's results of operations or financial position.

Critical Accounting Policies and Significant Estimates

The significant accounting policies are outlined within Note 1 to the
Condensed Consolidated Financial Statements. Some of those accounting policies
require the Company to make estimates and assumptions that affect the amounts
reported by the Company. The following items require the most significant
judgment and involve complex estimation:

Restructuring Charges

In calculating the cost to dispose of excess facilities the Company was
required to estimate for each location the amount to be paid in lease
termination payments, the future lease and operating costs to be paid until the
lease is terminated, and the amount, if any, of sublease revenues. This required
estimating the timing and costs of each lease to be terminated, the amount of
operating costs, and the timing and rate at which the Company might be able to
sublease the site. From the estimates for these costs the Company performed an
assessment of the affected facilities and considered the current market
conditions for each site. A charge of $1.9 million was recorded for the
restructuring of excess facilities as part of the restructuring plan. The
Company's assumptions on either the lease termination payments, operating costs
until terminated, or the offsetting sublease revenues may be proven incorrect
and actual cost may be materially different from the estimates.

Accounts Receivable

The Company periodically reviews the collectability of its accounts
receivable balances. Where significant doubt exists with regard to the
collection of a certain receivable balance, an allowance and charge to the
income statement is recorded. At September 30, 2003, the allowance for doubtful
accounts was $3.6 million, composed of $2.6 million relating to current trade
receivables and $1.0 million relating to a long term receivable. The Company
intends to continue vigorously pursuing these accounts. If future events
indicate additional collection issues, the Company may be required to record an
additional allowance for doubtful accounts.

Revenue Recognition - Percentage Completion

The Company uses estimates based on inputs to determine the percentage
completion of its software and service implementation contracts and thus its
revenue recognition. Under the percentage-of-completion method, sales and gross
profit are recognized as the work is performed based on the relationship between
costs incurred and the total estimated costs of completion. These estimates and
contracts are reviewed regularly and are adjusted prospectively to reflect the
Company's best estimate at the time. Provision for estimated losses on contracts
are recorded when identifiable. The Company's assumptions used to form these
estimates may be proven to be erroneous and materially different outcomes may
result.

Income Taxes

The Company has incurred losses and other costs that can be applied against
future taxable earnings to reduce the tax liability on those earnings. As the
Company is uncertain of realizing the future benefit of those losses and
expenditures, the Company has recorded a valuation allowance against most
non-capital loss carry forwards, and other deferred tax assets arising from
differences in tax and accounting bases. Actual results may be materially
different from the current estimate.

-23-

Product Warranties

The Company generally provides a limited warranty of ninety days on its
software and implementation services. As the types of services provided during
the warranty period are essential and inseparable to the software and service
agreement, associated costs are budgeted for as part of the software and
implementation serice and revenue recognized as part of the overall software and
implemtation contract using the percentage of completion. The Company typically
includes indemnification provisions within license and implementation service
agreements which are consistent with those prevalent in the software industry.
Such provisions indemnify customers against actions arising from patent
infringements which may arise through the normal use or proper possession of the
Company's software. To date that Company has not experienced any significant
obligations under customer indemnification provisions and accordingly, no such
amounts have been accrued for such potential indemnification obligations.

Contingencies

The Company is involved in a dispute with Citizens Telcom Services Co.,
L.L.C. The Company filed suit against Citizens alleging that Citizens had
breached a series of contracts, and failed to pay sums due. Citizens filed an
answer and counterclaim alleging the Company breached the contracts, entitling
Citizens to repayment of all sums paid to the Company of approximately $3.5
million. In addition, Citizens' counterclaims alleged fraud, negligent
misrepresentation, breach of express warranty and breach of implied warranties.
Citizens sought all actual, special, incidental and consequential damages
associated with these counterclaims, in addition to punitive damages, interest
and attorneys' fees.

On March 5, 2003, the court granted Citizens' motion for summary judgment,
dismissing the Company's claims for lack of sufficient evidence of damages. The
Company filed a motion for reconsideration of this ruling. On March 26, 2003,
the court denied the Company's motion. On March 26, 2003, the court granted the
Company's motion for partial summary judgment, finding that Citizens wrongfully
terminated the professional services agreement. On April 8, 2003, the court
granted the Company's motion for summary judgment on the Citizens' counterclaims
for fraud and negligent misrepresentation.

The Company tendered defense of the customer's counterclaims to its
insurance company. The insurance company accepted defense of the counterclaims
under a reservation of rights. On April 16, 2003, the Company was informed that
its insurer reached an agreement with Citizens to settle Citizens' breach of
contract and breach of warranty counterclaims for $1 million. The Company is not
a party to the settlement agreement and the settlement amount is to be paid by
its insurer. The settlement agreement preserved the Company's right to appeal
the court's ruling that dismissed the Company's claims on summary judgment for
lack of sufficient evidence of damages and Citizens' right to appeal the court's
ruling that dismissed Citizens' counterclaims of fraud and negligent
misrepresentation. On May 14, 2003, the Company filed its Notice of Appeal, and
on May 28, 2003 Citizens appealed the court's motion for summary judgment that
dismissed Citizens' counterclaims for fraud and negligent misrepresentation.
Both parties are awaiting a court date as to when the appeals will be heard.

The Company intends to expense as incurred costs in connection with the
appeal and any subsequent trial, and any amounts which may be payable in respect
to counterclaims asserted by Citizens for fraud and negligent misrepresentation.
The Company has classified the $3.7 million receivable from Citizens as a long
term receivable on its consolidated balance sheet as of September 30, 2003, and
due to the uncertain nature of the receivable has recorded an allowance in a
prior period of $1.0 million against the amounts due. There is currently no
provision in the Company's financial statements to address any payment to the
customer if Citizens is successful in any appeal and subsequent trial on its
fraud and negligent misrepresentation counterclaims, as the Company, after
consultation with counsel, views this to be an unlikely event. Should the
Company not be successful in its claims against the customer, the Company may be
required to take a $2.7 million dollar charge to earnings. If the customer is
successful in any fraud or negligent misrepresentation counterclaims, the
Company may be required to take an additional charge to earnings to the extent
of the judgment. Although the amount of any such judgment against the Company
for fraud or negligent misrepresentation cannot be determined, if the customer
is successful in any appeal and subsequent trial, the Company's financial
condition and results of operations would be materially adversely affected. See
the "Litigation" risk factor in Exhibit 99.1 hereto and see "Forward-Looking
Statements".

-24-

Results of Operations

The Company's net income was $0.3 million for the three months ended
September 30, 2003. This compares to a net loss of $0.1 million for the three
months ended September 30, 2002. For the nine months ended September 30, 2003
the Company had a net loss of $0.3 million, compared to a net loss of $2.0
million for the nine months ended September 30, 2002. The increase in net income
for both comparative periods is due primarily to increased revenues derived from
several significant contracts, partially offset by increased direct costs
relating to the significant contracts, weakness in the U.S. dollar which causes
Canadian dollar denominated expenses to rise, and strategic expenses incurred in
the second quarter of 2003.

The following table sets forth, for the periods indicated, certain
components of the selected financial data of the Company as a percentage of
total revenue:

Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
(As restated, (As restated,
see note 9) see note 9)
-------------- -------------- -------------- --------------

REVENUE
Software and services 62.5% 59.9% 64.5% 62.6%
Maintenance and support 25.5% 24.8% 24.7% 29.6%
Third party products and services 12.0% 15.3% 10.8% 7.8%
-------------- -------------- -------------- --------------
100% 100% 100% 100%

DIRECT COSTS 49.6% 47.6% 48.5% 44.7%
-------------- -------------- -------------- --------------
GROSS PROFIT 50.4% 52.4% 51.5% 55.3%
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Research and development 10.8% 12.2% 11.0% 15.6%
Sales and marketing 19.8% 28.8% 22.7% 34.5%
General and administrative 15.1% 14.1% 13.9% 17.2%
Provision for doubtful accounts 0.9% - 0.3% -
Strategic expenses - - 2.3% -
-------------- -------------- -------------- --------------
46.6% 55.1% 50.2% 67.3%
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) 3.8% (2.7)% 1.3% (12.0)%

OTHER (EXPENSE) INCOME (0.7)% 0.7% (1.5)% 0.9%
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE 3.1% (2.0)% (0.2)% (11.1)%
TAX PROVISION

INCOME TAX EXPENSE (RECOVERY) FROM CONTINUING
OPERATIONS 0.9% (0.5)% (0.6)% (3.2)%
-------------- -------------- -------------- --------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 2.2% (1.5)% (0.8)% (7.9)%

INCOME FROM DISCONTINUED OPERATIONS - 0.1% - 0.4%

-------------- -------------- -------------- --------------
NET INCOME (LOSS) FOR THE PERIOD 2.2% (1.4)% (0.8)% (7.5)%
============== ============== ============== ==============

Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002

Revenue. Revenue increased by $1.8 million or 16.9% for the three months
ended September 30, 2003 as compared to the three months ended September 30,
2002. This increase was primarily due to increases in revenue from software and
services and maintenance and support revenue during the third quarter of 2003
relative to the same period in 2002.

-25-

Software and services revenue increased by $1.4 million or 22.0% for the
three months ended September 30, 2003 as compared to the three months ended
September 30, 2002. The increase in revenue was attributable to several
significant contracts the Company has entered into, representing increased
success in the core markets the Company serves. These contracts continue to
generate significant revenue for the Company. The Company only recognized a
significant amount of revenue from one of these contracts for the three months
ended September 30, 2002, where during the three months ended September 30, 2003
there were significant amounts of revenue being recognized on all of these
contracts and therefore the Company's Software and Service revenues have
significantly increased for the three months ended September 30, 2003 as
compared to the three months ended September 30, 2002. The Company expects that
these contracts will continue to make up a significant portion of revenues over
the next few quarters. "See Forward Looking Statements". While the Company
believes that economic conditions in certain of its vertical markets show signs
of improvement, the Company anticipates that economic conditions and general
trends are likely to continue to have an adverse impact on software and services
revenues in future periods. See "Forward-Looking Statements".

Maintenance and support revenue was $3.1 million for the three months ended
September 30, 2003 as compared to $2.6 million for the three months ended
September 30, 2002. Maintenance and support revenue has increased primarily due
to the growth in the Company's installed customer base. Such revenue is expected
to fluctuate as it corresponds to the level of software support and services
that the Company is engaged to provide in support of its installations.

Third party products and services revenue decreased by $0.1 million for the
three months ended September 30, 2003 compared to the three months ended
September 30, 2002. Third party products and services revenue is primarily
earned from certain customers in the utilities market pursuant to agreements
under which the Company provides third party products and services, typically
host computer equipment and mobile computing devices, as part of the
installation of software and provision of services. In addition, not all
customers under contract require the provision of third party products and
services. Accordingly, there may be large fluctuations in revenue, direct costs,
gross profits and income from operations from one period to another. The Company
has agreed to supply a large amount of third party services at no margin, in
connection with one particular contract, and therefore expects that future
revenues from third party products and services will fluctuate in the near term.
For the three months ended September 30, 2003 approximately $0.4 million (2002 -
$ nil) of these no margin third party services were provided. See
"Forward-Looking Statements."

Direct Costs. Direct costs were 49.6% of revenue for the three months ended
September 30, 2003, compared to 47.6% for the three months ended September 30,
2002. Direct costs include labor and other costs directly related to a project
including those related to the ongoing provision of services and support, and
costs related to equipment purchased for sale to third parties. Labor costs
include direct payroll, benefits and overhead charges. The increase in direct
costs as a percentage of revenue occurred primarily due to the Company's
agreement to supply a large amount of third-party services at no margin, in
connection with one particular contract. The relative weakness of the United
States dollar also contributed to the cost increase as the majority of direct
costs are incurred in Canadian dollars. As a result, direct costs as a
percentage of revenue have increased. The Company expects that direct costs as a
percentage of revenue will remain relatively consistent with the current period
in the near term. See "Forward-Looking Statements."

Gross Margins. Gross margins were 50.4% of revenue for the three months
ended September 30, 2003, compared to 52.4% for the three months ended September
30, 2002. The decrease in gross margins as a percentage of revenue related
primarily to an agreement whereby the Company has agreed to supply a large
amount of third-party services at no margin. During the current period the
Company recognized approximately $0.4 million in third party revenues and costs
related to this project and as a result of this work, the Company's gross
margins as a percentage of revenue decreased. The relative weakness of the
United States dollar also contributed to the reduction in gross margin in the
period. The Company expects that in the near term its gross margins as a
percentage of revenue will remain consistent with the current period, subject to
the level of third party services actually provided. See "Forward-Looking
Statements."

Research and Development. Research and development expenses were $1.3
million, or 10.8% of revenue, for the three months ended September 30, 2003,
compared to $1.3 million, or 12.2% of revenue, for the three months ended
September 30, 2002. The decrease in research and development expenses as a
percentage of revenue was a result of stable research and development expenses
incurred during a period of revenue growth. The Company has also utilized
research and development personnel on revenue producing projects in the current
period, and corresponding portions of the associated salary costs for these
staff being reflected as direct costs as opposed to

-26-

Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002 (continued)

research and development expenses. The Company intends to continue committing a
significant portion of its revenue to enhance existing products and develop new
products. See "Forward-Looking Statements".

Sales and Marketing. Sales and marketing expenses were $2.4, million or
19.8% of revenue, for the three months ended September 30, 2003 compared to $3.0
million, or 28.8% of revenue, for the three months ended September 30, 2002. The
decrease in expenses was a result of a lower commission expense being incurred
by the Company, as several contract signings that occurred in the third quarter
of 2002 did not reoccur in the current period resulting in fewer commissions
being incurred in the current period. The Company anticipates that the dollar
amounts of its sales and marketing expenses will continue to be significant as a
result of the Company's commitment to its international marketing efforts and
attempts to penetrate additional markets for its products. See "Forward-Looking
Statements".

General and Administrative. General and administrative expenses were $1.9
million, or 15.2% of revenue, for the three months ended September 30, 2003
compared to $1.5 million, or 14.1% of revenue, for the three months ended
September 30, 2002. General and administrative expenses increased for the three
months ended September 30, 2003 as compared to the three months ended September
30, 2003 due to increased professional advisory services required during the
current period. The Company expects that in the near future, general and
administrative expenditures will remain relatively consistent with current
levels. See "Forward-Looking Statements".

Provision for doubtful accounts. During the three months ended September
30, 2003 the Company recorded a charge of $0.1 million as a provision for
doubtful accounts. Due to significant uncertainty surrounding collection of one
specific account from the Company's previously disposed of public safety
business, the Company took a charge of $0.2 million to value the account at the
most likely amount to be collected. Also during the quarter the Company received
notification that it would recover approximately $0.1 million for a previously
fully allowed for receivable as a result of a bankruptcy settlement. The net
effect of the $0.2 million dollar charge, partially offset by the $0.1 million
recovery of a previously allowed for account resulted in the net $0.1 million
provision for doubtful accounts being recorded during the three months ended
September 30, 2003.

Other (Expense) Income. Other (expense) income was $(81,000) for the three
months ended September 30, 2003 as compared to approximately $71,000 for the
three months ended September 30, 2002. Substantially all of other income
(expense) related to fluctuations in the currencies of the Company's foreign
operations, interest income on cash and short term deposits, and interest
expense on short-term borrowings under the line of credit and capital lease
obligations. In particular, the U.S. dollar weakened during the current period
and the Company's foreign denominated net liabilities increased in value which,
when reflected in U.S. dollars, caused an unrealized foreign exchange loss.

Income Taxes. The Company provided for income tax expense on income for the
three months ended September 30, 2003 and 2002 at rates of 30.0% and 25.9%
respectively. The Company's effective tax rate reflects the blended effect of
Canadian, U.S., and other foreign jurisdictions' tax rates.

Income (loss) from Discontinued Operations. During the three months ended
June 30, 2002 the Company announced its intention to divest its Hosting and IT
services subsidiary Connectria Corporation (Connectria). As a result, the
historical results of operations for Connectria have been presented as
Discontinued Operations. Income from Discontinued Operations for the three
months ended September 30, 2002 was $12,000. As the transaction was completed in
July of 2002, all assets and liabilities of Connectria were liquidated by the
end of July 2002 and no income or loss was incurred from Discontinued Operations
during the current period.

-27-

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002

Revenue. Revenue increased by $9.3 million or 34.1% for the nine months
ended September 30, 2003 as compared to the nine months ended September 30,
2002. This increase was primarily due to increases in revenue from software and
services and third party products and services during the first nine months of
2003 relative to the same period in 2002.

Software and services revenue increased by $6.5 million or 38.0% for the
nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002. The increase in revenue was attributable to several
significant contracts the Company has entered into during the year ended
December 31, 2002 representing increased success in the core markets the Company
serves. These contracts continue to generate significant revenue for the
Company. The Company earned significant revenues from only one of these
contracts for the nine months ended September 30, 2002 and therefore the
Company's software and service revenue significantly increased for the nine
months ended September 30, 2003 as compared to the nine months ended September
30, 2002. The Company expects that these contracts will continue to make up a
significant portion of revenues over the next few quarters. See "Forward Looking
Statements". While the Company believes that economic conditions in certain of
its vertical markets show signs of improvement, the Company anticipates that
economic conditions and general trends are likely to continue to have an adverse
impact on software and services revenue in future periods. See "Forward-Looking
Statements".

Maintenance and support revenue was $9.0 million for the nine months ended
September 30, 2003 as compared to $8.0 million for the nine months ended
September 30, 2002. Maintenance and support revenue has increased primarily due
to growth in the Company's installed customer base. Such revenue is expected to
fluctuate as it corresponds to the level of software support and services which
the Company is engaged to provide in support of its installations.

Third party products and services revenue increased by $1.8 million for the
nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002. Third party products and services revenue increased
primarily due to the Company agreeing to supply a large amount of third party
services at no margin in connection with one particular contract. For the nine
months ended September 30, 2003 approximately $1.8 million (2002 - $ nil) of
these no margin third party services were provided. See "Forward Looking
Statements."

Direct Costs. Direct costs were 48.5% of revenue for the nine months ended
September 30, 2003, compared to 44.7% for the nine months ended September 30,
2002. The increase in direct costs as a percentage of revenue occurred primarily
due to the Company's agreement to supply a large amount of third-party services
at no margin, in connection with one particular contract. The relative weakness
of the United States dollar also contributed to the cost increase as the
majority of direct costs are incurred in Canadian dollars. As a result, direct
costs as a percentage of revenue have increased, and the Company expects that
direct costs as a percentage of revenue will remain relatively consistent with
the current period in the near term. See "Forward-Looking Statements."

Gross Margins. Gross margins were 51.5% of revenue for the nine months
ended September 30, 2003, compared to 55.3% for the nine months ended September
30, 2002. The decrease in gross margins as a percentage of revenue related
primarily to a agreement whereby the Company has agreed to supply a large amount
of third-party services at no margin. During the current period the Company
recognized approximately $1.8 million in third party revenues and costs related
to this project and as a result of this work, the Company's gross margins as a
percentage of revenue decreased. The relative weakness of the United States
dollar also contributed to the reduction in gross margin in the period. The
Company expects that in the near term that its gross margins as a percentage of
revenue will remain consistent with the current period, subject to the level of
third party services actually provided. "See "Forward-Looking Statements."

-28-

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002 (continued)

Research and Development. Research and development expenses were $4.0
million, or 11.0% of revenue, for the nine months ended September 30, 2003,
compared to $4.2 million, or 15.6% of revenue, for the nine months ended
September 30, 2002. The decrease in research and development expenses as a
percentage of revenue was a result of stable research and development expenses
incurred during a period of revenue growth. The Company has also utilized
research and development personnel on revenue producing projects in the current
period, and corresponding portions of the associated salary costs for these
staff being reflected as direct costs as opposed to research and development
expenses. The Company intends to continue committing a significant portion of
its revenue to enhance existing products and develop new products. See
"Forward-Looking Statements".

Sales and Marketing. Sales and marketing expenses were $8.3 million, or
22.7% of revenue, for the nine months ended September 30, 2003, compared to $9.4
million, or 34.5% of revenue, for the nine months ended September 30, 2002. The
decrease in expenditures in the current period was a result of a lower
commission expense being incurred by the Company, as several large contract
signings that occurred in 2002 did not reoccur in the current period resulting
in fewer commissions being paid out in the current period. The Company
anticipates that the dollar amounts of its sales and marketing expenses will
continue to be significant as a result of the Company's commitment to its
international marketing efforts and attempts to penetrate additional markets for
its products. See "Forward-Looking Statements".

General and Administrative. General and administrative expenses were $5.0
million, or 13.9% of revenue, for the nine months ended September 30, 2003, as
compared to $4.7 million, or 17.2% of revenue, for the nine months ended
September 30, 2002. General and administrative expenses increased in the current
period as a result of an increased need for professional advisory services
during the nine months ended September 30, 2003 as compared to the nine months
ended September 30, 2002. The Company expects that in the near future, general
and administrative expenditures will remain relatively consistent with current
levels. See "Forward-Looking Statements".

Provision for doubtful accounts. During the nine months ended September 30,
2003 the Company recorded a charge of $0.1 million as a provision for doubtful
accounts. Due to significant uncertainty surrounding collection of one specific
account the Company took a charge of $0.2 million to value the account at the
most likely amount to be collected. Also during the nine months ended September
30, 2003 the Company received notification that it would recover approximately
$0.1 million for a previously fully allowed for receivable as a result of a
bankruptcy settlement. The net effect of the $0.2 million dollar charge,
partially offset by the $0.1 million recovery of a previously allowed for
account resulted in the net $0.1 million provision for doubtful accounts being
recorded during the nine months ended September 30, 2003.

Strategic expenses. Strategic expenses were approximately $0.8 million, or
2.2% of revenue, for the nine months ended September 30, 2003. The Company did
not incur any strategic expenses in the nine months ended September 30, 2002.
Strategic expenses consisted of professional fees associated with investigating
a potential corporate transaction that the Company considered and then abandoned
during the second quarter of 2003. The Company expects it will consider
additional strategic opportunities during the remainder of 2003 and expects to
incur additional strategic expenses during this period; however, the Company
cannot predict the amount of the strategic expenses or whether the Company will
be successful in negotiating a successful transaction. See "Forward-Looking
Statements." The Company has received an initial request for reimbursement of
expenses from the other party involved in the transaction. The Company strongly
believes that it is not obligated to reimburse these expenses, and the Company
has not provided for any reimbursement of the other party's expenses in its own
financial statements.

Other (Expense) Income. Other (expense) income was ($0.5) million for the
nine months ended September 30, 2003 as compared to approximately $0.2 million
for the nine months ended September 30, 2002. Substantially all of other income
(expense) related to fluctuations in the currencies of the Company's foreign
operations, interest income on cash and short term deposits, and interest
expense on short-term borrowings under the line of credit and capital lease
obligations. In particular, the U.S. dollar weakened during the current period
and the Company's foreign denominated net liabilities increased in value which,
when reflected in U.S. dollars, caused an unrealized foreign exchange loss.

Income Taxes. The Company provided for income tax expense (recovery) on
income (losses) for the nine months ended September 30, 2003 and 2002 at rates
of 31.0% and (28.9%) respectively, after adjusting for strategic expenses
incurred in the current period. The Company's effective tax rate reflects the
blended effect of Canadian,

-29-

U.S., and other foreign jurisdictions' tax rates. No provision has been made for
recovery of taxes on the strategic expenses as the Company has significant tax
losses in Canada where there is no certainty of realization of the benefit.

Income (loss) from Discontinued Operations. During the nine months ended
September 30, 2002 the Company announced its intention to divest its Hosting and
IT services subsidiary Connectria Corporation (Connectria). As a result, the
historical results of operations for Connectria have been presented as
Discontinued Operations. Income from Discontinued Operations for the nine months
ended September 30, 2002 was $121,000. As the transaction was completed in July
of 2002, all assets and liabilities of Connectria were liquidated by the end of
July 2002 and no income or loss was incurred from Discontinued Operations during
the current period.

Liquidity and Capital Resources

The Company has financed its operations, acquisitions and capital
expenditures with cash generated from operations, loans, private placements and
public offerings of its securities. At September 30, 2003, the Company had cash
and cash equivalents of $14.7 million and working capital of $9.2 million.

Cash provided by operating activities was $5.8 million for the nine months
ended September 30, 2003 compared to $1.3 million for the nine months ended
September 30, 2002. The net inflow of cash from operating activities, after
adding back depreciation and amortization of $2.2 million, was due to a net
decrease in non-cash working capital items of $3.8 million, a decrease in
deferred income tax receivable of $0.2 million and a net loss for the nine
months ended September 30, 2003 of $0.3 million. The net decrease in non-cash
operating working capital items was due primarily to a net decrease in trade and
unbilled receivables, an increase in deferred revenue, and an increase in trade
accrued liabilities. The decrease in trade receivables and increase in deferred
revenue were due to timing differences arising between revenue recognition and
billing milestones in multiphase projects. The increase in accrued liabilities
was a result of strategic expenses, and embedded software expenses incurred
during the nine months ended September 30, 2003, for which the Company had yet
to be invoiced.

The Company maintained as at September 30, 2003 a provision of $3.6 million
with respect to doubtful accounts, including $1.0 million classified as
non-current. The Company intends to vigorously pursue collection of these
accounts; however, due to uncertainty with regard to ultimate collection, the
Company determined that it would be prudent to maintain an allowance to address
this uncertainty.

The Company is currently involved in a dispute with a customer, and as the
Company had determined it is not likely to collect the amounts within one year,
it had previously reclassified $3.7 million in accounts receivable as long term.
As part of its total $3.6 million dollar doubtful accounts provision, the
Company has, in a prior period, recorded an allowance of $1.0 million, against
this receivable given the uncertain nature of collection. The Company is
currently involved in litigation to collect the amounts due. The nature and
amount of the Company's claims, the customer's counterclaims and recent
developments in the litigation are described more fully under Part II, Item 1 of
this Quarterly Report. The Company intends to expense the costs incurred in
connection with the appeal and any subsequent trial, and any counterclaims
asserted by the customer for fraud and negligent misrepresentation, as incurred.
Should the Company not be successful in its claims against the customer, the
Company may be required to take a $2.7 million dollar charge to earnings. If the
customer is successful in any fraud or negligent misrepresentation
counterclaims, the Company may be required to take an additional charge to
earnings to the extent of the judgment. Although the amount of any such judgment
against the Company for fraud or negligent misrepresentation cannot be
determined, if the customer is successful in any appeal and subsequent trial,
the Company's financial condition and results of operations could be materially
adversely affected. There is currently no provision in the Company's financial
statements to address any payment to the customer with respect to these
counterclaims as the Company, after consultation with counsel, views this to be
an unlikely event. The Company believes that its position in the matter is
strong and intends to vigorously pursue collection. If the Company is not
successful in the litigation, the Company's financial position, results of
operations, and liquidity would be materially adversely affected. See the
"Litigation" risk factor in Exhibit 99.l hereto and see "Forward-Looking
Statements".

Cash used by financing activities of $1.3 million during the nine months
ended September 30, 2003 primarily related to $1.4 million in repayments of
capital leases made during the nine months, partially offset by proceeds of
$80,000 from the issuance of shares under the employee share purchase plan and
exercise of employee stock options. The capital leases are to be repaid over a
36 month period ending September 2005, bear interest at various interest rates
to a maximum of approximately 9% and are secured by certain computer hardware
and software assets of the Company.

-30-

Cash used in investing activities was $0.8 million for the nine months
ended September 30, 2003 as compared to $1.4 million for the nine months ended
September 30, 2002. Total investing activity during the nine months ended
September 30, 2003 consisted of $0.8 million in purchases of capital assets.
Purchases of capital assets include computer hardware and software for use in
implementation activities, research and development and for general corporate
purposes. Investing activities in 2002 also related to purchases of capital
assets.

Existing sources of liquidity at September 30, 2003 included $14.7 million
of cash and cash equivalents and additional funds available under the Company's
operating line of credit. At September 30, 2003, the Company's borrowing
capacity under the line of credit was up to $10 CDN million. Under the terms of
the agreement, borrowings and letters of credit under the line are limited to
75% to 90% of eligible accounts receivable. Borrowings accrue interest at the
bank's prime rate plus 0.25%. At September 30, 2003, the Company was not using
this line of credit, other than to secure performance guarantees.

The Company believes that the principal source of its liquidity is
operating cash flow. Certain circumstances including a reduction in the demand
for the Company's products, an increase in the length of the sales cycle for the
Company's products, an increase in operating costs, unfavorable results of
litigation, or general economic slowdowns could have a material impact on the
Company's operating cash flow and liquidity. See the risk factors in Exhibit
99.1 hereto and see "Forward Looking Statements".

The Company believes that future cash flows from operations and its
borrowing capacity under the operating line of credit combined with current cash
balances will provide sufficient funds to meet cash requirements for at least
the next twelve months. Commensurate with its past and expected future growth,
the Company may increase, from time to time, its borrowing facility under its
operating line of credit to support its operations. Future growth or other
investing activities may require the Company to obtain additional equity or debt
financing, which may or may not be available on attractive terms, or at all, or
may be dilutive to current or future shareholders. See "Forward Looking
Statements".

As at September 30, 2003 the Company had the following contractual
obligations and commercial commitments:

--------------------------------------------------------------------------------------------------
Contractual Payments Due by Period
Obligations
--------------------------------------------------------------------------------------------------
Total Less Than One 1-3 Years 4-5 Years After 5
Year Years
--------------------------------------------------------------------------------------------------

Capital Lease $ 2,903,579 $1,574,031 $1,329,548 - -
Obligations
--------------------------------------------------------------------------------------------------
Operating Leases $ 7,130,704 $1,649,202 $2,859,402 $2,420,400 $201,700
--------------------------------------------------------------------------------------------------
Total Contractual $10,034,283 $3,223,233 $4,188,950 $2,420,400 $201,700
Obligations
--------------------------------------------------------------------------------------------------

In addition to these commercial commitments the Company has provided, as
performance bonds, under its operating line of credit, an irrevocable revolving
letter of credit in the amount of, $1,381,161 (CDN $1,864,568) expiring October
1, 2003, and a performance guarantee of $600,000 (CDN $810,000) expiring April
4, 2004. The Company has pledged an amount equal to the letter of credit and the
guarantee against its operating line of credit as security.

The Company has entered into a significant customer contract in which the
Company has agreed to utilize a certain amount of local services and create a
certain amount of commercial activity in South Africa. The Company will be
required to utilize local content or obtain credits equivalent to approximately
$7 million over a seven year period. The Company has furnished a performance
guarantee for $356,369 payable if the Company does not fulfill its obligations
within the seven year period.. The Company expects to fulfill its obligation
through a number of activities, including the establishment of a software
development center in South Africa, the provision of technical services, and the
provision of training to local systems integrators who will be able to provide
implementation and support services with respect to the Company's software
products. As the Company expects to fulfill its obligations

-31-

through the purchase of services in the normal course of business, no liability
has been established for these future spending commitments.

Derivative Financial Instruments

The Company generates a significant portion of sales from sales to
customers located outside the United States, principally in Canada and Europe.
Canadian sales are made mostly by the Company and on occasion are denominated in
Canadian dollars. International sales are made mostly from a foreign subsidiary
and are typically denominated in either U.S. dollars, Euros or British pounds.
The Company also incurs a significant portion of expenses outside the United
States, principally in Canada and Europe, which are typically denominated in
Canadian dollars, Euros or British pounds. The Company's international business
is subject to risks typical of an international business including, but not
limited to: differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors. The Company
may enter into foreign exchange forward contracts to offset the impact of
currency fluctuations on certain nonfunctional currency assets and liabilities,
primarily denominated in the Canadian dollar, Euro and British pound. The
foreign exchange forward contracts the Company enters into generally have
original maturities ranging from three to eighteen months. The Company does not
enter into foreign exchange forward contracts for trading purposes, and does not
expect gains or losses on these contracts to have a material impact on the
Company's financial results.

The Company's foreign currency forward contracts are executed with credit
worthy banks and are denominated in currencies of major industrial countries. As
at September 30, 2003, the Company had no foreign currency forward contracts
outstanding.

ITEM 3: QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk is foreign currency exchange rates. The
Company has established procedures to manage sensitivity to foreign currency
exchange rate market risk. These procedures include the monitoring of the
Company's net exposure to each foreign currency and the use of foreign currency
forward contracts to hedge firm exposures to currencies other than United States
dollars. The Company has operations in Canada and Europe in addition to its
United States operations and did not hedge these exposures as at September 30,
2003. However, the Company may from time-to-time hedge any net exposure to
currencies other than the United States dollar.

As of September 30, 2003, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to the Company's foreign currency sensitive contracts and assets would
be approximately $3.9 million. The foreign currency sensitivity model is limited
by the assumption that all foreign currencies to which the Company is exposed
would simultaneously change by 10%. Such synchronized changes are unlikely to
occur. The sensitivity model does not include the inherent risks associated with
anticipated future transactions denominated in foreign currencies or future
forward contracts entered into for hedging purposes.

The Company does not have any material exposure to interest or commodity
risks. The Company is exposed to economic and political changes in international
markets where the Company competes such as inflation rates, recession, foreign
ownership restrictions, domestic and foreign government spending, budgetary and
trade policies and other external factors over which the Company has no control.

-32-

ITEM 4: CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by this report (the
"Evaluation Date").

Based upon the evaluation described above, the Chief Executive Officer and
Chief Financial Officer concluded that as of the Evaluation Date, subject to the
matters discussed in the following paragraphs with respect to the Company's
internal accounting controls, the Company's disclosure controls and procedures
were effective in timely alerting them to the material information relating to
the Company (or its consolidated subsidiaries) required to be included in
reports that the Company files or submits under the Exchange Act.

In connection with the contract review undertaken concerning the
restatements of the Company's financial statements for the year ended December
31, 2002 and the quarters ended September 30, 2002, March 31, 2003 and June 30,
2003, described in notes 1(a) and 9 to the unaudited condensed consolidated
financial statements and in the "Restatements" section of the Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Company together with its independent auditors identified certain areas in which
the Company could improve its internal controls over financial reporting. The
Company had implemented internal controls and procedures to review and evaluate
its software and implementation contracts to determine the appropriate revenue
recognition accounting treatment for such contracts in accordance with U.S.
generally accepted accounting principles. Notwithstanding these internal
controls, the Company, in consultation with its independent auditors, determined
that its analysis of the terms included in certain of the Company's software and
implementation contracts resulted in the Company's revenue recognition for such
contracts being inappropriate under U.S. generally accepted accounting
principles.

(b) Changes in Internal Control

On November 17, 2003, the Company announced its intention to restate the
Company's annual financial statements for the fiscal year ended December 31,
2002 and the quarterly financial statements for the periods ended September 30,
2002, March 31, 2003 and June 30, 2003. The restatement related to an
inappropriate allocation of contracted fees between software and implementation
services and maintenance and support services as a result of certain terms or
provisions included in a limited number of software and implementation
contracts. Please see notes 1(a) and 9 to the condensed consolidated financial
statements and "Restatements" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations for further information.

In connection with this restatement, senior management performed a review
of the circumstances that resulted in the need for the restatements and as a
result, the Company has taken steps to strengthen the Company's internal control
over financial reporting in order to prevent future recurrences. These steps
include a thorough review and analysis of the Company's software and
implementation contracts by senior members of the Company's accounting group, a
determination of the appropriate revenue recognition treatment for each contract
by the senior members of the accounting group and implementing a formal contract
review checklist for each new contract.

The Audit Committee and senior management are currently considering whether
additional measures or modifications to the above measures are necessary in
order to improve the Company's internal control over financial reporting.

With the exception of the above items, there were no changes made in the
Company's internal control over financial reporting during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting. The
Company's management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that its disclosure controls and procedures or internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

-33-

Part II - OTHER INFORMATION

ITEM 1. Legal Proceedings

Mobile Data Solutions Inc. v. Citizens Telecom Services Co., L.L.C. - U.S.
District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00).

On November 22, 2000, MDSI filed suit in Texas District Court Collin County
against Citizens Telecom Services Co., L.L.C., generally alleging that Citizens
breached a series of contracts dated October 15, 1998. The suit alleged that
Citizens has wrongfully terminated the contracts and failed to pay sums due of
approximately $3.7 million. The suit sought payment of the contract balance,
plus other damages, interest and attorneys' fees. In late February 2001,
Citizens filed an answer and counterclaim alleging that MDSI breached the
contracts, justifying Citizens' termination of the contracts and entitling
Citizens to repayment of all sums paid to MDSI of approximately $3.5 million in
addition to interest and attorneys' fees. At Citizens' request, the parties held
a mediation on April 2, 2001. Mediation was not successful and both parties
began discovery. In October 2002, Citizens filed amended counterclaims alleging
fraud, negligent misrepresentation, breach of express warranty and breach of
implied warranties. Citizens sought all actual, special, incidental and
consequential damages associated with these counterclaims, in addition to
punitive damages, interest and attorneys' fees. In March 2003, Citizens
submitted an expert report estimating that Citizens had incurred approximately
$6.1 million in damages due to lost productivity and direct costs, and that
Citizens may be entitled to additional contractual penalties from MDSI of
approximately $1.1 million. MDSI disputed these counterclaims and believes them
to be without merit.

On March 5, 2003, the court granted Citizens' motion for summary judgment,
dismissing MDSI's claims for lack of sufficient evidence of damages. MDSI filed
a motion for reconsideration of this ruling. On March 26, 2003, the court denied
MDSI's motion.

On March 26, 2003, the court granted MDSI's motion for partial summary
judgment, finding that Citizens wrongfully terminated the professional services
agreement. On April 8, 2003, the court granted MDSI's motion for summary
judgment, dismissing Citizens' fraud and negligent misrepresentation
counterclaims.

MDSI tendered the prosecution of its claim and the defense of Citizens'
counterclaims to its insurance company. The insurance company accepted the
claims under a reservation of rights. The trial started on April 7, 2003 in
Texas District Court Collin County. On April 16, 2003, during the trial, the
Company was informed that its insurer, reached an agreement with Citizens to
settle Citizens' breach of contract and breach of warranty counterclaims for $1
million. The Company is not a party to the settlement agreement and the
settlement amount is to be paid by the insurance company. The settlement
agreement preserved the Company's right to appeal the court's ruling that
dismissed the Company's claims on summary judgment for lack of sufficient
evidence of damages and Citizens' right to appeal the court's ruling that
dismissed Citizens' counterclaims of fraud and negligent misrepresentation. On
May 14, 2003, the Company filed its Notice of Appeal, and on May 29, 2003
Citizens appealed the court's motion for summary judgment, that dismissed
Citizens' counterclaims for fraud and negligent misrepresentation. Both parties
are awaiting a court date as to when the appeals will be heard.

The Company intends to expense as incurred costs in connection with the
appeal and any subsequent trial, and any amounts which may be payable in respect
to counterclaims asserted by the customer for fraud and negligent
misrepresentation.

MDSI believes that its claims against Citizens are strong and it intends to
vigorously pursue its claims for damages on appeal. If, contrary to MDSI's
expectations, MDSI is not successful in its claims against Citizens, the Company
may be required to take a $2.7 million dollar charge to earnings. If Citizens is
successful in any fraud or negligent misrepresentation counterclaims, the
Company may be required to take an additional charge to earnings to the extent
of the judgment. Although the amount of any such judgment against the Company
for fraud or negligent misrepresentation cannot be determined, if Citizens is
successful in any appeal and subsequent trial, the Company's financial condition
and results of operations could be materially adversely affected. See the
"Litigation" risk factor in Exhibit 99.1 and see "Forward-Looking Statements".

-34-

From time to time, the Company is a party to other litigation and claims
incident to the ordinary course of its business. While the results of litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (TO BE UPDATED)

(a) Exhibits

Exhibit Number
Description

2.1(3) Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman and
Doug Engerman
3.1(1) Articles of Incorporation of the Company
3.2(1) Articles of Amendments of the Company
3.3(1) By-laws of the Company
4.1(1) Form of Common Share Certificate
10.1(2)(3) 2000 Stock Option Plan
10.2(1) Form of Indemnification Agreement between the Company and certain
officers of the Company
10.3(1) Lease dated September 25, 1997 between Sun Life Assurance Company
of Canada and the Company
10.4(4) Lease dated May 14, 1999 between California Public Employees'
Retirement System and Mobile Data Solutions Inc. a subsidiary of
the Company
10.5(4) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.6(2)(5) Employment Agreement dated January 2, 2002 between the Company
and Verne Pecho
10.7(2)(6) 2002 Stock Purchase Plan
10.8(7) Exchange Agreement dated as of June 26, 2002 among the Company,
Connectria Corporation, Richard S. Waidmann and Eric Y. Miller
10.19(7) Amendment to Exchange Agreement dated as of June 30, 2002 among
the Company, Connectria Corporation, Richard S. Waidmann and Eric
Y. Miller
10.10(7) Warrant dated as of June 29, 2002 to purchase 50,380 shares of
Series A Nonvoting Preferred Stock of Connectria Corporation
10.11(7) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.12(7) Security Agreement dated as of June 30, 2002 between Connectria
Connectria and the Company
10.13(2)(8) Employment Agreement dated January 1, 1999 between the Company
and Glenn Y. Kumoi
10.14(2)(8) Settlement Agreement dated March 15, 2002 between the Company and
Gerald F. Chew
10.15(2)(8) Settlement Agreement dated May 31, 2002 between the Company and
Gene Mastro*
10.16(2) Employment Agreement dated September 12, 2001 between the Company
and Walter J. Beisheim
10.17 Employment Agreement dated August 1, 2003 between the Company and
Peter Hill Rankin
10.18 Employment Agreement dated September 3, 2003 between the Company
and Glenn Kumoi
10.19 Employment Agreement dated September 4, 2003 between the Company
and Erik Dysthe
10.20 Employment Agreement dated August 20, 2003 between the Company
and Joo-Hyung (Tommy) Lee
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
99.1 Risk Factors
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(1) Previously filed as exhibits with the same corresponding number with the
Registrants' Registration Statement on Form F-1 (Registration No. J33-5872)
and amendments numbers 1 and 2 thereto, filed with the Securities and
Exchange Commission on October 28, 1996, November 13, 1996 and November 25,
1996, respectively.
(2) This document has been identified as a management contract or compensatory
plan or arrangement.
(3) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(4) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(7) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
(8) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2002.

* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to an application for Confidential
Treatment under Rule 24b-2 promulgated under the Securities Exchange act of
1934, as amended.

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(b) Reports on Form 8-K

The Company furnished a Form 8-K on July 29, 2003 pursuant to Items 9 and 12
attaching a press release regarding the Company's operating results in the
second quarter of 2003, and the resignation of a director of the Company. The
Company furnished a Form 8-K on September 22, 2003 pursuant to Item 9 attaching
a press release regarding the retention of a financial advisor. The Company
furnished a Form 8-K on September 23, 2003 pursuant to Item 9 attaching a press
release clarifying certain media reports regarding the Company. The information
in a Form 8-K furnished pursuant to Items 9 and 12 shall not be deemed to be
filed under the Exchange Act.

The Company filed a Form 8-K on September 25, 2003 pursuant to Items 5 and 7
attaching copies of the materials mailed to the Company's shareholders in
connection with the annual general meeting held on June 5, 2003.

The Company furnished a Form 8-K to the SEC on November 17, 2003 pursuant to
Items 9 and 12 attaching a press release regarding the Company's intent to
restate its consolidated financial statements for the fiscal year 2002, the
third and fourth quarters of 2002 and the first and second quarters of 2003. The
information in a Form 8-K furnished pursuant to Items 9 and 12 shall not be
deemed to be filed under the Exchange Act.

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SIGNATURES

Pursuant to the requirements 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.

MDSI MOBILE DATA SOLUTIONS INC.

Date: November 19, 2003 By /s/ Erik Dysthe
---------------------------------
Name: Erik Dysthe
Title: President, Chief Executive Officer,
Chairman of the Board and Director

Date: November 19, 2003 By: /s/ Verne D. Pecho
---------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer

-37-

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