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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR

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


COMMISSION FILE NUMBER: 1-15641

724 SOLUTIONS INC.
(Exact name of registrant as specified in its charter)


ONTARIO
(State or other jurisdiction of
incorporation and organization)

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


10 York Mills Road, 3rd Floor
Toronto, Ontario M2P 2G4
(Address of principal executive offices, including zip code)

(416) 226-2900
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
no par value.

(Title of class)

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

The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Registrant's common shares on
March 25, 2002 of $1.40, as reported on the Nasdaq National Market, was
approximately $45.9 million. Common shares held as of February 28, 2002 by each
executive officer and director and by each person who owns 5% or more of the
outstanding common shares have been excluded from this computation, in that such
persons may be deemed to be affiliates of the Registrant. This determination of
affiliate status is not necessarily a conclusive determination for any other
purpose.

As of March 25, 2002, the Registrant had outstanding 59,628,351 common
shares, no par value.





INDEX

724 SOLUTIONS INC.
ANNUAL REPORT ON FORM 10-K


PAGE


PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 32
Item 3. Legal Proceedings.............................................. 32
Item 4. Submission of Matters to a Vote of Security Holders............ 33

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 33
Item 6. Selected Financial Data........................................ 38
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 57
Item 8. Financial Statements and Supplementary Data.................... 57
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 57

PART III
Item 10. Directors and Executive Officers of the Registrant............. 58
Item 11. Executive Compensation......................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management. 58
Item 13. Certain Relationships and Related Transactions................. 58

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58

SIGNATURES..............................................................

Consolidated Financial Statements....................................... F-1









PART I

ITEM 1. BUSINESS.

DESCRIPTION OF BUSINESS

OVERVIEW

AN INVESTMENT IN OUR COMMON SHARES INVOLVES SUBSTANTIAL RISKS AND
UNCERTAINTIES. WE ENCOURAGE YOU TO CAREFULLY REVIEW THE INFORMATION SET FORTH IN
THIS ITEM I UNDER THE CAPTIONS "RISK FACTORS" AND "INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS" FOR A DESCRIPTION OF THESE RISKS AND UNCERTAINTIES.

We are a leading global provider of Internet infrastructure software that
enables the delivery of secure applications and mobile transaction solutions
across a wide range of Internet-enabled devices. We were incorporated in 1997,
and introduced our initial financial services products in 1999. Since that time,
we have also begun to offer brokerage, credit card, payments and alerts
solutions, in a variety of languages and currencies around the world. Our suite
of products and services enables companies to capitalize on the mobile Internet
by building, deploying and integrating personalized and secure mobile payments
and applications. In 2001, the company extended its solutions to the mobile
operator market, leveraging its Alerts Solutions, 724 Frameworks and Secure
Payment Solutions. With critical security features built in, our Wireless
Internet Platform, 724 Frameworks and solutions can be quickly implemented and
integrated with existing systems and scaled or expanded to accommodate future
growth. We also enable our customers to more rapidly introduce services with
end-to-end customer support through our global hosting provider, Computer
Sciences Corporation.

Using our solutions, our customers can offer new, easy to use, highly
personalized, value-added services which leverage the flexibility and
convenience of the mobile Internet, while building stronger relationships with
their customers. Our customers currently include leading financial institutions
and we have entered into key strategic customer relationships with two leading
mobile network operators partners. With corporate offices in Toronto, Canada, we
have development and sales offices around the world, including Australia, Hong
Kong, Germany, the United Kingdom and the United States.

We were established in July 1997, and launched our initial product in May
1999. We have completed four acquisitions since that time:

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

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





SPYONIT. In September 2000, we completed our acquisition of Chicago-based
Spyonit. Spyonit's intelligent alerting infrastructure software monitors the
Internet for items of interest such as stock prices, product sales or auction
bids.

TANTAU SOFTWARE. In January 2001, we completed our acquisition of
Austin-based TANTAU Software. TANTAU develops and designs software and related
services that enable enterprises to conduct high-volume, secure, m-commerce
transactions.

INDUSTRY OVERVIEW

GROWTH OF THE INTERNET

The Internet has emerged as a global communications medium to deliver and
share information and conduct business electronically. The dramatic growth in
the number of Internet users has led to a proliferation of information and
services on the Internet, including financial services, e-mail, e-commerce, news
and lifestyle content. We believe that consumers are increasingly seeking
personalized and practical Internet applications that they can use in their
daily activities.

GROWTH OF DIGITAL WIRELESS COMMUNICATIONS

Digital wireless communications have grown rapidly due to declining
consumer costs, expanding network coverage, the availability of extended service
features such as voice and text messaging and the proliferation of wireless
devices. These wireless devices include personal digital assistants such as
PalmPilot connected organizers, Handspring Visors, "Pocket PC" organizers;
digital mobile phones by Ericsson, Nokia and Motorola; and two-way pagers, such
as those developed by Research In Motion and Motorola. According to Gartner
Dataquest, the proportion of total worldwide mobile connections using digital
services is expected to grow from approximately 90 percent at the end of 2000 to
99 percent by the end of 2005. Recent developments in wireless technology and
deployment of digital data networks have enabled the introduction of wireless
data applications such as financial services, mobile commerce, news and
lifestyle content. Over the next few years, consumer adoption of these services
is expected to accelerate as their ease-of-use benefits from the allocation of
additional wireless spectrum and the deployment of high-speed, packet-switched
networks and new devices designed to take advantage of this newly available
bandwidth.

CONVERGENCE OF WIRELESS COMMUNICATIONS AND THE INTERNET

The convergence of wireless communications and the Internet has created
new opportunities for the delivery of wireless data services. We expect that the
convergence of wireless communications and the Internet will enable the delivery
of wireless multimedia applications, including voice, data, image and video.
International wireless technology groups, such as the Wireless Application
Protocol Forum, Wireless Village and the Third Generation Partnership Project,
have created global standards for the transmission of wireless applications,
which we believe will help lead to increased penetration of the market for
wireless devices and services.

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GROWTH OF E-COMMERCE

With the emergence of the Internet as a globally accessible, fully
interactive medium, many individuals and companies that have traditionally
conducted business in person, through the mail or over the telephone now
increasingly conduct business electronically. We expect that consumer use of
e-commerce will accelerate as more individuals gain access to the Internet, as
the cost of Internet access decreases, and as security concerns are alleviated.

GROWTH OF SECURE MOBILE TRANSACTIONS

As the mobile Internet continues to grow and evolve, the focus of user
activity is expanding beyond basic content delivery applications. E-mail and
other forms of messaging that facilitate mobile person-to-person communications
have begun to drive accelerated adoption of wireless data devices and services.
We expect that one of the next major types of functionality this market will
demand is the ability to conduct secure mobile transactions, with a particular
emphasis on banking, brokerage and mobile payments. The Yankee Group forecasts
global mobile commerce to be a US$120 billion market by 2006. With convenient
access, mobile transactions can be faster, less expensive and easier than
transactions conducted through a broker, teller, ATM or bricks-and-mortar
storefront. In addition, the location-based and presence-sensing capabilities
made possible by wireless networks and device technology, facilitate the
creation of a personalized, context-sensitive user experience that is unique to
the mobile environment. Secure mobile transaction services can also offer
productivity and efficiency benefits to enterprise users who require the ability
to securely execute high-value transactions when away from the office.
Applications aimed at full-service brokers, financial advisors, institutional
traders, insurance agents, corporate treasurers and purchasing agents are some
examples of the mobile workforce opportunity within the secure transactions
market.

As in the online context, however, concern among users about the security
of their sensitive financial and payment information is a key hurdle to be
overcome for mass adoption of mobile transaction technology to occur. In the
financial services sector, financial institutions are well positioned to respond
with strategies that build on their unique trust relationship with clients and
the strengths of their traditional channels and services to overcome these
security concerns. We believe that the increasing popularity of new
Internet-enabled devices will help generate greater demand for mobile financial
services and provide an opportunity for financial institutions to drive adoption
of banking, brokerage, mobile payments and other secure transaction services to
their large and attractive customer bases.

Mobile network operators also have a significant interest in stimulating
the adoption of secure mobile transaction services because of the need to offset
the slowing growth of revenues from voice services and to begin realizing
returns on their substantial investments in new wireless spectrum and network
infrastructure. Mobile operators are uniquely positioned to play this role
because they maintain the account relationship with the mobile subscriber,
control access to their networks by third party merchants and service providers,
operate the billing systems that will be a prime enabler of mobile payments, and
enjoy preferred menu positioning for the data services they choose to market to
their subscribers. Recently announced initiatives, such as Vodafone UK's m-pay
service, provide early evidence of the potential opportunity for mobile
operators going forward

3


as they continue to expand their role from access providers to wireless portal
operators to secure payment enablers.

To execute these strategies, financial institutions and mobile operators
will require solutions that extend their existing systems (which we believe were
generally not designed to facilitate mobile transactions) to exchange
information with third party systems, such as those operated by merchants and
payment processors, and with a variety of Internet-enabled consumer access
devices. This exchange requires a complex bridging architecture that can
interface with a variety of access devices, communication protocols, operating
systems, and network and security technologies. These solutions must also be
secure in order to protect the integrity and confidentiality of information, and
fault-tolerant and scalable in order to process an increasing number of
transactions. The ideal solutions must also enable rapid deployment and provide
the flexibility to add additional functions and services.

BUSINESS STRATEGY

Our objective is to become the leading mobile solution provider to
financial institutions and mobile network operators, providing technology,
applications and services that enable the delivery and adoption of secure mobile
transactions.

Our strategy is to:

TARGET FINANCIAL INSTITUTIONS AND MOBILE NETWORK OPERATORS: Our initial
strategic focus was to provide our solutions to large financial institutions
worldwide, particularly banks and brokerage firms. We believe that large
financial institutions have both the scale and global consumer base to maximize
the adoption of services based on our solutions.

Having established a significant presence in consumer banking and
brokerage, we expect to use many of the components of our architecture to
develop solutions for the mobile workforces of our financial institutions
customers and to expand into new financial services sectors such as insurance.

In 2001, we broadened our market focus beyond financial services by
extending our core competencies of security, scalability, transaction enablement
and actionable alerting to create solutions for our second target customer
segment, mobile network operators. We believe that there will be continued high
interest from this segment in the deployment of mobile payments and alerts-based
solutions, particularly due to the expanded service capabilities supported by
the new wireless networks and devices being launched.

PROVIDE AN OPEN, FLEXIBLE TECHNOLOGY ARCHITECTURE: Our next generation
architecture is designed to be compliant with the J2EE technology standard,
Sun's Java software platform for enterprise applications. We believe that this
architecture will help enable the increasing number of large enterprises
investing in J2EE application servers to leverage this same infrastructure to
deploy our mobile solutions. The flexibility of our architecture enables
customers to expand the functionality of their 724 Solutions-powered services by
adding new applications, modes of interaction and devices as their needs evolve.
We expect to continue broadening the range of capabilities available to our
customers. For example, we are integrating interactive voice response (IVR) and
voice recognition technologies to create new multi-modal solutions that allow

4



consumers to seamlessly move from voice to text, depending on their surroundings
and the type of transaction they are conducting.

OFFER SOLUTIONS THAT ADDRESS CUSTOMERS' CRITICAL BUSINESS CHALLENGES: We
are focused on developing and delivering differentiated mobile technology
solutions for our financial institution and mobile operator customers. These
solutions are designed to specifically address the business challenges of our
customers in these two segments. Our approach is to gain a deep understanding of
the competitive dynamics within our target markets and the common needs of our
individual customers, and then to combine and apply our core software products
and support services in creative ways to solve critical business problems.

LEVERAGE STRATEGIC PARTNERSHIPS: We are establishing strategic
relationships with distribution partners and providers of complementary products
and services to extend our market reach, enhance our solutions and improve our
cost structure. Examples of this aspect of our financial services strategy
include our partnership with Nomura Research Institute in the Japanese market,
and our relationship with Computer Sciences Corporation (CSC), which will
operate our hosting services. Through our relationship with CSC, we will seek to
provide wireless capability to CSC's extensive Hogan Systems and Credit Card
Management installed customer bases. To build our distribution capability into
the mobile operator segment, we have established partnerships with Nortel
Networks, Ericsson, Aspire Technologies, iMobile5 and Sonera SmartTrust.

IMPROVE OPERATING EFFICIENCY: In response to the challenging economic
climate in 2001, we have been substantially re-engineering our cost structure to
better position the company for sustainable, profitable growth. Some of the
critical cost reduction initiatives being implemented include transitioning the
hosting portion of our business to CSC, optimizing the size of our worldwide
office network and migrating to a single headquarters based in Toronto. We also
believe that our next generation technology architecture will enable us to
develop and support solutions more cost effectively going forward.

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

724 SOLUTIONS - CUSTOMER BENEFITS

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

- SPEED TO MARKET: Our products, whether installed in a customer's
operations enter or operated as a service through our hosting
partner, Computer Sciences Corporation, can be rapidly deployed by a
new customer, branded and offered to consumers.

5




- EASE OF INTEGRATION WITH EXISTING SYSTEMS: Our products link to a
customer's existing systems, enabling customers to preserve their
existing investment, and to extend the productivity and
functionality of their existing infrastructure to new electronic
channels.

- SECURITY: The security framework of our product offerings address
the stringent security standards of financial institutions, creating
an environment of trust for consumers and allowing our customers to
offer transactions and other services with reduced fraud-related
concerns.

- SCALABILITY AND MANAGEABILITY: Our products are designed to add
users efficiently and effectively. We believe that our products
can support significant growth in users with little increase in
infrastructure.

- ABILITY TO EXPAND FUNCTIONALITY: Our 724 FrameWorks is designed
to facilitate the addition of new applications, devices, content
and services. It provides tools and application services that
simplify development and quickly bring mobile applications to
market.

- MAINTAIN AND DEEPEN CONSUMER RELATIONSHIPS: Our product offerings
are designed to stimulate and facilitate more frequent and
value-added interactions between our customers and their clients.
With the ability to set up personal preferences and alerts, and
seamlessly move from voice to text while executing a transaction,
users of 724 Solutions-powered services enjoy a personalized,
easy-to-use experience. In addition, the information contained in
the personalization and notification databases can provide our
customers with a competitive advantage in building consumer loyalty
through the delivery of more targeted services.

We believe that our products benefit our customers and the companies with
which we have relationships by enabling the delivery of differentiated wireless
and wireline financial services, and other types of secure transaction services.
These services help increase consumer loyalty and drive network usage, consumer
electronic device sales, and the purchase of other products and services.


OUR PRODUCTS, SERVICES AND SOLUTIONS

We offer a variety of secure mobile transaction solutions to financial
institutions and mobile operators around the world. These solutions are
developed and delivered by combining and applying our core software products and
support services to specifically address the high-priority business challenges
of our customers in these two market segments.

SOFTWARE PRODUCTS

Our products are written in C++ and Java, widely accepted standard
programming languages for developing object-oriented applications. We also make
extensive use of Extensible Markup Language (XML), which was completed by the
World Wide Web Consortium in 1998, and

6



Extensible Style Language (XSL) in our software applications. Our software
runs on the Windows NT and the Sun Solaris operating systems.

724 FRAMEWORKS

724 FrameWorks is a development and runtime environment for rapidly
building, customizing, and deploying multi-channel business applications. For
enterprise organizations and mobile network operators looking to extend
functionality of legacy applications and rapidly deploy next generation,
multi-device applications, 724 FrameWorks provides tools and application
services that simplify development and help to quickly bring mobile applications
to market. 724 FrameWorks helps to shield a customer's development from the
complexities of multi-device applications. We intend to enable 724 FrameWorks to
run on popular J2EE-compliant application servers.

Features:

Rapid Development Architecture - Enables rapid application development by
providing developers with easy access to web services standards and development
services for business rules, presentation, security and personalization.

Session Framework - Helps shield developers from the complexities of
mobile device session management such as dropped connections and sharing of
sessions between different devices and channels. The Session Framework provides
services that easily enable fast session-reconnect and management of unique
sessions across multiple channels.

Policy Management Framework - Provides flexible, system-wide security by
governing application and user enrolment policies - for example, by enabling the
service provider to pre-set the level of authentication required before a
specific user or group of users can access a particular service.

Presentation Framework - Delivers a device-specific user interface to a
broad range of client devices. Developers write one device-independent
presentation and the Presentation Framework handles the display for each
specific device.

Business Framework - Allows business logic (how the application works) to
be written independently of the presentation layer (how the application looks to
the user). Definitions of all incoming and outgoing messages, bindings and
port-types are defined in Web Services Description Language (WSDL) for each
application.

Application Services - Provides a set of common services to applications
that would otherwise need to be managed separately for each application.
Services include, user profile management, device management, content
management, alerts and messaging and presence.

7




724 PAYMENTS

724 Payments provides mobile operators and financial institutions the
ability to offer tailored m-commerce services both directly and via merchant
partners. The Payments Server is a flexible, scaleable, high performance mobile
payments solution that supports multiple forms of payment, including credit,
debit, pre- and post-paid billing. 724 Payments manages the connectivity and
flow of information between the parties to an m-commerce transaction, and
implements the pre-set business rules governing the transaction.

Features:

Payment Gateway Connectivity - Provides connectivity to payment gateways
for credit and debit (non-PIN based) card transactions.

Interfaces to Pre- and Post-Paid Billing Systems - Enables end-users to
make payments on their service provider's pre or post-paid bill.

Flexible Business Rules Engine and Transaction Workflow - Provides
flexible tools for establishing the rules that will govern the execution of an
m-commerce transaction and how information will flow between the parties to the
transaction.

Merchant Relationship Management - Provides flexible, end-to-end
management of merchant relationships.

End User Management - Provides tools and services to ease the user
experience and manage end-user security.

724 ALERTS

724 Alerts is an integrated suite of software and toolkits for delivering
highly personalized, time-critical information and enabling the recipient to act
on the information quickly and easily. Available as a hosted or installed
solution, mobile operators, financial institutions and enterprises can leverage
their existing infrastructure and data to offer a value-added, differentiated
service offering to their end-customers. 724 Alerts can be rapidly deployed by
its customers to enable them to create new revenue channels and lower
operational costs.

Whether implemented as a stand-alone solution or integrated with 724
Solutions' suite of mobile applications, 724 Alerts provides secure and scalable
alerting capabilities, and is designed to be compatible with future developments
in technology.

Features:

724 Alerts offers flexible and extensible alerting capabilities through a
sophisticated and extendable process of monitoring, detection and notification.

8



Flexible Data Monitoring - watches any number of content sources, such as
real-time news feeds, account databases or web sites, based on a redefined
schedule or a real-time event trigger.

Sophisticated Detection - determines what conditions are appropriate to
notify users based on predefined preferences and rules.

Message Manager - a highly scalable, intelligent messaging application
that provides secure, reliable delivery of messages across multiple carrier
networks to any mobile device, including mobile phones, personal digital
assistants (PDAs) and one and two-way pagers. Message Manager provides a
feature-rich user interface for message management and also offers
administration tools for subscriber management, system monitoring and message
tracking.

Message Delivery - service providing connections to 90% of paging and
wireless networks worldwide.

Actionable Alerts - provides the recipient of an alert with the ability to
immediately act on the information received through one of several methods,
including clicking on an embedded URL, pressing a button on the handheld device
or responding with a typed or voice command.

SUPPORT SERVICES

724 Solutions works with customers to provide a turnkey operating
environment. Together with our partners, we offer a services suite that includes
professional services, training services, support and application hosting. These
services are designed to quickly deliver cost-effective solutions.

Professional Services - The 724 Solutions Professional Services team and
our system integrator partners are experienced in helping our customers realize
the benefits of our products, providing a range of services to enhance the
quality of the software and minimize the risks involved in the deployment
process.

Training Services - provides customers with sophisticated product
information and hands-on experience that will accelerate their productivity and
minimize the learning curve so they can take full advantage of their technology
investment.

Application Hosting - our secure and cost-effective Application Hosting
services are available through our partner, Computer Sciences Corporation, and
are designed to accelerate the time-to-market for customer deployments by
eliminating the customer's need to install and operate our products on their own
systems.

Customer Support - support is available on a 24x7 basis and is maintained
from four strategically assigned locations.

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FINANCIAL SERVICES SOLUTIONS

Our financial services solutions enable our customers to offer consumers
the ability to execute a variety of banking, brokerage and credit card account
inquiries and transactions, using a wide range of Internet-enabled devices.

Banking - functionality includes account information and statements,
credit card statements and advances, intra-bank transfers, bill payment and
post-dated payments, commercial cash management, positive pay exceptions and
multi-currency transfers.

Brokerage - functionality includes order placement and confirmation,
balances, positions and open orders, holdings and transaction records,
investment statements, trading data and charting, detailed stock quotes and
watch lists.

Credit Cards - ability to view balances, search transaction history, and
make payments. Basic account access functionality can be extended further with
724 Alerts. For example, an issuer could alert a cardholder of an overdue
payment, thereby collecting a late payment fee while reducing the risk that the
account will be charged-off. Alerts for credit limits, payments-received and
cardholder promotional offers are also offered.

MOBILE OPERATOR SOLUTIONS

Our solutions for mobile network operators are designed to leverage their
existing technology investments to sell new services in the short-term, while
laying the groundwork for their deployment of enhanced services on their future
high-speed wireless networks. To do so, our development efforts have focused on
creating rich, flexible infrastructure services that can support a broad range
of potential consumer applications, thereby reducing the need for mobile
operator customers to anticipate the next set of dominant applications when
investing in our solutions.

Mobile Prepaid Top-up - replaces prepaid cards as mechanism for adding
value to a subscriber's prepaid phone account, reducing costs for the mobile
operator and adding convenience for the subscriber. The subscriber first
receives a text or recorded voice message indicating that his or her pre-paid
time is about to run out. Then, with a push on the keypad, a request is sent to
a bank server that debits the customer's bank account (if sufficient funds are
available) and credits his or her prepaid phone account.

Digital Goods Payment - provides transaction processing and payment
capabilities for the sales of digital goods (e.g., games, ring tones) within the
mobile operator's wireless portal offering. Transaction processing and payment
capabilities include transaction workflow, business rules, revenue sharing
tools, and settlement data. The solution connects to content provider
applications and to key systems in the mobile operator's operations and business
support systems.

Actionable Alerts - a variety of customer service and mobile commerce
solutions can be implemented based on the 724 Alerts and 724 Payments products
to reduce costs and expand revenue generation opportunities. For example, a text
message or recorded voice call can alert customers when their bill is due or
overdue and provide the ability to pay instantly. Alerts can be sent in response
to customer-specified areas of interest - such as event tickets, new releases of
CDs and DVDs and other consumer goods. These items can then be purchased over
the mobile

10



operator's network, producing fees or commissions with every purchase. Mobile
operators can also deliver their own or third-party subscription services
such as sports scores, betting information, show times, horoscopes and more.

CUSTOMERS

Mobile access to the Internet is having a significant effect on the
delivery of our products and services to consumers, and enables consumers to
effect transactions in new ways. As a group, we believe that online consumers
generally represent an affluent and important market segment. These consumers
are increasingly using new methods, including wireless technologies, to access
the Internet. The convergence of the Internet and digital wireless technologies
presents new opportunities for financial institutions and mobile operators that
seek to use the Internet to reach consumers. Using our products to enable secure
mobile transactions, we believe that financial institutions and mobile operators
can differentiate their services to retain and strengthen their existing
customer relationships and attract new customers.

We currently market our products and services which include banking,
brokerage, credit card, payments and alerts solutions, in a variety of languages
and currencies around the world to large financial institutions such as banks
and brokerages. In 2001, we broadened our focus by offering solutions that
leverage mobile network operators' (MOs) existing infrastructure investments.

In 2001, we derived approximately 73%, 15% and 12% of our revenues from
customers in North America, Europe and Asia Pacific respectively. In 2000, we
derived approximately 98% and 1% of our revenues from customers in North America
and Asia Pacific, respectively. See note 12 to our consolidated financial
statements.

RESEARCH AND DEVELOPMENT

As of February 28, 2002, our research and development department consisted
of 143 employees, some of whom are a part of the January 2002 restructuring;
these people are expected to continue their employment until such time as is
needed to complete key projects and transfer their knowledge. These units are
responsible for assessing new technologies, new release schedules, product
architecture, security, performance engineering, product requirements, quality
assurance and product support.

SALES, MARKETING AND CUSTOMER SUPPORT

As of February 28, 2002, we employed 157 people, some of whom are on
transition plans as part of the 2002 restructuring initiative, in sales and
customer support in North America, Europe and Asia-Pacific. In addition, we
employed 11 people in our marketing department. Some of these people are a part
of our January 2002 restructuring initiative, and are expected to continue their
employment with the Company to complete key projects as necessary. Our sales
employees generally receive incentive compensation based on individual sales
volume.

We offer our customers consulting services to assist in the installation
and deployment of our products, as well as ongoing product support. Services
offered during installation include training, configuration, and connectivity to
existing systems. We believe that our customer support

11



and consulting services result in improved customer satisfaction and loyalty,
a shorter sales process, faster implementation and an increase in the sales
of our products.

Our personnel typically work directly with our customers' in-house
personnel to implement our solution. We bring together and coordinate the
technology and resources needed to deliver a single solution to customers who do
not wish to use their in-house resources to implement our products.

To expand our distribution into the financial institutions and mobile
operator markets, we are supplementing our direct sales and marketing efforts by
establishing relationships with resellers such as hardware and software vendors,
payment processors, solution developers and systems integrators. We expect that
we will generate a substantial portion of our revenues in future periods through
our relationships with these third parties.

STRATEGIC RELATIONSHIPS

We are establishing worldwide relationships with financial services system
vendors and integrators, payment processors, wireless network equipment and
solution providers, device manufacturers and content and technology providers to
facilitate the adoption of our customers' 724 Solutions-enabled products and
services. We anticipate that some of these relationships will lead to formal
arrangements in which strategic partners will agree to incorporate, resell
and/or implement our solutions, we will incorporate new technologies into our
solutions, or in which we will adapt our solutions to support new types of
devices. Through strategic relationships, we seek to gain worldwide access and
positioning, technological leadership, and an early awareness of emerging mobile
Internet technologies.

We are working with network equipment and solution providers, such as
Ericsson and Nortel; device manufacturers, such as Palm Computing, Motorola,
Nokia, and Research In Motion; software companies, such as InterVoice-Brite,
Sonera SmartTrust, Neomar and Certicom; hardware platform vendors, such as
Compaq, Hewlett Packard and Sun Microsystems; financial solution providers, such
as CashEdge, Nomura Research Institute, Computer Sciences Corporation,
Checkfree, Ezenet (Cognicase) and Politzer & HANEY; credit card associations,
such as MasterCard and Visa; mobile network connectivity providers, such as
MobileSys and MobileWay; system integrators, such as iMobile5; and content
providers, such as Maptuit and Reuters. We believe that these relationships help
to increase the demand for our secure mobile transaction solutions while at the
same time helping our partners increase the demand for their respective products
and services.

COMPETITION

The market for our products and services is becoming increasingly
competitive. The widespread adoption of open standards may make it easier for
new market entrants and existing competitors to introduce products that compete
against ours. We believe that we will compete primarily on the basis of the
quality, functionality and ease of integration of our products, as well as on
the basis of price. As a provider of secure mobile transaction solutions to
financial institutions and mobile operators, we assess potential competitors
based primarily on their

12



management, functionality and range of services, the security and scalability
of their architecture, their customer base and geographic focus and their
capitalization and other resources.

Our current and potential competitors include:

- THE IN-HOUSE DEVELOPMENT TEAMS OF FINANCIAL INSTITUTIONS: In-house
development teams are a primary source of competition as some
financial institutions choose to develop their own solutions using
internal expertise and, in some cases, outsourced service providers
instead of contracting with 724 Solutions or another third party
solution provider. Examples of this in-house approach include
Celestial Securities Limited's wireless trading service in Hong Kong
and the wireless trading capability developed by Fidelity using
Research In Motion's two-way pagers.

- SOFTWARE VENDORS FOCUSED ON FINANCIAL INSTITUTIONS: Mobile finance
competitors include Aether Systems, EverSystems, Macalla Software,
Smartserv Online and Meridea Financial Software. In addition,
various companies active in the Internet banking and brokerage
businesses with a primary focus on back-end processing, middleware
or front-end personal computer platforms for retail Internet banking
are potential competitors. These include companies such as Financial
Fusion, S1 Corporation, TIBCO Software and Sanchez Computer
Associates.

- ENTERPRISE SOFTWARE VENDORS AND SYSTEMS INTEGRATORS: Application
server vendors such as IBM, BEA and Oracle and systems integrators
such as Accenture, IBM and PriceWaterhouseCoopers have historically
competed with us in the financial solutions market. Companies in
both categories seek to expand the scope of their existing
relationships with financial institutions, the former by adding
wireless access capabilities into their existing software platforms
and the latter by addressing specific customer needs through a
combination of third party technologies, custom application
development and systems integration services.

- M-COMMERCE AND PAYMENT SOLUTION VENDORS: Our competitors in the
mobile operator market are companies providing various types of
mobile commerce solutions that enable consumers to pay for goods and
services through their handset using a credit card, debit card, or
mobile phone account. These players include digital wallet and
payment server providers such as Encorus, iPin, Trintech and Qpass,
mobile shopping service providers such as Infospace and Digital Rum,
and billing system vendors such as Amdocs, Portal and Convergys.

- NETWORK EQUIPMENT AND DEVICE MANUFACTURERS: Ericsson, Nokia,
Motorola and other large wireless technology vendors are both
potential competitors and potential partners for us in our target
segments of financial institutions and mobile network operators.
Although our solutions and these manufacturers' products are
primarily complementary, they may choose to jointly market their own

13



technology and the technology of our competitors in a manner that
may reduce our sales.

MOBILE ACCESS GATEWAY VENDORS AND MESSAGING SOLUTION PROVIDERS:
Companies in this category, such as Openwave Systems, CMG, Comverse,
Nokia and Ericsson, have extensive mobile operator relationships and
will play a key role in driving the adoption of wireless data
services and, consequently, mobile payments for these services. Much
like the network equipment and device manufacturers, these companies
can be both partners and competitors for us in the mobile operator
segment. The competitive threat to us would arise if any of these
companies use partnerships or acquisitions to expand their
capabilities from enabling content delivery and messaging services
into secure transactions, in an attempt to position itself as a
single source supplier of wireless data infrastructure software to
mobile operators.

INTELLECTUAL PROPERTY

We protect our proprietary technology through a combination of contractual
confidentiality provisions, trade secrets, and patent, copyright and trademark
laws. We have applied for registration of several trademarks, including "724
Solutions," "724 Solutions & Arrows Design," "724 Solutions Financial Services
Platform," "Poet," and "Your Customer is in Motion." To protect our trademarks
throughout the world, we have applied for registration of some or all of our
trademarks in Europe, Canada, the United States, the United Kingdom, Japan,
Australia and Mexico. 724 has received registered trademarks in Australia, the
U.K. and the European Community.

We have also applied for patents for applications relating to our mobile
commerce technology, the Wireless Internet Platform and our 724 Solutions
Platform. We have applied for patent protection in Canada, the United States,
Japan and through the Patent Cooperation Treaty, which is an international
patent application designating multiple countries. To date, 724 has received
thirteen patents with respect to the technologies relating to its Wireless
Internet Platform.

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

We rely heavily on technology and other intellectual property licensed to
us by third parties. For example, we have entered into license agreements with
Certicom Corp. for use of their encryption technology. In addition, we use
certain third-party software that may not be available to us on commercially
reasonable terms or prices or at all in the future. Moreover, some of our
third-party license agreements are non-exclusive and, therefore, our competitors
may have access to some of the same technology.

14



To date, we have not been notified that our product infringes on the
proprietary rights of third parties, but third parties could claim infringement
by us with respect to our existing or future products. Any claim of this kind,
whether or not it has merit, could result in costly litigation, divert
management's attention, cause delays in product installation, or cause us to
enter into royalty or licensing agreements on terms that may not be acceptable
to us.

EMPLOYEES

As of February 28, 2002, we had 347 employees worldwide. Of these
employees, 68 are part of the Company's January 2002 restructuring and are
continuing their work term until such time as is needed to complete certain key
projects.

RISK FACTORS

RISK FACTORS RELATED TO OUR BUSINESS

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

We have not been profitable since our inception. We incurred losses of
$13.8 million for the year ended December 31, 1999, $63.3 million for the year
ended December 31, 2000 and $554.2 million for the year ended December 31, 2001.
As of December 31, 2001, we had an accumulated deficit of $634.2 million. We
have taken significant measures to reduce our operating expenses since
commencing our restructuring efforts in June 2001. These expense reduction
measures are based in part on our expectations regarding future revenues. As a
result, any shortfall in our revenues relative to our expectations could cause
significant changes to our net losses. We cannot predict if we will ever achieve
profitability and, if we do, we may not be able to sustain or increase our
profitability.

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

Our future revenues and operating results are dependent to a large extent
upon general economic conditions, conditions in the wireless market and within
that market, our primary target markets of financial institutions and mobile
network operators. As economic activity slowed in these markets during 2001, our
sales cycle began to lengthen significantly as potential customers began to
reduce their spending commitments, deferring wireless projects and reducing
their willingness to make investments in new wireless services. Moreover,
adoption of wireless services has not proceeded as rapidly as previously
anticipated. As a result of these factors, our revenues began to decline in
2001. If general economic conditions continue to be adverse, if the economies in
which our target customers are located suffer from a recession, or if demand for
our solutions does not expand, our ability to increase our customer base may be
limited, and our revenue may decrease further.

15



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

We believe that certain factors in the current market contribute to the
risk that prices and therefore our gross margins will decrease in future fiscal
quarters. As the weakening economy affects our customers' budget for wireless
spending, we will feel additional pressure to lower our prices. In addition, due
to the downturn in the economy, many of our customers are reluctant to make a
commitment to pay a large upfront license fee, which could also cause our
revenues to decrease. With a greater portion of services revenue in the mix in
the short-term, if we are not successful in reducing our costs of sales in
response to the pricing pressure and any reduced upfront commitment, we will
experience a decrease in our gross margins. In addition, due to the difficulties
in achieving sales in the current economic environment, we will have less
control over the portion of our sales consisting of licenses, which generally
has a higher gross margin than services. Accordingly our current gross margins
may decrease.

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

The evaluation of our business is difficult because of our limited
operating history. We were founded in July 1997, and services based on our
technology were first launched on a trial basis in May 1999 with our initial
licensee, Bank of Montreal. The four companies that we have acquired also had
short operating histories prior to these acquisitions, and we have operated as a
single company for a very short period of time. Because we are in an early stage
of development, our prospects are difficult to predict and may change rapidly.
We may encounter difficulties as a young company in a new and rapidly evolving
market, including our dependence on a small number of products with only limited
market acceptance to date and the need to manage expanding operations. Our
business strategy may not be successful, and we may not successfully address
these risks.

WE EXPECT TO LIMIT THE EXTENT TO WHICH WE INVEST IN OTHER COMPANIES, AND
WE MAY NOT TAKE ADVANTAGE OF INVESTMENT OPPORTUNITIES THAT COULD PROVIDE
SIGNIFICANT LONGTERM FINANCIAL BENEFITS TO OUR COMPANY.

For the year ended December 31, 2001, we realized a loss of $4.6 million
on sales of our long-term investments and recorded a loss provision of $10.0
million against these investments as they have experienced a significant other
than temporary decline in their value. Particularly if the economic environment
worsens, we may need to record additional write-downs of these investments in
the future. Any write-downs of this kind could cause our losses to increase.

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


16



WE MAY NOT PURSUE THE TECHNOLOGY THAT WE PURCHASED AND MAY NEED TO RECORD
ADDITIONAL CHARGES.

During fiscal 2001, we have made significant investments in new
technologies, to help expedite customer adoption of our solutions, including
interactive voice response technology, technologies relating to short messaging
services and technology to allow mobile applications to be executed with
real-time interaction. In accordance with our accounting policy, we review the
carrying value of these technologies, considering key factors such as our
estimate of customer demand for these technologies and the technologies' fit
with our product strategy. For the year ended December 31, 2001, we recorded a
charge of $6.7 million relating to our decision not to use our acquired "Web
Application Event Framework" technology. In the future, if there are any
circumstances in which there is a decline in the carrying value of our other new
technologies, for example, if we decide not to pursue these technologies if we
determine that customer demand for them is not substantial, we may need to
record additional charges.

IF WE DO NOT SUCCESSFULLY DELIVER OUR HOSTING SERVICES, WE MAY NOT BE ABLE
TO RETAIN OUR EXISTING CUSTOMERS OR ATTRACT NEW CUSTOMERS.

Some of our existing customers require, and some potential customers will
require, that we host and manage the server infrastructure and software platform
as part of the implementation of our software. In January 2002, we formalized
our plan to transfer the management of our application hosting service to
Computer Sciences Corporation ("CSC"). We will be dependent on CSC to provide
secure hosting services for our software products. If the transition of our
hosting service to CSC is not successful, if CSC becomes unable to deliver these
services, if CSC does not deliver these services in a manner that is sufficient
for our customers' needs, or if other circumstances occur that affect CSC or its
computer systems, our hosting services may be substantially impaired. If any of
these circumstances occur and cause us to fail to deliver our hosting services,
we may lose customers, our reputation may suffer, and our ability to attract new
customers may be damaged.

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

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

WE ARE ENTERING NEW MARKETS WHERE WE HAVE LIMITED EXPERIENCE

We have recently made mobile network operators a primary focus of our
activities. We have limited experience in marketing our services to, and working
with, these customers. In order


17


to encourage these potential customers to adopt and implement our solutions,
we may incur higher costs than we have in the past, and we may not be able to
attract a large number of these customers. Mobile network operators may not
be successful in rolling out our services, and subscribers to these services
may not seek to use them. Any developments of this kind could limit our
ability to sell our solutions to companies in this industry, may increase our
expenses and may damage our reputation.

WE HAVE BEEN EXPERIENCING A DECLINE IN SALES FROM INTERNATIONAL MARKETS

Since December 31, 2000, we have begun to recognize revenues from our
sales in international markets. We recognized net revenue of $6.6 million and
$5.2 million from sales in Europe and Asia Pacific, respectively, in 2001. In
the past, in deriving our revenue forecasts, we have expected that sales in
these regions would be a major factor in our growth, particularly since the use
of wireless networks and wireless devices have generally proceeded more rapidly
there. However, in recent months, some key countries in these regions have
experienced decreasing economic activity, and our sales to these regions
declined in the third quarter of 2001. Accordingly, our sales to these regions
during 2001 may not be indicative of future trends, and may not expand
significantly during the next several quarters.

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

Our products are among a number of competing products that are currently
available in a new and rapidly evolving market. Other companies may introduce
other software products that will compete with ours. Customers may not prefer
our products to competing technologies. If customers do not accept our products
as the preferred solution, we may not attract new customers and our business
will not grow.

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

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

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


18


adoption among their consumers. As a result, we cannot ensure that a
large number of consumers will use these services in the future.

IF WE ARE NOT ABLE TO ESTABLISH RELATIONSHIPS WITH RESELLERS OR ADEQUATELY
ENCOURAGE RESELLERS TO SELL OUR PRODUCTS, OUR REVENUE MAY NOT GROW.

Historically, we have not made a major portion of our sales through
resellers and partners. However, we anticipate that in future periods a
substantial portion of our sales will be made through resellers and partners. If
we are not able to establish relationships with resellers and partners or
adequately encourage resellers and partners to sell our products, our revenues
may not grow. We have a limited number of relationships with resellers and
partners and only limited experience working with resellers and partners. These
resellers and partners may not market our products in a manner that will
maximize our sales. In addition, we anticipate that most of our resellers and
partners will be permitted to sell the products and services of our competitors,
and may determine not to continue to serve as resellers and partners of our
products.

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

We have agreements with existing customers whereby they have an option to
purchase additional software licenses and/or renew their current relationship
with us. If any of our customers discontinue their relationship for any reason,
do not renew their agreements or seek to reduce or renegotiate their purchase
and payment obligations, our revenue may be substantially reduced. In addition,
we believe that in the existing environment, customers are reluctant to renew
existing contracts and/or add more products and services. If our sales efforts
to these potential customers are not successful, our products may not achieve
market acceptance and our revenue will not grow. Further decreases in adoption
will have a material impact on our revenues.

In addition, as the market for mobile financial services evolves, our
customers may change their plans as to the services that they will provide using
our products.

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

We have historically derived a significant portion of our revenue from the
sale of our solution to a limited number of customers. In the year ended
December 31, 2001, we had two customers who accounted for 11% and 10% of our
total revenues. A relatively small number of customers may continue to account
for a significant portion of our revenue for the foreseeable future. If we are
not successful in selling additional products and services to these customers in
the future, or maintain the amount of revenues that we generate from them, it
could have a material impact on our future revenues, and we may encounter
difficulties in increasing our market acceptance.


19


OUR REPUTATION MAY SUFFER IF OUR CUSTOMERS WHO ARE ALSO SHAREHOLDERS
CEASE TO LICENSE OUR TECHNOLOGY

We currently have customers who hold more than 5% of our common shares. We
are currently negotiating with two of them, Bank of America and Bank of
Montreal, to renew their existing license agreements with us, the most recent
terms of which recently ended. If these customers cease to license our
technology, our credibility in the market may suffer, which may impede our
ability to attract new customers. Bank of Montreal and Bank of America,
individually, accounted for less than 10% of our total revenues in 2001.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH COULD CAUSE OUR STOCK
PRICE TO FLUCTUATE OR DECLINE.

Our operating results may fluctuate significantly in the future from
quarter to quarter. If our quarterly revenues and operating results fail to meet
or exceed the expectations of securities analysts and investors, the market
price of our common shares could fall substantially. Our operating results vary
depending on a number of factors, many of which are outside our control,
including:

- demand for our products and services;
- the timing of sales of our products and services;
- the announcement and introduction of competing offerings;
- changes in our pricing policies or those of our competitors;
- whether our products and services are sold directly or through
indirect sales channels;
- costs related to acquisitions of technology or businesses;
- customer budget cycles and changes in these cycles; and
- deferrals of customer orders in anticipation of enhancements to
our technology or new offerings.

Our results of operations in any individual quarter should not necessarily
be viewed as an indication of our performance in any future quarters.

IF THE DIGITAL WIRELESS AND OTHER NETWORK SERVICE PROVIDERS THAT ENABLE
OUR CUSTOMERS TO DELIVER TO CONSUMERS SERVICES BASED ON OUR PRODUCTS FAIL TO
SUPPORT OUR SERVICE, OUR REVENUE FROM EXISTING CUSTOMERS WILL DECLINE AND WE MAY
NOT ATTRACT NEW CUSTOMERS.

We rely on wireless and other network service providers to introduce and
support our products, and services based on our products, in a timely and
effective manner. We have no control over the pace at which they will do so. If
these providers are slow to support the services that use our solution, our
existing customers may not be able to effectively offer these services and
potential customers may be reluctant to purchase our products. In addition,
wireless and other network service providers face implementation and support
challenges in introducing services delivered to Internet-enabled devices, which
may slow their rate of adoption or implementation of our solution. Moreover, the
continued expansion of digital wireless services, especially in North America,
is critical to our success. The pace of this expansion may not increase for a
variety of


20


reasons, including, for example, if the U.S. government does not allocate a
sufficiently broad portion of the available spectrum to render the services
attractive.

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

Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
technologies, including technologies related to communications and the Internet
generally and the financial services industry in particular. Wireless Internet
access is a rapidly evolving market and is characterized by an increasing number
of market entrants that have introduced or developed, or are in the process of
introducing or developing, products that facilitate the delivery of
Internet-based services through wireless devices. In addition, our competitors
may develop alternative products that gain broader market acceptance than ours.
As a result, the life cycle of our products is difficult to estimate. We need to
develop and introduce new products and enhancements to our existing products on
a timely basis to keep pace with technological developments, evolving industry
standards, changing customer requirements and competitive technologies that may
render our products obsolete. These research and development efforts may require
us to expend significant capital and other resources. In addition, as a result
of the complexities inherent in our products, major enhancements or improvements
will require long development and testing periods. If we fail to develop
products and services in a timely fashion, or if we do not enhance our products
to meet evolving customer needs and industry standards, including security
technology, we may not remain competitive or sell our solution.

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

Despite our efforts to maximize the security of the transactions effected
using our platform, we may not be able to stop unauthorized attempts to gain
access to or disrupt transactions between our customers and the consumers of
their services. Specifically, computer viruses, break-ins and other disruptions
could lead to interruptions, delays, loss of data or the inability to accept and
confirm the receipt of information or instructions regarding transactions. Any
of these events could substantially damage our reputation. We rely on encryption
and authentication technology licensed from third parties to provide key
components of the security and authentication necessary to achieve secure
transmission of confidential information. We cannot ensure that this technology,
future advances in this technology or other developments will be able to prevent
security breaches.

WE MAY NEED TO EXPEND FURTHER CAPITAL AND OTHER RESOURCES TO PROTECT
AGAINST THE THREAT OF SECURITY BREACHES OR TO ALLEVIATE PROBLEMS CAUSED BY
THESE BREACHES.

Because our activities involve the storage and transmission of proprietary
information such as credit card numbers and bank account numbers, if a
third-party were able to steal a user's proprietary information, we could be
subject to claims, litigation or other potential liabilities that could cause
our expenses to increase substantially. In addition to purposeful security
breaches, the


21


inadvertent transmission of computer viruses could expose us to costly
litigation or a significant loss of revenue. Although our customer agreements
contain provisions which limit our liability relating to security to some
extent, our customers or their consumers may seek to hold us liable for any
losses suffered as a result of unauthorized access to their communications.
Any litigation of this kind, regardless of its outcome, could be extremely
costly and could significantly divert the attention of our management. We may
not have adequate insurance or resources to cover these losses.

ANY FAILURE TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS COULD LIMIT
OUR POTENTIAL REVENUE GROWTH.

We have operations outside the U.S. and Canada. Our international
operations may be adversely affected by a number of risks, including:

- difficulties in adapting our product and services for foreign
markets;

- challenges in staffing and managing foreign operations;

- difficulties in establishing relationships with local partners;

- restrictions on the export of encryption and other technologies;

- recessionary environments in foreign economies, particularly in
Asian countries and in the financial services sector; and

- longer payment cycles and increased difficulties in collecting
amounts owed to us.

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

Our operations outside the U.S. and Canada may be conducted in currencies
other than the U.S. dollar. Fluctuations in the value of foreign currencies
relative to the U.S. dollar, including the value of the Canadian dollar, could
cause currency exchange losses, as our principal offices and staff in Toronto
generate Canadian dollar denominated expenses. We have not taken significant
steps to hedge against these losses. We cannot predict the effect of exchange
rate fluctuations upon our future operating results.

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

Our ability to execute our business successfully depends in large part
upon our ability to have a sufficient number of qualified employees to achieve
our goals. However, if our workforce is not properly sized to meet our operating
needs, our ability to achieve and maintain profitability is likely to suffer. As
indicated in this report, we are substantially reducing the number of our
employees. This will mean that we will use a smaller number of employees to
conduct some of the operations that were previously performed by a larger
workforce, which may cause disruption of our business. In addition, the morale
of our current employees may decrease, reducing their performance. Our recent
stock option exchange program and related option issuances may not be


22


sufficient to incentivize our personnel to remain in our employment. Our
ability to attract potential new employees and retain current employees in
the future may suffer as a result of these staffing reductions.

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

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

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

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

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

IF WE DO NOT SUCCESSFULLY INTEGRATE PUBLIC KEY INFRASTRUCTURE INTO OUR
PRODUCTS, WE MAY BE COMPETITIVELY DISADVANTAGED AND OUR BUSINESS MAY NOT GROW.

We expect that the use of public key infrastructure (PKI), an emerging
technology which facilitates user identity authentication and non-repudiation of
transactions, will be used by financial institutions' customers and by
competitors. If we do not succeed in integrating PKI into our products, they may
not be attractive to potential customers because of their security concerns. If
PKI becomes a widely used standard and our products do not use that standard, we
may be at a competitive disadvantage. Although we are working with Certicom
Corporation to design and implement technologies through which we are
integrating PKI into our products, and introduced our PKI gateway in February
2001, these efforts may not be successful.


23


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

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

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

To help ensure that we would have sufficient capital to take advantage of
our core business opportunities we have taken significant actions since the
second quarter of 2001 to reduce our operating expenses. However, most of our
operating expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively stable, and these expense levels are
based in part on our expectations regarding future revenues. As a result, any
shortfall in our revenues relative to our expectations could cause significant
changes in our operating results from quarter to quarter. Accordingly, if the
cost-cutting actions that we have taken are insufficient, we may not have
sufficient capital to fund our operations, and additional capital may not be
available on acceptable terms, if at all. Any of these outcomes could adversely
impact our ability to respond to competitive pressures or could prevent us from
conducting all or a portion of our planned operations. We may need to undertake
additional measures to reduce our operating expenses in the future.

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


24


RISK FACTORS RELATED TO OUR INDUSTRY

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

The markets for wireless data services and related products are still
emerging and continued growth in demand for, and acceptance of, these services
remains uncertain. Our products depend on the acceptance of wireless data
services and Internet-enabled devices in the commercial, financial and mobile
network operator markets. Current barriers to market acceptance of these
services include cost, reliability, platform and distribution channel
constraints, safety, functionality and ease of use. We cannot be certain that
these barriers will be overcome. Since the market for our products is new and
evolving, it is difficult to predict the size of this market or its future
growth rate, if any. Our future financial performance will depend in large part
upon the continued demand for online financial, mobile network operators and
payments services through wireless application devices. We cannot ensure that a
sufficient volume of subscribers will demand these services or will seek these
services provided through the Internet on wireless access devices. If the market
for these wireless online services grows more slowly than we currently
anticipate, our revenue may not grow.

IF FINANCIAL INSTITUTIONS AND OTHER POTENTIAL CUSTOMERS DO NOT CONSIDER
THE MOBILE INTERNET TO BE A VIABLE COMMERCIAL MEDIUM, OUR CUSTOMER BASE MAY
NOT GROW.

Our success depends upon the extent to which large enterprises,
particularly financial institutions, accept the Internet as a viable means to
deliver their services. The adoption of the mobile Internet for commerce and
communication, particularly by those financial institutions and other companies
that have historically relied upon traditional means, generally requires them to
understand and accept a new way of conducting business and exchanging
information. Financial institutions and other companies may be reluctant or slow
to adopt a new, mobile Internet-based strategy because of increased pressure on
costs and the complexity and risk involved in developing a solution based on
emerging technologies. Reluctance by financial institutions and other potential
customers to use the Internet to deliver their services may prevent us from
growing.

LACK OF CONSUMER CONFIDENCE IN THE SECURITY OF MOBILE INTERNET-ENABLED
TRANSACTIONS COULD LIMIT ADOPTION OF OUR SOLUTION, WHICH COULD PREVENT US FROM
BECOMING PROFITABLE.

Consumers will not seek to effect transactions using the mobile Internet
and wireless applications if they are not confident that financial transactions
over the mobile Internet can be undertaken securely and confidentially. Although
there is security technology currently available for mobile Internet-enabled
transactions, many mobile Internet users do not use the Internet mobile for
commercial transactions because of continued security concerns. These concerns
may be heightened by well-publicized security breaches of any mobile
Internet-related service, which could deter consumers from adopting the services
provided by our solution. If consumers do not gain confidence in the security
for mobile Internet-enabled transactions that the current technologies provide,
our revenue will not increase.


25


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

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

- in-house development teams of financial institutions;

- software vendors focused on financial institutions;

- enterprise software vendors and systems integrators;

- m-commerce and payment solution vendors;

- network equipment and device manufacturers; and

- mobile access gateway vendors and messaging solution providers.

We may also face competition in the future from established companies that
have not previously entered the market for wireless data services and
Internet-related services. Barriers to entry in the software market are
relatively low and it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, many of our competitors and potential competitors have greater
resources, which may enable them to penetrate the market more quickly.

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

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


26


RISKS RELATING TO INTELLECTUAL PROPERTY

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

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

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

We depend on our ability to develop and maintain the proprietary aspects
of our technology. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, as well as
confidentiality provisions in contracts with our customers, suppliers,
contractors and employees, all of which afford limited protection. We also seek
to protect our proprietary technology under patent laws. We also seek to protect
our proprietary technology under patent laws, and have 13 U.S. patents that we
acquired in connection with our acquisition of TANTAU. We have also applied for
several trademark registrations for many of our trademarks in several countries
throughout the world. To date, we have received registered trademarks in the
Australia, the European Community and the U.K. Despite the measures we have
taken to protect our intellectual property, we cannot ensure that these steps
will be adequate, that we will be able to secure the desired patent or trademark
registrations for our patent applications in Canada, the U.S. or other
countries, or that third parties will not breach the confidentiality provisions
in our contracts or infringe or misappropriate our copyrights, patents or
pending patents, trademarks and other proprietary rights. Similarly, we cannot
ensure that our employees will comply with the confidentiality agreements that
they have entered into with us, and misappropriate our technology for the
benefit of a third party. If a third party or any employee breaches the
confidentiality provisions in our contracts or misappropriates or infringes on
our intellectual property, we may not have adequate remedies. In addition, third
parties may independently discover or invent competing technologies that are not
covered by our patents or reverse engineer our trade secrets, software or other
technology. Moreover, the laws of some foreign countries may not protect our
proprietary rights to the same extent as do the laws of the U.S. and Canada.
Therefore, the measures we are taking to protect our proprietary rights may not
be adequate.


27


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

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

RISKS RELATING TO THE OWNERSHIP AND TRADING OF OUR COMMON SHARES

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

Our principal shareholders, together with our directors and executive
officers, hold a substantial percentage of our outstanding common shares.
Several of our directors hold positions with our major shareholders or their
affiliates. Accordingly, these shareholders may, if they act together, exercise
significant influence over all matters requiring shareholder approval, including
the election of a majority of the directors and the determination of significant
corporate actions. This concentration could also have the effect of delaying or
preventing a change in control that could be otherwise beneficial to
shareholders.

THE MARKET PRICE OF OUR COMMON SHARES IS VOLATILE, WHICH MAY RESULT IN
LITIGATION THAT COULD BE COSTLY AND DIVERT OUR RESOURCES.

Stock markets have recently experienced extreme price and volume
fluctuations, particularly for the shares of technology companies. Since our
initial public offering, the market value of our common shares has fluctuated
significantly. The closing price of our common shares on the Nasdaq National
Market has ranged from US$231.87 during the first quarter of 2000 to US$1.07
during the first quarter of 2002. These fluctuations are often unrelated to the
operating performance of particular companies, including ours. The broad market
fluctuations may adversely affect the market price of our common shares. This
may adversely affect our ability to use our common shares as consideration in
acquisition transactions. In addition, when the market price of a company's
stock drops significantly, shareholders often commence securities class action
lawsuits against that company, regardless of the merit of their claims. A
lawsuit against us could cause us to incur substantial costs and could divert
the time and attention of management and other resources, regardless of the
outcome of the lawsuit.


28


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

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

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

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

Based on the nature of our revenue and our anticipated corporate
structure, we may be treated as a passive foreign investment company. To
determine whether we are a passive foreign investment company, we will be
required each year to examine our revenue and expenses and the value of our
assets. The tests are complex and require, among other things, that we determine
how much of our income from our license agreements each year will be passive
income. Moreover, the manner in which the tests apply to our business is not
certain.

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

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

If our shareholders sell substantial amounts of our common shares in the
public market, the market price of the common shares could fall. The perception
among investors that these sales will occur could also produce this effect. In
connection with our merger with TANTAU, we filed a registration statement on
Form F-4 which, subject to limitations under the U.S. securities laws and the
resale restriction agreements entered into by most of the security holders of
TANTAU, made


29


the common shares that we issued in the offering available for resale in the
U.S. In July 2000, we filed a registration statement on Form S-8 relating to
the issuance and sale of more than 6.5 million of our common shares that are
issuable under our stock option plans. In February 2001, we filed an
additional registration statement relating to more than 3.5 million options
that we assumed in the TANTAU acquisition, which may be exercised to purchase
our common shares by TANTAU's directors, officers, employees and consultants.
We intend to file an additional registration statement relating to our 2000
Stock Option Plan, the size of which was increased to 10.8 million shares in
2001.

We have entered into a registration rights agreement with shareholders
that currently own a majority of our common shares. Under this agreement, we are
obligated, under a number of circumstances, including upon the demand of some of
the shareholders that are parties to the agreement, to register a substantial
number of our common shares so that they may be freely sold on the Nasdaq
National Market and The Toronto Stock Exchange. This agreement relates to the
common shares held by our 5% shareholders, as well as more than 10 million of
the common shares that we issued in connection with our acquisition of TANTAU.
If these rights are exercised, a substantial number of shares could be sold in
the public markets, which is likely to adversely affect our stock price.

IF THE MARKET PRICE OF OUR COMMON SHARES FALLS BELOW $1.00 FOR AN
EXTENDED PERIOD OF TIME WE MAY NOT CONTINUE TO BE LISTED ON NASDAQ

Our common shares trade on the Nasdaq National Market, which has a number
of compliance requirements for continued listing. One of these requirements is
that the market price of our common shares must be at least US$1.00 for a
specified period of time. While we believe that we are currently in compliance
with all of Nasdaq's listing requirements, we may not continue to be in the
future, particularly if the market price for our common shares decreases to a
price of less than US$1.00. If we are delisted from the Nasdaq National Market
at any time in the future, we believe that our common shares may be able to move
to trade in the U.S. on the Nasdaq SmallCap Market and if that fails, onto the
Over-the-Counter-Bulletin-Board. If we are delisted from the Nasdaq National
Market, there would likely be a reduction in the liquidity of our common shares
and a further adverse effect on their trading price. Lack of liquidity would
also make it more difficult for us to raise capital in the future, effect
acquisitions or other strategic transactions, or to retain our personnel.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this annual report about our future results, levels of
activity, performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those listed under "-- Risk Factors" or
described elsewhere in this annual report. These statements include, but are not
limited to, the statements regarding:

- the expected growth in the number of wireless subscribers and
demand for wireless services;


30


- the expected growth in the number of wireless Internet
subscribers;

- the expected and continued convergence of wireless communications
and the Internet;

- the expected growth in consumer use of e-commerce;

- the expected growth and adoption of secure mobile transaction
solutions to protect the integrity and confidentiality of
information;

- our plans to integrate our operations with those of the companies
that we have acquired;

- our plans to increase our customer base;

- our plans to form additional strategic relationships;

- our plans to offer enhanced products and services, and the
benefits that customers and consumers will receive from these
services;

- our plans to market our products and services to new industry
sectors; and

- our plans to improve our operating efficiency through cost cutting
initiatives.

In some cases, you can identify forward-looking statements by our use of
words such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative or other variations of these words, or other comparable words or
phrases.

In addition, several of the statements set forth under the caption "Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations" are of a forward-looking nature. These statements include, but
are not limited to, the statements regarding:

- the future revenues that we expect to derive from our products and
services, our solution sales, revenue sharing arrangements and
commissions on m-commerce transactions;

- our expectations regarding our future gross margins, future cost of
revenue, future net losses, our future research and development,
sales and marketing, general and administrative, amortization,
stock-based compensation and restructuring expenses; and our future
capital expenditures;

- our expectations regarding our future capital requirements; and

- our expectations regarding the impact of recent accounting
pronouncements upon our future financial statements.

Among the factors that could cause our actual results or events to differ
are the risks that are set forth in this document under the caption "--Risk
Factors," in particular:


31


- the risk that general economic conditions will not improve;

- unanticipated trends and conditions in our industry;

- risks associated with our ability to compete in a variety of
international markets;

- the risk that we will not have sufficient capital to expand our
operations;

- any delay, inability or difficulty encountered in increasing our
revenues from our existing and future contracts;

- risks associated with our ability to efficiently integrate
acquired businesses; and

- risks associated with our ability to implement cost savings and
combined operational strategies.

Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. We are under no
duty to update any of our forward-looking statements after the date of this
report, other than as required by law. You should not place undue reliance on
forward-looking statements.

ITEM 2. PROPERTIES.

Our head office is located in Toronto, Ontario Canada. We also have
development and sales offices around the world, including Australia, Hong Kong,
Germany, the United Kingdom and the United States. As part of our restructuring
efforts, which began in June 2001, we have closed many our facilities around the
world. To further reduce our facilities costs, we may close additional offices
by consolidating our employees into a smaller number of employees.

ITEM 3. LEGAL PROCEEDINGS.

The Company has been named in several class actions filed in federal court
in the Southern District of New York between approximately June 13, 2001 and
June 28, 2001 (collectively the "IPO Allocation Litigation"). The IPO Allocation
Litigation was filed on behalf of purported classes of plaintiffs who acquired
the Company's common shares during certain periods. In addition to the Company,
the named defendants in actions similar to the IPO Allocation Litigation include
over 180 other issuers that have had initial public offerings since 1998. The
complaints in the IPO Allocation Litigation name as defendants some or all of
the current or former directors and officers of the Company (the "Individual
Defendants") and underwriters of the Company's initial public offering of
securities ("Underwriter Defendants"). In general, the complaints in the IPO
Allocation Litigation allege that the Underwriter Defendants: (1) allocated
shares of the Company's offering of equity securities to certain of their
customers, in exchange for which these customers agreed to pay the Underwriter
Defendants extra commissions on transactions in other securities; and (2)
allocated shares of the Company's initial public offering to certain of the
Underwriter Defendants' customers, in exchange for which the customers agreed to
purchase additional common shares of the Company in the after-market at certain
pre-determined prices. The Company intends to vigorously defend itself and the
Individual Defendants against these


32


claims made against it in the IPO Allocation Litigation. However, due to the
inherent uncertainties of litigation, and because the IPO Litigation is at a
preliminary stage, we cannot accurately predict the ultimate outcome IPO
Allocation Litigation.

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

Not applicable.



PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

MARKET PRICES OF 724 SOLUTIONS' COMMON SHARES

Our common shares are listed on the Nasdaq National Market under the
symbol "SVNX" and on The Toronto Stock Exchange under the symbol "SVN." The
following table sets forth the high and low closing sales prices per share of
our common shares as reported on the Nasdaq National Market and The Toronto
Stock Exchange for each of the quarters during the fiscal years ending December
31, 2001 and December 31, 2000.

YEAR ENDED DECEMBER 31, 2001




NASDAQ NATIONAL NASDAQ NATIONAL TORONTO STOCK TORONTO STOCK
MARKET: HIGH MARKET: LOW EXCHANGE: HIGH EXCHANGE: LOW

--------------------------------------------------------------------------

First Quarter US$ 27.62 US$ 9.40 Cdn.$ 41.82 Cdn.$15.00
Second Quarter US$ 12.13 US$ 5.80 Cdn.$ 18.78 Cdn.$ 8.83
Third Quarter US$ 7.57 US$ 2.02 Cdn.$ 11.16 Cdn.$ 3.13
Fourth Quarter US$ 2.80 US$ 1.07 Cdn.$ 4.50 Cdn.$ 1.72



YEAR ENDED DECEMBER 31, 2000




NASDAQ NATIONAL NASDAQ NATIONAL TORONTO STOCK TORONTO STOCK
MARKET: HIGH MARKET: LOW EXCHANGE: HIGH EXCHANGE: LOW

--------------------------------------------------------------------------

First Quarter
(from January 28, 2000) US$ 231.87 US$ 65.50 Cdn.$337.00 Cdn.$92.50
Second Quarter US$ 121.00 US$ 32.00 Cdn.$165.00 Cdn.$46.75
Third Quarter US$ 53.46 US$ 28.90 Cdn.$79.00 Cdn.$43.15
Fourth Quarter US$ 45.75 US$ 16.25 Cdn.$69.10 Cdn.$25.25



RECORD HOLDERS

As of February 28, 2002, there were 368 registered holders of our common
shares, approximately 239 of which had addresses in the U.S. These record
holders owned 64% of our issued and outstanding common shares.


33


DIVIDEND POLICY

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

MATERIAL UNITED STATES FEDERAL AND CANADIAN INCOME TAX CONSEQUENCES

GENERAL

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

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

- persons subject to the alternative minimum tax;

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

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

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

- insurance companies;

- financial institutions;

- dealers in securities;

- traders that mark to market;

- tax-exempt organizations; and

- retirement plans.

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

A "U.S. Holder" means a holder of shares of 724 Solutions who is (i) a
citizen or resident of the U.S., (ii) a corporation or other entity taxable as a
corporation created in or organized under the laws of the U.S. or any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income tax regardless of its source or (iv) in general, a trust if a
U.S. court can exercise


34


primary supervision over the administration of such trust, and one or more
U.S. persons have the authority to control all of the substantial decisions
of such trust. A "non-U.S. Holder" means a holder of shares who is not a
"U.S. Holder."

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

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

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

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

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

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

PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS. 724 Solutions does not
believe it will be a passive foreign investment company (a "PFIC") in 2001. In
the future, the determination of 724 Solutions' PFIC status will depend on,
among other things, a valuation of


35


724 Solutions' assets, including goodwill and other intangible assets. No
assurance can be given that 724 Solutions will not be attributed PFIC status
in future years.

724 Solutions will be classified as a PFIC in a particular taxable year if
either 75% or more of its gross income for the taxable year is passive income,
or during the taxable year, the average percentage of the value of 724
Solutions' assets that produce or are held for the production of passive income
is at least 50%. The U.S. Internal Revenue Service has indicated that cash
balances, even if held as working capital, are considered to be assets that
produce passive income.

If 724 Solutions were classified as a PFIC, any gain recognized by a U.S.
Holder upon the sale of common shares of 724 Solutions, or the receipt of
certain distributions, would generally be treated as ordinary income. In this
case, this income would be allocated over the period that the U.S. Holder held
724 Solutions shares and an interest charge would be imposed on the amount of
deferred tax on such income allocated to prior taxable years. If 724 Solutions
were determined to be a PFIC, however, a U.S. Holder could elect to treat his or
her shares as an interest in a qualified electing fund (a "QEF Election"), in
which case the U.S. Holder would be required to include in income annually his
or her proportionate share of 724 Solutions' income and net capital gain in
years in which 724 Solutions was a PFIC, regardless of whether such income or
gain was actually distributed, but any gain subsequently recognized upon the
sale by such U.S. Holder of the shares would generally be taxed as capital gain.
Alternatively, a U.S. Holder could make an election (a "Mark-to-Market
Election"), pursuant to which the U.S. Holder would be required to include as
ordinary income annually the excess of the fair market value of the 724
Solutions shares over the U.S. Holder's basis therein. If a U.S. Holder makes a
Mark-to-Market Election, then any gain recognized upon the sale by such U.S.
Holder of his or her common shares of 724 Solutions generally would be taxed as
ordinary income in the year of sale.

You should consult with your own tax advisors regarding your eligibility
for, and the manner and advisability of making, the QEF Election or
Mark-to-Market Election if 724 Solutions is treated as a PFIC.

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

THIS TAX DISCUSSION DOES NOT PURPORT TO CONTAIN A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX CONSIDERATIONS RELEVANT TO THE OWNERSHIP OF 724
SOLUTIONS COMMON SHARES. THUS, 724 SOLUTIONS'


36


SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE OWNERSHIP OF 724 SOLUTIONS COMMON SHARES,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT
OF ANY PROPOSED CHANGES IN THE TAX LAWS. STOCKHOLDERS THAT ARE NOT U.S.
HOLDERS SHOULD CONSULT THEIR TAX ADVISOR REGARDING, AMONG OTHER THINGS, THE
CONSEQUENCES OF INVESTING IN 724 SOLUTIONS' COMMON SHARES UNDER THE FOREIGN
INVESTMENT IN REAL PROPERTY TAX ACT, INCLUDING ANY REPORTING REQUIREMENTS
THAT MAY APPLY.

MATERIAL CANADIAN INCOME TAX CONSEQUENCES

The following discussion applies only to a holder of 724 Solutions common
shares who, for purposes of the INCOME TAX ACT (Canada) (the "Act"), is neither
resident nor deemed to be resident in Canada at any time and does not use or
hold, and is not deemed to use or hold, the 724 Solutions common shares in
connection with a trade or business that the holder carries on, or is deemed to
carry on, in Canada at any time (each a "non-resident holder"). Special rules
which are not discussed in this summary may apply to a non-resident holder that
is an insurer carrying on business in Canada and elsewhere, or a financial
institution as defined by section 142.2 of the Act. If you are in any doubt as
to your tax position, you should consult with your tax advisor.

DIVIDENDS

Dividends paid or credited or deemed to be paid or credited to a
non-resident holder on the 724 Solutions common shares will be subject to
Canadian non-resident withholding tax at the rate of 25% of the gross amount of
such dividends under the Act. This rate may be reduced under an applicable
income tax treaty between Canada and such non-resident holder's country of
residence. In the case of a non-resident holder which is the beneficial owner of
such dividends and a resident of the United States for the purposes of the
Canada-U.S. Tax Convention, the rate of non-resident withholding tax in respect
of dividends on the 724 Solutions common shares will generally be reduced to a
rate of 15% of the gross amount of such dividends (except that where such
beneficial owner is a corporation and owns at least 10% of the voting stock of
724 Solutions, the rate of withholding tax is reduced to 5% for dividends paid
or credited). Under the Canada-U.S. Tax Convention, dividends paid or credited
to a non-resident holder that is a United States tax exempt organization as
described in Article XXI of the Canada-U.S. Tax Convention will not be subject
to Canadian withholding tax.

DISPOSITIONS

A non-resident holder will not be subject to tax under the Act in respect
of capital gains realized on the disposition or deemed disposition of 724
Solutions common shares unless such shares are "taxable Canadian property"
(within the meaning of the Act) to the holder at the time of the disposition.
724 Solutions common shares will generally not constitute taxable Canadian
property to a non-resident holder provided such shares are listed on a
prescribed stock exchange (which currently includes the TSE and NASDAQ) on the
date of disposition and, at any time during the five-year period immediately
preceding the disposition or deemed disposition of the 724


37


Solutions common shares, the non-resident holder or persons with whom such
holder did not deal at arm's length or the non-resident holder and such
persons has not had an interest in or an option to acquire not less than 25%
of the issued shares of any class or series of the capital stock of 724
Solutions. Even if the 724 Solutions common shares are taxable Canadian
property to a non-resident holder, any capital gain realized by such holder
on a disposition of such shares may be exempt form Canadian tax under an
applicable income tax treaty. The Canada-U.S. Tax Convention will generally
exempt such a non-resident holder, who is resident in the United States for
purposes of the Canada-U.S. Tax Convention from tax in respect of the
disposition provided the value of the 724 Solutions common shares is not
derived principally from real property situated in Canada. 724 Solutions is
of the view and has advised counsel that the value of the 724 Solutions
common shares is not currently derived principally from real property
situated in Canada.

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

RECENT SALES OF UNREGISTERED SECURITIES

On March 25, 2002, we issued 1,011,690 of our common shares to the
former shareholders of YRLess, pursuant to the terms of our March 2000
acquisition agreement. This issuance occurred in connection with a transaction
not subject to the registration requirements of the Securities Act of 1933, as
amended, pursuant to the provisions of Section 4(2) and Regulation S thereunder.

ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated statement of operations data for the years ended
December 31, 2001, 2000 and 1999 and the balance sheet data as of December 31,
2001 and 2000 have been derived from our audited financial statements, which are
included elsewhere in this report. The selected statement of operations data for
the period from July 28, 1997 (inception) to December 31, 1999 and the balance
sheet data as of December 31, 1999, 1998 and 1997 have been derived from other
audited financial statements not included in this report. These operating
results are not necessarily indicative of results for any future period. You
should not rely on them to predict our future performance. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and other financial information
beginning on page F-1 in this report, as well as the information set forth under
"Item 7-Management's Discussion and Analysis of Financial Condition and Results
of Operations."


38







July 28, 1997
Year ended December 31, (inception)
2001 2000 1999 1998 to December
31, 1997

- ----------------------------------------------------------------------------------------
(IN THOUSAND OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
Revenue:
Product $ 27,054 $ 14,191 $ 1,697 $ 1,678 $ -
Less stock-based
compensation related to
software development - (248) (1,644) (1,395) -
Services 16,763 7,303 1,169 208 -
----------------------------------------------------------
Total Revenue 43,817 21,246 1,222 491 -

Operating expenses:
Cost of revenue 19,286 12,560 1,839 61 -
Research and development 39,052 28,876 7,158 2,087 44
Sales and marketing 36,807 12,531 2,574 378 39
General and administrative 15,904 13,868 3,609 502 82
Depreciation 8,142 3,946 752 88 -
Amortization of 80,172 18,843 - - -
intangible assets
Stock-based compensation
Cost of revenue 411 653 19 21 -
Research and development 27,730 3,748 97 107 -
Sales and marketing 11,077 484 24 27 -
General and 7,951 1,530 25 26 -
administrative
Restructuring Costs 16,488 - - - -
Write-down of intangible 321,461 - - - -
and other assets
Write-down of fixed assets 3,156
----------------------------------------------------------
Total operating expenses 587,637 97,039 16,097 3,297 165
Loss from operations (543,820) (75,793) (14,875) (2,806) (165)

Interest income 5,773 11,582 1,044 107 10
Equity in losses of (1,591) (943) - - -
affiliate
Loss on sale of long-term (4,591) - - - -
investments
Write-down of long-term (9,975) - - - -
investments
Dilution gain - 1,890 - - -

----------------------------------------------------------
Net loss for the period $(554,204) (63,264) (13,831) (2,699) (155)
----------------------------------------------------------

39


Basic and diluted net loss $ (9.72) $ (1.71) $ (0.82)$ (0.47) $ (0.06)
per share
Weighted-average number of
shares used in computing
basis and diluted net loss
per share (in thousands) 57,015 36,963 16,887 5,784 2,752
----------------------------------------------------------

CONSOLIDATED BALANCE
SHEETS DATA

Cash and cash equivalents $ 60,279 $ 73,898 $ 65,287 $ 2,976 $ 1,299
Short-term investments 28,857 92,726 - - -
Intangible and other assets 35,729 90,563 1,100 - -
Working capital 75,512 149,782 58,805 2,333 1,267
Total assets 135,830 287,316 73,242 3,892 1,321
Total shareholders' equity 109,246 262,263 62,168 3,193 1,288



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

The following discussion and analysis should be read together with our
audited consolidated financial statements and the accompanying notes appearing
elsewhere in this report. All financial information is presented in U.S.
dollars unless otherwise noted.

As described in Part I - Business - Information Regarding Forward-Looking
Statements, some of the statements set forth in this section are forward-looking
statements relating to our future results of operations. Our actual results may
vary from the results anticipated by these statements. For a description of the
risks that may cause our future performance to differ adversely from those
described below, please read carefully the information set forth under Part I -
Business - Risk Factors.

OVERVIEW

We are a leading global provider of Internet infrastructure software that
enables the delivery of secure applications and mobile transaction solutions
across a wide range of Internet-enabled devices. We were incorporated in 1997,
and introduced our initial financial services products in 1999. Since that time,
we have also begun to offer brokerage, credit card, payments and alerts
solutions, in a variety of languages and currencies around the world. Our suite
of products and services enables companies to capitalize on the mobile Internet
by building, deploying and integrating personalized and secure mobile payments
and applications. In 2001, we extended our solutions to the mobile operator
market, leveraging our Alerts Solutions, 724 Frameworks and Secure Payment
Solutions. With critical security features built in, our Wireless Internet
Platform, 724 Frameworks and solutions can be quickly implemented and integrated
with existing systems and scaled or expanded to accommodate future growth. We
also enable our customers to more rapidly introduce services with end-to-end
customer support through our global hosting provider, Computer Sciences
Corporation.

40


Using our solutions, our customers can offer new, easy to use, highly
personalized, value-added services which leverage the flexibility and
convenience of the mobile Internet, while building stronger relationships with
their customers. Our customers currently include leading financial institutions
and we have entered into key strategic customer relationships with two leading
mobile network operators partners. With our corporate office in Toronto, Canada,
we have development and sales offices around the world, including Australia,
Hong Kong, Germany, the United Kingdom and the United States.

DEVELOPMENTS IN 2001

TANTAU SOFTWARE ACQUISITION
In January 2001, we completed our acquisition of Austin-based TANTAU
Software Inc. TANTAU develops and designs software and related services that
enable enterprises to conduct high-volume, secure, m-commerce transactions. The
acquisition price of $407.7 million included the issuance of 17,119,869 common
shares, 2,011,055 replacement common share purchase options and acquisition
costs of $9.4 million. The acquisition was accounted for by the purchase method.
For the year ended December 31, 2001, we performed an assessment of the carrying
value of the remaining intangible and other identifiable assets recorded in
connection with our acquisitions, including TANTAU. See "Results of Operations -
Write-down of Intangible and Other Assets".

RESTRUCTURING AND OTHER CHARGES
In June 2001, in response to the downturn in general economic conditions,
we began our restructuring initiative which included eliminating duplicate
resources and positions, narrowing our product offerings and streamlining our
operating processes. In January 2002, we announced the continuation of our cost
reduction initiative. See "Results of Operations Year Ended December 31, 2001
Compared to Year Ended December 31, 2000" and note 17(a) to our consolidated
financial statements.

In September 2001, we performed an assessment on the carrying value of the
remaining intangible and other identifiable assets recorded with our various
acquisitions. We concluded that a significant other than temporary decline
existed with respect to these assets, and recorded a charge of $314.7 million
for the year ended December 31, 2001. In addition, we reassessed our technology
purchased from Webhelp and concluded that it was not expected to be a part of
our future strategy. Accordingly we reduced the carrying value of this
technology to zero and recorded a charge of $6.7 million. See "Results of
Operations - Year Ended December 31, 2001 Compared to Year Ended December 31,
2000" and note 17(b) to our consolidated financial statements.

In 2001, we reviewed the carrying value of our long-term investments and
concluded that some of them had an other than temporary decline in value.
Accordingly, we recorded $10.0 million as an other than temporary decline in the
value of our long-term investments. In addition, we also realized a loss on sale
of long-term investment of $4.6 million. See "Results of Operations -Write-down
of long-term investments" and note 17(c) to our consolidated financial
statements.

STOCK OPTION EXCHANGE PROGRAM
In January 2002, in recognition that a large percentage of our outstanding
options have exercise prices that are significantly higher than the current
prices at which our common shares trade on the Nasdaq National Market and The
Toronto Stock Exchange, we announced a voluntary

41


Stock Option Exchange Program that was offered to a majority of our
employees, excluding directors, executive officers and selected senior
personnel. Approximately 1.4 million options are expected to be granted under
this program in August 2002. In connection with this program we announced a
special grant of options for those who are ineligible to participate in the
option exchange program. See "Stock-based compensation" and note 19 (b) to
our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

We periodically review our financial reporting and disclosure practices
and accounting policies to ensure that our financial reporting and disclosure
system provided accurate and transparent information relative to current
economic and business environment. As part of the process, we have reviewed our
selection, application and communication of critical accounting polices and
financial disclosures. We note that we have determined that our critical
accounting policies relating to our core ongoing business activities are
primarily those that relate to revenue recognition. Other important accounting
polices are described in Note 2 to our consolidated financial statements, which
we encourage you to read.

REVENUE RECOGNITION

SOURCES OF REVENUE
In 2001, our revenue was primarily derived from the licensing of our
products, provision of related services, including installation, integration,
training and maintenance support, and our application hosting services. We
recognize revenue from our license agreements when all the following conditions
are met:

o We have an executed license agreement with the customer;
o We have delivered the software product to the customer;
o The amount of the fees to be paid by the customer is fixed and
determinable; and
o Collection of these fees is deemed probable.

Typically, software license agreements are multiple element arrangements
as they include related maintenance and implementation fees. Accordingly, the
entire arrangement fee is allocated to each element in the arrangement based on
the respective vendor specific objective evidence of value (VSOE) of each
element. Contracts for which we do not have sufficient VSOE, we use the residual
method to record revenues. Under this method, as long as we have VSOE for all
undelivered elements which are typically, services and maintenance, we can
record the remaining value of the contract as license revenue after allocating
full value to the undelivered elements.

PRODUCT REVENUE
Currently, product revenue consists of the following:

o Subscription Arrangements - fixed fee licenses in which our customers pay
us a fixed annual fee and we are required to deliver additional technology
that we develop during the term of the agreement. These fees have been
recognized using the subscription method of accounting, commencing with the
delivery of the first product in the contract. Our earlier agreements used
this model.

o Fixed License Fee - one-time license fee for a fixed number or copies of
unlimited use of the software, in exchange for a license with a perpetual
term. We typically recognize the upfront fees in the period

42


the contract is executed or shortly thereafter, provided that we have
vendor specific objective evidence of fair value and our revenue
recognition criteria are met.

o Variable License Fee Arrangement - variable license fees based on a per
user fee with specified quarterly minimum payments. We typically provide
discounts and/or maximum quarterly payments to our customers based on the
number of their customers using our applications. We recognize revenue from
these contracts on a quarterly basis as the amount is determined. Our
revenue under this model will vary with the number of our customer's
end-users. To date, we have not received revenues from user fees in excess
of any minimum payments. However, over time, we expect these fees to become
a significant portion of our revenues once our customers rollout services
based upon our solution to a substantial number of their customers.

o Fixed License Fee With Future Royalty Payments - these license arrangements
consist of an up front payment upon execution of the contract and an
ongoing variable fee based on the number of users. The monthly user fees
may be subject to minimum quarterly payments. We allocate revenue to the
software based on vendor specific objective evidence of fair value. The
portion of revenue that will be allocated to the software will be
recognized when we meet the four revenue recognition criteria listed above.
As a result, we anticipate that the initial payments under these contracts
will tend to be recognized as revenue either in the quarter in which the
contract is executed or shortly thereafter. Revenue from the minimum
payments will be recognized on a monthly basis. Revenue associated with
user fees in excess of any minimum payments will be recognized on a monthly
basis when the amount is determined.

o Reseller Arrangements - the reseller generally pays either a non-refundable
licensing fee for our software and/or a royalty fee based on the related
number of users. We recognize revenue associated with a non-refundable
license fees when we have met our revenue recognition criteria.

We anticipate that future revenues will include solution sales in addition
to our current software and services models. The key distinguishing factors
between what we would consider to be a solutions sale and a software and
services sale are the comparable dollar values for services compared to software
and the nature of the services contracted, being customized code and more
complex interfaces as opposed to installation. In addition, we may maintain a
large amount of risk related to the success of our solutions sales agreements.
These risks may be in the form of significant commitments to refunds and/or
penalties on the services and/or license components should the system not
perform according to expectations. Recognition of revenue from such contract
will primarily be based on the percentage of work completed method based either
on inputs or on outputs as dictated by the specific contracts. We expect that
revenue will be deferred until we achieve contractually defined milestones or
until customer acceptance has occurred, as the case may be for such contract.
Accordingly, there will likely be an increase in the time between when the
contract is signed and when we record the revenue.

Due to the down-turn in the economy, our customers have been and continue
to be reluctant to make large commitments in up front license fees and as such,
our revenues from license and maintenance arrangements have been and are
expected to be lower until the economy recovers and our customers begin to
increase their levels of capital expenditures. The lack of a sufficient quantity
of customer transactions will make it difficult for us to establish VSOE for
license sales of new products and to maintain VSOE for license sales of products
for which we historically sold. As a result, we expect that in the future, for
contracts for which we do not have sufficient VSOE, we will be using the
residual method to record revenues. Under this method, for arrangements where

43


we have established VSOE for all undelivered elements, which are typically,
services and maintenance, we will record the remaining value of the contract as
license revenue after allocating full value to the undelivered elements.

SERVICE REVENUE
IMPLEMENTATION AND CUSTOMER SERVICE FEES
Revenue from implementation and customer services include fees for
implementation of our product offerings, consulting and training services. We
currently rely, and expect to continue to rely, upon a combination of our own
resources and third-party consulting organizations to deliver these services to
our customers. Customers are charged a fee based on time and expenses. Revenue
from implementation and customer service fees is recognized as the services are
performed.

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

HOSTING FEES
For some of our customers, we host and manage the server infrastructure
and software platform as part of the implementation of our products. We
typically charge a customer a one-time setup fee plus a monthly flat fee or a
monthly fee based on the number of users. The set-up fees are recognized
rateably over the term of the hosting arrangement, and the monthly fees are
recognized on a monthly basis.

For a more detailed description of revenue recognition polices, refer to
note 2(c) of our consolidated financial statements.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Our consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles. These principles conform
in all material respects with U.S. generally accepted principles, except as
disclosed in Note 15 of our consolidated financial statements.

REVENUE

PRODUCT REVENUE
In the year ended December 31, 2001, product revenue increased to $27.1
million from $13.9 million in 2000. Product revenue increased in 2001 compared
to 2000 as a result of our acquisition of TANTAU and the increase in the number
of customers licensing our products. In addition, in 2000, our product offerings
were limited to our banking and brokerage products, whereas in 2001, we have
been generating more sales from our expanded suite of product offerings, which
include credit cards, alerts, payments and platform products. Since 2000, we
have

44


expanded our sales force and formed new relationships to gain customers
outside of North America. In 2001, we gained new customers from Europe and Asia
Pacific.

SERVICE REVENUE
Service revenue increased to $16.8 million in the year
ended December 31, 2001 compared to $7.3 million in 2000. The change from
2000 mainly resulted from increases in consulting and implementation fees
from additional customers and increases in maintenance fees due to growth in
product sales. The increase in consulting and implementation fees resulted
primarily from the additional implementation services that we performed in
connection with our banking and brokerage, credit card, payments and alerts
product offerings. In addition, in 2001, we derived consulting revenue from
performing strategic consulting work relating to assisting a number of
customers with their wireless and mobile offerings.

OPERATING EXPENSES

COST OF REVENUE
Cost of revenue consists primarily of personnel costs associated with
customer support, training, implementation, consulting and hosting services, as
well as amounts paid to third-party consulting firms for those services,
together with an allocation of expenses for our facilities and administration.
Cost of revenue also includes software licenses paid for third-party software
used with our products.

Cost of revenue was $19.3 million for the year ended December 31, 2001
compared to $12.6 million for 2000. The increase is mainly due to the fact that
in 2001 we had more customers for whom we were performing consulting and
implementation work than we did in 2000. Cost of revenue for the year ended
December 31, 2001 was 44% of revenue compared to 59% for the same period in
2000. We continue to utilize the infrastructure that we have built and leveraged
the experience that we have gained in enabling our customers to deploy our
products. In addition, as part of our restructuring efforts and realigning of
our business, we have decreased the number of professional services personnel.

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

Research and development (R&D) expenses increased to $39.1 million in the
year ended December 31, 2001 compared to $28.9 million in 2000. The increase
mainly reflects the growth in R&D personnel, in the first six months of 2001
before the restructuring, mainly as a result of our acquisitions of Ezlogin,
Spyonit and TANTAU. This increase also resulted from our investment in
developing our "724 Payments" solution. R&D expense, as a percentage of revenue,
was 89% for the year ended December 31, 2001 compared to 136% for the same
period in 2000. The goals of the restructuring and realignment of our business
in 2001, were to have a more streamlined, integrated and focused product road
map and reduce duplication in the R&D process. We began to see benefits in our
restructuring materialize in the third quarter of fiscal 2001 as R&D expenses
decreased in absolute dollars from the second quarter of 2001, when the
restructuring initiative

45



began. We have additional plans in place to lower our R&D costs in the future
with the restructuring initiative announced in January 2002. We will also
continue to evaluate our R&D expenditure needs based on new product
architecture and services and the current market environment.

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

Sales and marketing (S&M) expenses were $36.8 million for the year ended
December 31, 2001 compared to $12.5 million in 2000. With the acquisition of
TANTAU, these costs increased as we had additional sales personnel to manage our
relationships with our major customers and strategic alliances and to expand our
business in Europe and the Asia Pacific region. In addition, the increase in
absolute dollars is attributable to our continuing strategy of expanding our
reach to new markets and of increasing our efforts to sell our suite of
products. S&M expenses, as a percentage of revenues, increased to 84% in the
year ended December 31, 2001 from 59% in 2000. We have reduced the number of our
worldwide sales and marketing personnel and discretionary marketing programs as
part of our restructuring efforts in 2001 and in January 2002 in reaction to the
downturn in economic conditions in our target markets. We will continue to
monitor our pace of marketing expenditures to help ensure that they remain
aligned with the opportunities that we have targeted as well as prevailing
market conditions.

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

Our G&A expenses increased to $15.9 million for the year ended December
31, 2001, from $13.9 million in 2000. The increase in G&A expenses reflected
expenditures incurred in the first two quarters of 2001, primarily related to
the enhancement of our international infrastructure necessary to support our
growing business as a result of acquiring TANTAU. G&A expenses as a percentage
of revenues decreased to 36% for the year ended December 31, 2001 from 65% for
2000. We continue to monitor our G&A expenditures and believe that we currently
have the infrastructure required to support our business in the current market
environment.

DEPRECIATION AND AMORTIZATION
Depreciation expense increased to $8.1 million in the year ended December
31, 2001, compared to $3.9 million in 2000. The increase reflects our capital
spending in the first half of 2001, relating to equipment for our hosting
facilities, computer hardware, office furniture and leasehold improvements at
our facilities to support the additional personnel that we have hired and/or
acquired through our acquisitions. We expect that depreciation expense will be
stable or lower in 2002 as we have made significant reductions in our capital
expenditure budget and have decommissioned redundant assets.

46



Amortization expense increased to $80.2 million for the year ended
December 31, 2001 compared to $18.8 million in 2000. The increase was mainly due
to the amortization of the goodwill and acquired intangibles from our
acquisitions of Ezlogin, Spyonit and TANTAU. As a result of the write-down of
our intangible and other assets in the year ended December 31, 2001, as
described in Note 17 of our consolidated financial statements, we have
approximately $9.1 million and $8.8 million as the carrying value of goodwill
and acquired technology respectively. After fiscal 2001, acquired technology
will be amortized over a period of two years, while goodwill will be assessed
for impairment only, rather than being amortized, on a prospective basis
starting January 1, 2002. See "Recent Accounting Principles".

STOCK-BASED COMPENSATION
Stock-based compensation represents amortization of deferred stock-based
compensation that we recorded as a result of granting stock options to employees
at less than the fair market value of our shares for financial reporting
purposes on the date of grant. This stock based compensation is being amortized
on a straight-line basis over the vesting periods of these options, which is
generally three years. In addition, included in stock-based compensation expense
is the amortization of deferred stock compensation that arose due to the
acquisition of TANTAU (see Note 3(a) of our consolidated financial statements)
and compensation expense relating to the contingent consideration incurred as
part of our acquisition of YRLess.

Stock-based compensation increased to $47.2 million for the year ended
December 31, 2001 from $6.4 million in the same period of 2000. Most of the
increase was attributed to the amortization of the deferred stock compensation
that we recorded as part of the TANTAU acquisition in the first quarter (this
amount is being amortized over a maximum period of two years, starting January
17, 2001) and the immediate recognition of stock compensation expense for those
terminated employees who have options that vest immediately upon their
termination.

Some of our employees who were terminated in January 2002 have options
that vest immediately upon termination. We expect to expense the unamortized
portion of the deferred stock compensation related to these options of
approximately $3.2 million as non-cash stock compensation expense in the first
quarter of 2002.

In recognition that a large percentage of our outstanding options have
exercise prices that are significantly higher than the current prices at which
our common shares trade on the Nasdaq National Market and The Toronto Stock
Exchange, in January 2002, we announced a Voluntary Stock Option Exchange
Program that was offered to a majority of our employees, excluding directors,
executive officers and selected senior personnel. This program offered eligible
employees to exchange their current options, based on prescribed guidelines, for
new options that we expect to be granted on or about August 29, 2002.
Approximately 1.4 million options are expected to be granted under this program.
Some employees who participated in the stock option exchange program were issued
stock options for which we recorded a deferred stock compensation charge. As
these employees agreed to exchange their options outstanding at January 23, 2002
for new ones to be issued on or about August 29, 2002, we expect to expense the
related unamortized portion of the deferred stock compensation amount of
approximately $2.0 million as non-cash stock compensation expense in the first
quarter of 2002.

47



In connection with this program, we announced a special grant of options
for directors, executive officers and selected senior personnel, who are not
eligible for the voluntary stock option exchange program and we are proposing to
make a special grant of options to other employees who are not eligible to
participate in this program. These options are expected to be granted on or
about August 29, 2002. See note 19(c) to our consolidated financial statements.

RESTRUCTURING COSTS
With the downturn in general economic conditions, we have been working to
identify areas to reduce costs by eliminating duplicate resources and positions,
narrowing our product offerings and streamlining our operating processes. As a
result of this realignment, in the year ended December 31, 2001 we recorded a
restructuring charge of $16.5 million related to employee severance and lease
costs for the closing of several of our offices. In addition, we recorded $3.2
million relating to the decommissioning of our redundant fixed assets and $3.6
million relating to the immediate recognition of deferred stock based
compensation expenses relating to employees whose stock options vested upon
termination of their employment. Included in our "Accrued Liabilities" is
approximately $8.9 million in restructuring reserve relating to unpaid severance
costs and lease exit costs. See note 17(a) to our consolidated financial
statements.

In January 2002, we announced the continuation of our cost reduction
initiative. As a result, we expect to incur a charge in the first quarter of
2002 of approximately $13.1 million, consisting of severance and benefits costs,
non-cancelable lease costs for the closing of additional offices, write-offs of
fixed assets and stock compensation expenses related to the immediate
recognition of deferred stock compensation for those employees whose stock
options vest upon termination of employment. The cost realignment is critical to
our plan to achieve operational profitability. In the restructuring, we narrowed
our product focus, realigned our organization, developed a single product
architecture and roadmap, unified company network and infrastructure, further
integrated our business and purchasing processes and consolidated worldwide
offices. See note 19(a) to our consolidated financial statements.

In January 2002, we formalized our plan to form an alliance with Computer
Sciences Corporation ("CSC"), located in Austin, Texas. CSC will be providing us
with application hosting services in order to support our current hosting
agreements until such time as such agreements are assigned to CSC. As a result
of this transaction, we expect to record a charge of approximately $8.8 million
relating to fees to be paid to CSC to service existing customer contracts and
transitional costs relating to the transfer of our hosting business and a
write-down of redundant computer equipment. See note 19(a) to our consolidated
financial statements.

WRITE-DOWN OF FIXED ASSETS
For the year ended December 31, 2001, we recorded a charge of $3.2 million
related to the write-down of fixed assets that are redundant as a result of our
restructuring.

WRITE-DOWN OF INTANGIBLE AND OTHER ASSETS
ACQUIRED BUSINESSES
We performed an assessment of the carrying values of intangible and other
assets recorded in connection with our various acquisitions: TANTAU, Spyonit and
ezlogin. The assessment was performed because a number of factors indicated that
an impairment existed in the year ended December 31, 2001. The main indicators
of impairment were the significant changes in valuations

48


of companies in the technology sector, a reduction in the multiples used in
valuing technology companies such as revenue multiples, significant negative
industry and economic trends impacting both our current operations and
expected future growth rates, and our decisions related to the abandonment of
certain acquired technology. Based on these factors, we concluded that a
significant other than temporary impairment existed with respect to our
intangible assets, which primarily relates to the goodwill and acquired
technology associated with the acquisitions of Ezlogin, Spyonit and TANTAU.

In quantifying the impairment charge, we compared the expected future cash
flows of each acquisition, including terminal value, to the respective carrying
value of the assets of the business, including assigned goodwill. Variables in
the cash flow include estimated revenue contribution to our overall revenue and
estimated costs. The cash flow periods used ranged between three and five years,
consistent with the useful life of the related asset acquired. The discount rate
ranged between 15 and 20 percent and is based on the risk free rate, adjusted
for risk factors of the acquired company.

As a result of our review, we determined that the carrying values of the
acquired businesses were not fully recoverable. Accordingly, we recorded, in the
year ended December 31, 2001, a $314.7 million write-down of intangible and
other assets based on the amount by which the carrying amount of the intangible
and other assets exceeded the fair value calculated as described in the
preceding paragraph. The goodwill and intangible assets write-down primarily
relates to the goodwill and intangible assets that arose in the businesses that
we acquired primarily through the issuance of shares and replacement options
which were valued, for accounting purposes, on the respective dates of the
acquisition which was significantly higher than our share trading price at the
time of determining the existence of an impairment.

ACQUIRED TECHNOLOGY
For year ended December 31, 2001, we performed a review of the carrying
value of our "Web Application Event Framework" technology (WAEF) which we
acquired from Webhelp in March 2001. During the course of the review, we
considered our future use of WAEF, in light of the restructuring of our business
and the downturn in the economy and concluded that the WAEF technology was not
expected to be a part of our future strategy. We currently do not intend to
incorporate this technology into our business. As a result, we reduced the
carrying value of this technology to zero and recorded a charge of $6.7 million.

INTEREST INCOME
Interest income decreased to $5.8 million in the year ended December 31,
2001, compared to $11.6 million in the same period of 2000. Interest was derived
from cash and cash equivalent balances and short-term investments, representing
primarily the unused portion of the proceeds from our issuances of common
shares, including, in particular, the proceeds from our initial public offering
in the first quarter of 2000. Interest income decreased in 2001 compared to 2000
because we have smaller holdings of cash and cash equivalent balances and
short-term investments. Given the recent reductions in prevailing interest
rates, we anticipate that we will receive reduced rates of interest on these
assets during the current year compared to the year ended December 31, 2001.

EQUITY IN LOSS OF AFFILIATE

49


We owned 24.9% of the equity of Maptuit, as of December 31, 2001. Our
investment in Maptuit is accounted for using the equity method. Our share in the
net loss of Maptuit was $1.6 million compared to a net gain of $947,000 in 2000.
The net gain in 2000 consisted of an equity loss of $943,000 offset by a
dilution gain of $1.9 million recorded as a result of Maptuit financings in
2000.

WRITE-DOWN OF LONG-TERM INVESTMENTS
In the year ended December 31, 2001, we reviewed the carrying values of
our long term investments. Due to adverse changes in operating market
conditions, several of our long-term investments in other companies have
experienced a significant other than temporary decline in their values. In
or`der to determine the amount of the write-down, we assessed the fair market
value of these investments and compared them to the investments' carrying
values. The fair market value of these investments was based on a combination of
the following:

o if public, recent trading prices and trend in trading prices;
o values indicated by recent rounds of financing in the investee company;
o valuations performed by the investee company or venture capitalists if the
investee company is seeking a round of financing and
o changes in the market value of the investment relative to industry indices.

For the year ended December 31, 2001, we realized losses on the sale of
long-term investments of $4.6 million and recorded $10.0 million as an other
than temporary decline in value of our long-term investments.

NET LOSS
We recorded a net loss of $554.2 million for the year ended December 31,
2001 compared to net loss of $63.3 million for 2000. Our net loss increased as
we recorded significant non-cash charges for impairment in value of our
intangible and other assets, other than temporary decline in value of our
long-term investments and amortization of goodwill related to our acquisitions
and as we invested heavily in building our infrastructure. In addition, prior to
our adoption of our restructuring plan in June 2001, our research and
development expenses and our sales and marketing expenses increased to meet
required product delivery schedules and to expand our market share. In response
to the downturn of the economy in 2001, which affected our operations and
expected growth rates, we adopted a restructuring plan to realign our operations
to eliminate duplicate resources. As a result of this decision, we recorded
restructuring related charges in 2001 of $19.6 million. We expect that the
future cost savings due to reduction in salary, benefits and infrastructure
costs, will more that offset the expense incurred.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUE
Our revenue, before the offset of stock-based compensation, increased to
$21.5 million for the year ended December 31, 2000 from $2.9 million in December
31, 1999.

PRODUCT REVENUE
Our product revenue, before the offset of stock-based compensation,
increased to $14.2 million in 2000 compared to $1.7 million in 1999.
Substantially all of the increase resulted from the

50


delivery of our 724 Solutions platform in accordance with the terms in our
customer contracts entered into in 1999.

SERVICE REVENUE
Our service revenue increased to $7.3 million from $1.2 million for the
twelve months ended December 31, 2000 and 1999, respectively. Most of the
increase resulted from our customers seeking additional services to help them
deploy our 724 Solutions platform and applications and other products. In
addition, we received revenue for consulting work related to the implementation
and customization of our LiveClips product, which we have made available as a
result of our June 2000 acquisition of Ezlogin.

STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE

Under our subscription agreement with Bank of Montreal (BMO) dated April
30, 1998, we granted an option to BMO to subscribe for 2,428,570 common shares
for Cdn. $1.0 million. This option was only exercisable in the event that BMO
extended its technology license agreement for a second year and paid the second
year's license fee. In October 1998, following BMO's extension of the license
agreement, BMO exercised the option. On the date of exercise, the fair value of
the 2,428,570 common shares was determined to be Cdn. $6.1 million, resulting in
a stock-based compensation charge related to software development revenue of
Cdn. $5.1 million, or U.S. $3.3 million. This stock-based compensation was
attributed to our software development revenue over the term of the agreement in
proportion to the revenue recognized in the first and second years. Stock-based
compensation related to software development revenue decreased to $248,000 for
the twelve months ended December 31, 2000 from $1.6 million for the twelve
months ended December 31, 1999. The decrease resulted from the fact that the
second year of this agreement ended in the first quarter of fiscal 2000. This
deferred stock-based compensation charge has now been fully expensed.

OPERATING EXPENSES

COST OF NET REVENUE
Cost of revenue was $12.6 million for the year ended December 31, 2000
compared to $1.8 million for the year ended December 31, 1999. Most of the
increase was due to salary and consulting costs as we significantly increased
our implementation and customer services personnel and third-party consulting
firms to support our customers' deployment of our 724 Solutions Platform, and as
we incurred startup and implementation costs required to establish our hosting
infrastructure.

RESEARCH AND DEVELOPMENT
Research and development expenses increased to $28.9 million for the year
ended December 31, 2000 compared to $7.2 million for the same period in 1999.
The increase from the prior year was attributed to the expansion of the
functionality of our platform and costs associated with integrating Ezlogin and
Spyonit and other acquired technology, as well as the continued development of
our LiveClips and alerts products.

SALES AND MARKETING
Sales and marketing expenses were $12.5 million in 2000 compared to $2.6
million in 1999. These costs increased primarily because in fiscal 2000 we hired
additional sales personnel to manage our relationships with our major customers
and to expand our business both in North

51


America and worldwide. In addition, in 2000, we opened sales offices in
Tokyo and Sydney to establish our presence in the Asia Pacific region and
incurred fees associated with marketing programs designed to build brand
awareness.

GENERAL AND ADMINISTRATIVE
Our general and administrative expenses increased to $13.9 million in 2000
from $3.6 million in 1999. The increase in general and administrative expenses
reflected our continued investment in increased staffing and related expenses
for the enhancement of the international infrastructure necessary to support our
growing business. The remainder of the increase was due to integration and
professional fees related to our acquisitions and corporate development
activities.

DEPRECIATION AND AMORTIZATION
Depreciation expense increased to $3.9 million in 2000 compared to
$752,000 in 1999. The increase reflects the capital spending in computer
hardware, office furniture and leasehold improvements at our Canadian facilities
to support the increase in the number of personnel. Additional software
development tools used for research and development and computer hardware
purchased for our hosting facilities accounted for the remainder of the
increase.

Amortization expense increased to $18.8 million in 2000 from nil in 1999.
The increase was due to the goodwill and acquired intangibles relating to the
Ezlogin acquisition completed in June 2000 and the Spyonit acquisition completed
in September 2000.

STOCK-BASED COMPENSATION
Stock-based compensation was $6.4 million for the twelve months ended
December 31, 2000 compared to $165,000 for the twelve months ended December 31,
1999. The increases are largely attributed to the amortization of deferred
stock-based compensation related to options that were granted between October 1,
1999 and March 31, 2000. Stock-based compensation also includes accrued stock
consideration related to the YRLess acquisition. (See Note 3(b) of our
consolidated financial statements).

INTEREST INCOME
Interest income increased to $11.6 million for the year ended December 31,
2000 from $1.0 million for the twelve months ended December 31, 1999. Interest
was derived from cash and cash equivalent balances and short-term investments,
representing primarily the unused portion of the proceeds from our issuances of
common shares, including, in particular, the proceeds from our initial public
offering in the first quarter of 2000.

EQUITY IN LOSSES OF AFFILIATE
Our relative ownership in Maptuit decreased from 33.4% in March 2000 to
24.9% in December 2000. This decrease is due to the additional financing that
Maptuit arranged with other investors. Our investment in Maptuit is accounted
for using the equity method. In fiscal 2000, we recognized a net gain of
$947,000, including a dilution gain of $1.9 million, as a result of Maptuit's
additional financing, offset by our share of Maptuit's fiscal 2000 losses of
$943,000.

NET LOSS
We recorded a net loss of $63.3 million for the year ended December 31,
2000 compared to a net loss of $13.8 million for the year ended December 31,
1999. Our loss increased as we invested heavily in building our infrastructure.
In particular, our research and development

51


expenses and our sales and marketing expenses increased to meet required
product delivery schedules and to gain market share.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited consolidated statements
of operations data for each of the eight most recent quarters ended December 31,
2001. The information has been derived from our unaudited consolidated financial
statements that, in management's opinion, have been prepared on a basis
consistent with the audited consolidated financial statements contained
elsewhere in this annual report and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of information
presented. The statements of operations for 2001 include the results of
operations of TANTAU and subsidiaries. These operating results are not
necessarily indicative of results for any future period. You should not rely on
them to predict our future performance.

- --------------------------------------------------------------------------------



Quarter Ended
2001 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total Year
C>

(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
- --------------------------------------------------------------------------------

Revenue:
Product $9,127 $8,976 $6,614 $2,337 $27,054
Services 4,722 5,102 3,427 3,512 16,763
-------------------------------------------------------
Total Revenue 13,849 14,078 10,041 5,849 43,817

Operating expenses:
Cost of revenue 5,090 5,646 4,232 4,318 19,286
Research and 11,189 11,728 9,308 6,827 39,052
development
Sales and marketing 9,029 10,594 9,751 7,433 36,807
General and 6,586 3,997 2,416 2,905 15,904
administrative
Depreciation 1,742 2,155 2,422 1,823 8,142
Amortization of 23,870 27,375 26,964 1,963 80,172
intangible assets
Stock-based
compensation
Cost of revenue 207 230 (171) 145 411
Research and 6,113 7,988 8,326 5,303 27,730
development
Sales and marketing 2,529 2,815 2,804 2,929 11,077
General and 1,839 2,047 2,757 1,308 7,951
administrative
Restructuring costs - 3,433 - 13,055 16,488
Write-down of
intangible
and other assets - - 321,461 - 321,461
Write-down of fixed
assets - - - 3,156 3,156

53

-------------------------------------------------------
Total operating
expenses 68,194 78,008 390,270 51,165 587,637
-------------------------------------------------------
Loss from operations (54,345) (63,930) (380,229) (45,316) (543,820)

Interest income 2,476 1,605 1,101 591 5,773
Equity in losses of
affiliate (278) (480) (420) (413) (1,591)
Loss on long-term
investments (6,250) - (7,750) (566) (14,566)

-------------------------------------------------------
Net loss for the
period $(58,397) (62,805) $(387,298) (45,704) $(554,204)
-------------------------------------------------------

Basic and diluted net
loss per share $ (1.09) $ (1.08) $ (6.64) $ (0.78) $ (9.72)

-------------------------------------------------------
Weighted-average number
of shares used in
computing basic and
diluted net loss per
share (in thousands) 53,581 57,981 58,317 58,367 57,015
-------------------------------------------------------










Quarter Ended
2000 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Total Year



(IN THOUSANDS OF U.S. DOLLARS, EXCEPT
SHARES AND PER SHARES AMOUNTS)
- ---------------------------------------------------------------------------------

Revenue:
Product $2,514 $2,591 $3,482 $5,356 $13,943
Services 597 1,377 2,632 2,697 7,303
-------------------------------------------------------
Total Revenue 3,111 3,968 6,114 8,053 21,246

Operating expenses:
Cost of revenue 1,953 2,550 3,777 4,280 12,560
Research and 4,163 6,227 8,065 10,421 28,876
development
Sales and marketing 3,031 3,983 3,632 1,885 12,531
General and 1,896 5,045 3,879 3,048 13,868
administrative
Depreciation 317 684 1,313 1,632 3,946
Amortization of - 1,350 7,917 9,576 18,843
intangible assets
Stock-based
compensation
Cost of revenue 189 125 27 312 653

54


Research and 487 641 950 1,670 3,748
development
Sales and marketing 85 160 335 (96) 484
General and 82 530 243 675 1,530
administrative
-
-------------------------------------------------------
Total operating
expenses 12,203 21,295 30,138 33,403 97.039
-------------------------------------------------------
Loss from operations (9,092) (17,327) (24,024) (25,350) (75,793)

Interest income 2,237 2,722 3,633 2,942 11,582
Equity in income
(losses) of affiliate (66) (213) 965 261 947

-------------------------------------------------------
Net loss for the
period $ (6,921) $ (14,818) $ (19,426) $ (22,147) $ (63,264)
-------------------------------------------------------

Basic and diluted net
loss per share $ (0.20) $ (0.40) $ (0.51) $ (0.57) $ (1.71)
-------------------------------------------------------
Weighted-average number
of shares used in
computing basic and
diluted net loss per
share (in thousands) 34,037 36,717 37,961 39,092 36,963
-------------------------------------------------------



LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $86.7 million for the year ended
December 31, 2001 compared to $26.8 million in 2000. Net cash used in operating
activities in 2001 consisted mainly of our net loss of $554.2 million, offset by
depreciation and amortization of $88.3 million, stock-based compensation expense
of $47.2 million, loss on sale of investments of $4.6 million, write-down of
long term investments of $10.0 million, write-down of intangible and other
assets of $321.5 million, write-down of fixed assets of $3.2 million, equity in
loss of affiliate of $1.6 million and use of working capital of $8.7 million.
The main reason for the increase in cash used in operating activities in 2001
compared to 2000 is because in 2001, due to the acquisition of TANTAU, we had
increased headcounts and additional infrastructure to support. In addition, in
mid-2001, due to the downturn of economic conditions, we initiated our
organizational restructuring and incurred severance costs related to terminated
employees. With the further reduction announced in January 2002, we expect to
record additional cash costs related to severance and fees to be paid to CSC to
service exiting customer contracts and transitional costs relating to the
transfer of our hosting business. See Note 19 to our consolidated financial
statements.

As at December 31, 2001, we have commitments to make $15.7 million in
minimum lease payments, until the year 2008, relating to our facilities and
equipment rentals. As a result of our

55


restructuring initiative, we have vacated some of our premises. Accordingly,
we have plans in place to renegotiate these leases and/or sublease these
premises to reduce our future commitments, however, we cannot provide any
assurances that such plans will be successful.

Cash provided by financing activities was $9.6 million for the year ended
December 31, 2001 compared to $165.6 million for the same period in 2000. The
funds in 2000 represented the proceeds we raised in connection with our initial
public offering of 6,900,000 common shares. The funds in 2001 represented the
issuance of our common shares for cash used as part of our transaction with
Webhelp in March 2001, offset by the repayment of a portion of the principal on
our loan which we assumed as a result of purchasing TANTAU. In 2002, we are
obligated to pay approximately $3.6 million in principal and interest related to
this loan.

Cash from investing activities, before the sale of short-term investments,
was $1.4 million for the year ended December 31, 2001 and is comprised of
purchases of fixed assets of $10.7 million, purchases of intangible and other
assets of $9.1 million, which is mainly related to our purchase of Webhelp's
WAEF technology, proceeds on sale of our long-term investments of $2.8 million,
$11.8 million outflow of cash relating to our investment in Webhelp and CashEdge
and $30.2 million in cash inflow assumed on our acquisition of Tantau. We have
initiatives in place to reduce capital expenditure costs, as we plan on using
and redeploying, where possible, our existing fixed assets.

Due to the operational savings that we expect to achieve as a result of
our restructuring, we expect that cash from operations, interest income and our
existing cash and cash equivalents and short-term investments will be sufficient
to cover our cash requirements, including planned capital expenditures, for at
least the next 12 months. We may require additional financing if we expand our
operations at a faster rate than currently expected, or if we seek to effect one
or more significant acquisitions.

RECENT ACCOUNTING POLICIES AND REGULATIONS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No.141, "Business
Combinations". SFAS No.141 requires that all business combinations be accounted
for under the purchase method of business combination initiated after June 30,
2001 for which the date of acquisition is July 1, 2001 or later. Use of the
pooling-of-interests method is no longer permitted. In July 2001, the FASB
issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
requires that all goodwill no longer be amortized to earnings, but instead be
periodically reviewed for impairment. SFAS No.142 must be adopted with fiscal
years beginning after December 15, 2001. The impact of adopting SFAS No. 141 and
SFAS No. 142 has not been determined. As of December 31, 2001, we had
approximately $9.1 million as the carrying value of goodwill, which we will
periodically review in accordance with these provisions.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementaion of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair

56


value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and its provisions are to be
applied prospectively. We are currently assessing the impact of SFAS No. 144
on our financial position and results of operations.

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

IMPACT OF INTEREST RATE EXPOSURE

As of December 31, 2001, we had approximately $89.1 million in cash, cash
equivalents and short-term investments, of which $28.9 million were short-term
investments. A significant portion of the cash earns interest at variable rates.
In addition, although our short-term investments are fixed-rate instruments, the
average term is short. Accordingly, our interest income is effectively sensitive
to changes in the level of prevailing interest rates. This is partially
mitigated by the fact that we generally do not liquidate our short-term
investments before their maturity dates.

IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE

Our functional currency is the U.S. dollar. The majority of our non-US
dollar denominated expenses are incurred in Canadian dollars, although with the
purchase of TANTAU, an increased proportion are incurred in Euros and other
European currencies. Changes in the value of these currencies relative to the
U.S. dollar may result in currency gains and losses, which could affect our
operating results. In the period ended December 31, 2001, we incurred unrealized
foreign currency gains relating to the translation of our non-US denominated
monetary assets and liabilities of approximately $113,000. In the future, we may
seek to minimize this risk by hedging our known exposures, such as salaries,
rent and other payments. We will account for any arrangements of this kind
according to Financial Accounting Standard 133.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

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

Not applicable.



PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 25, 2002, and which is incorporated
by reference herein.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 25, 2002, and which is incorporated
by reference herein.

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

The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 25, 2002, and which is incorporated
by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 25, 2002, and which is incorporated
by reference herein.



PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.

(a) The following documents are filed as part of this Report:

1. Financial Statements.

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

2. Financial Statement Schedules.

None.


58


3. Exhibits.




EXHIBIT NAME OF DOCUMENT
NUMBER

3.1(1) Articles of the Registrant.
3.2(1) By-laws of Registrant.
10.1(1)(2) Master Technology License Agreement, dated December 29,
1999, between Citicorp Strategic Technology Corporation
and the Registrant.
10.2(1) Support Agreement, dated December 29, 1999, among Citicorp
Strategic Technology Corporation, 724 Solutions
International SRL and the Registrant.
10.3(2)(3) Licensed Affiliate Agreement between the Registrant and
Citibank, N.A.
10.4(4) Agreement and Plan of Merger, dated as of November 29,
2000, by and among the Registrant, Saturn Merger. Sub,
Inc. and TANTAU Software, Inc.
10.5(4) Form of Resale Restriction Agreement relating to former
security holders of TANTAU Software, Inc.
10.6(4) Form of Indemnification and Escrow Agreement relating to
former security holders of Tantau Software, Inc.
10.7.1(5) 724 Solutions Inc. 1997 Stock Option Plan, as amended and
restated.
10.7.2(5) Form of Stock Option Agreement pursuant to the 724
Solutions Inc. 1997 Stock Option Plan, as amended and
restated.
10.7.3(5) 724 Solutions Inc. 2000 Stock Option Plan, as amended and
restated.
10.7.4(5) Forms of Canadian and U.S. Stock Option Agreements
pursuant to the 724 Solutions Inc. 2000 Stock Option Plan,
as amended and restated, for option grants prior to
January 24, 2002.
10.7.5(5) Forms of Canadian and U.S. Stock Option Agreements
pursuant to the 724 Solutions Inc. 2000 Stock Option Plan,
as amended and restated (for option grants after January
24, 2002).
10.7.6 Registrant's Tantau Software Inc. 1999 Stock Option Plan,
as amended and restated for options granted prior to
January 2001.
10.7.7(5) Registrant's Tantau Software Inc. 1999 Stock Option Plan,
as amended and restated for options granted in January
2001.
10.7.8 Registrant's Form of Stock Option Agreement pursuant to
the Tantau Software Inc. 1999 Stock Option Plan for
options granted prior to January 2001.
10.7.9(5) Registrant's Form of Stock Option Agreement pursuant to
the Tantau Software Inc. 1999 Stock Option Plan for
options granted in January 2001.
10.7.10(6) Employment Agreement of Gregory Wolfond.
10.7.11(6) Employment Agreement of John J. Sims.
10.7.12 Employment Agreement of Christopher Erickson.
10.7.13(6) Employment Agreement of Karen Basian.
10.7.14 Employment Agreement of Harald Sammer.
10.7.15 Employment Agreement of Alistair Rennie.
10.7.16 Employment Agreement of Peter Klante.



59





21.1.(5) List of Subsidiaries.
23.1 Consent of KPMG LLP, Toronto.



--------------

(1) Incorporated by reference to the Registrant's Registration
Statement on Form F-1, File No. 333-90143.

(2) Confidential treatment has been requested with respect to certain
portions of the Exhibit pursuant to Rule 406 under the Securities
Act of 1933, as amended. Omitted portions have been filed separately
with the Securities and Exchange Commission.

(3) Incorporated by reference to the Registrant's Annual Report on Form
20-F, filed on June 29, 2000.

(4) Incorporated by reference to the Registrant's Registration
Statement on Form F-4, File No. 333-52698.

(5) Incorporated by reference to the Registrant's Tender Offer Statement
on Schedule TO, filed on January 24, 2002.

(6) Incorporated by reference to the Registrant's Annual Report on Form
10-K, filed on March 29, 2001.

(b) The Registrant did not file any reports on Form 8-K during the
three months ended December 31, 2001.


60



AUDITOR'S REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of 724 Solutions Inc. as at
December 31, 2001 and 2000 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

With respect to the consolidated financial statements for the years ended
December 31, 2001 and 2000, we conducted our audits in accordance with Canadian
generally accepted auditing standards and United States generally accepted
auditing standards. With respect to the consolidated financial statements for
the year ended December 31, 1999, we conducted our audit in accordance with
Canadian generally accepted auditing standards. Those standards require that we
plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2001 in accordance with
Canadian generally accepted accounting principles.



/S/ KPMG LLP



CHARTERED ACCOUNTANTS



TORONTO, CANADA

January 23, 2002


F-1


724 SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
Years ended December 31, 2001, 2000



2001 2000

- ---------------------------------------------------------------------------------------------
ASSETS

Current Assets
Cash and cash equivalents (NOTE 4) $60,279 $73,898
Short-term investments (NOTE 4) 28,857 92,726
Accounts receivable, net of allowance for
doubtful accounts of nil (2000 - $56) 8,335 4,376
Prepaid expenses and other receivables 2,630 2,260
- ---------------------------------------------------------------------------------------------
Total current assets 100,101 173,260

Fixed assets (NOTE 5) 12,525 11,297
Investments (NOTE 6) 5,347 12,196
Intangible and other assets (NOTE 7) 17,857 90,563

- ---------------------------------------------------------------------------------------------
Total assets $135,830 $287,316
- ---------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 2,728 $ 2,203
Accrued liabilities 15,667 18,198
Note payable (NOTE 8) 3,394 -
Deferred revenue 1,386 1,887
Deferred consideration (NOTE 3(B)) 1,414 1,190
- ---------------------------------------------------------------------------------------------
Total current liabilities 24,589 23,478

Leasehold inducements 284 375
Deferred consideration, net of current portion (NOTE 3(b)) 1,415 1,200
Note payable, net of current portion (NOTE 8) 296 -

Shareholders' equity (NOTE 9):
Unlimited common shares authorized, no par value:
58,375,761 common shares issued and
outstanding (2000 - 39,112,975) 763,033 357,158

Deferred stock-based compensation (19,582) (14,946)
Accumulated Deficit (634,153) (79,949)
Cumulative translation adjustment (52) -
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 109,246 262,263

Lease commitments (NOTE 11)
Contingent liabilities (NOTE 18)
Subsequent events (NOTE 19)

- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $135,830 $287,316
- ---------------------------------------------------------------------------------------------



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


F-2



724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except number
of share amounts and per share amounts)
Years ended December 31, 2001, 2000 and 1999



2001 2000 1999

---------------------------------------------------------------------------------------

Revenue:
Product:
Third parties $27,054 $ 2,828 $ -
Related parties (NOTE 13) - 11,363 1,697
Less stock-based compensation related to
software development (NOTES 9 AND 13) - (248) (1,644)

Services:
Third parties 16,763 2,570 206
Related parties (NOTE 13) 4,733 963
---------------------------------------------------------------------------------------
Total revenue 43,817 21,246 1,222

Operating expenses:
Cost of revenue 19,286 12,560 1,839
Research and development 39,052 28,876 7,158
Sales and marketing 36,807 12,531 2,574
General and administrative 15,904 13,868 3,609
Stock-based compensation:
Cost of revenue 411 653 19
Research and development 27,730 3,748 97
Sales and marketing 11,077 484 24
General and administrative 7,951 1,530 25
Depreciation 8,142 3,946 752
Amortization of intangible assets 80,172 18,843 -
Restructuring costs (NOTE 17(a)) 16,488 - -
Write-down of intangible and other
assets (NOTE 17(b)) 321,461 - -
Write-down of fixed assets (NOTE 17(a)) 3,156 - -

---------------------------------------------------------------------------------------
Total operating expenses 587,637 97,039 16,097
---------------------------------------------------------------------------------------

Loss from operations (543,820) (75,793) (14,875)
Interest income 5,773 11,582 1,044
Equity in loss of affiliate (1,591) (943) -
Loss on sale of investments (NOTE 17(c)) (4,591) - -
Write-down of investments (NOTE 17(c)) (9,975) - -
Dilution gain (NOTE 6(b)) - 1,890 -
---------------------------------------------------------------------------------------
Loss for the year $(554,204) $(63,264) $(13,831)
---------------------------------------------------------------------------------------
Basic and diluted loss per share (note 14) $(9.72) $(1.71) $(0.82)
---------------------------------------------------------------------------------------

Weighted average number of
shares used in computing basic
and diluted loss per share
(in thousands) 57,015 36,963 16,887
---------------------------------------------------------------------------------------


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3



724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars, except number of share amounts)
Years ended December 31, 2001, 2000 and 1999



Deferred
stock-based
Deferred compensation
stock-based related to
compensation software Cumulative Total
Common shares related to stock development Accumulated translation shareholders'
Number Amount options revenue deficit adjustment equity

- ---------------------------------------------------------------------------------------------------------------------------------
Balance

December 31, 1998 11,428,570 $ 7,752 $ (233) $ (1,472) $ (2,854) $ - $ 3,193

Loss for the year - - - - (13,831) - (13,831)

Deferred stock-based compensation - 5,841 (5,841) - - - -

Amortization of deferred
stock-based compensation - - 165 - - - 165

Allocation of deferred stock-based
compensation to software
development revenue and
deferred revenue - - - 1,472 - - 1,472

Issuance of common shares 17,973,855 71,169 - - - - 71,169
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,

December 31, 1999 29,402,426 84,762 (5,909) - (16,685) - 62,168

Loss for the year - - - - (63,264) - (63,264)

Deferred stock-based compensation - 14,364 (14,364) - - - -

Common share purchase options - 4,786 - - - - 4,786

Amortization of deferred
stock-based compensation - - 5,327 - - - 5,327

Issuance on exercise of options 765,339 627 - - - - 627

Issuance of common shares 8,945,210 262,619 - - - - 252,619
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,

December 31, 2000 39,112,975 357,158 (14,946) - (79,949) - 262,263

Loss for the year - - - - (554,204) - (554,204)

Cumulative translation adjustment - - - - - (52) (52)

Deferred stock-based compensation - 48,631 (50,306) - - - (1,675)

Amortization of deferred
stock-based compensation - - 45,670 - - - 45,670

Issuance on exercise of options 998,748 906 - - - - 906

Issuance of common shares 18,264,038 356,338 - - - - 356,338
- --------------------------------------------------------------------------------------------------------------------------------
Balance,

December 31, 2001 58,375,761 $763,033 $(19,582) $ - $(634,153) $ (52) $109,246



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4



724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years ended December 31, 2001, 2000 and 1999




2001 2000 1999

- --------------------------------------------------------------------------------
Cash flows from operating activities
Loss for the year $(554,204) $(63,264) $(13,831)
Items not involving cash:
Depreciation and amortization 88,314 22,789 752
Stock-based compensation 47,169 6,663 1,809
Other non-cash expenses (41) 1,722 -
Loss on sale of investments 4,591 - -
Write-down of investments 9,975 - -
Write-down of intangible and
other assets 321,461 - -
Write-down of fixed assets 3,156 - -
Equity in loss of affiliate 1,591 943 -
Dilution gain - (1,890) -
Change in operating assets and liabilities:
Accounts receivable 1,254 (1,255) (3,086)
Prepaid expenses and other receivables 654 (632) (1,347)
Accrued interest on short-term investments 1,847 (2,290) -
Accounts payable (218) 221 1,746
Accrued liabilities (9,570) 14,638 2,504
Deferred revenue (2,644) (4,486) 5,953
- ---------------------------------------------------------------------------------
Net cash flows used in operating activities (86,665) (26,841) (5,500)

Cash flows from financing activities:
Principal repayment of notes payable (1,310) - -
Issuance of common shares 10,916 165,555 71,169
Deferred charges - - (1,100)
- ---------------------------------------------------------------------------------
Net cash flows from financing activities 9,606 165,555 70,069

Cash flows from investing activities:
Purchase of fixed assets (10,744) (11,814) (2,258)
Sale (purchase) of short-term investments, net 62,022 (90,436) -

Purchase of intangible and other assets (9,091) (2,230) -
Proceeds on sale of investments 2,833 - -
Purchase of investments (11,828) (11,250) -
Acquisitions, net of cash received 30,248 (14,373) -
- ---------------------------------------------------------------------------------
Net cash flows from (used in) investing 63,440 (130,103) (2,258)
activities
- ---------------------------------------------------------------------------------
Increase (decrease) in cash and cash (13,619) 8,611 62,311
equivalents

Cash and cash equivalents, beginning of year 73,898 65,287 2,976

- ---------------------------------------------------------------------------------
Cash and cash equivalents, end of year $60,279 $73,898 $65,287
- ---------------------------------------------------------------------------------


Supplemental disclosure of cash flow information (NOTE 16).

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5



724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
Years ended December 31, 2001, 2000 and 1999

1. ORGANIZATION OF THE COMPANY:

The Company was established in July 1997 to provide internet
infrastructure solutions to financial institutions, enabling them to offer
personalized and secure mobile banking, investment and commerce services across
a wide range of internet-enabled wireless and consumer electronic devices. Since
that time, the Company has also begun to offer brokerage, credit card, payments
and alerts solutions in a variety of languages and currencies around the world.
In the second half of 2001, the Company announced its launch into the mobile
operator market, 724 Frameworks, alerts and secure payments solutions. All of
the Company's solutions can be implemented and integrated with customers'
existing systems and scaled or expanded to accommodate future growth.

2. SIGNIFICANT ACCOUNTING POLICIES:

These consolidated financial statements are stated in U.S. dollars, except
as otherwise noted. They have been prepared in accordance with Canadian
generally accepted accounting principles which, except as disclosed in note 15,
conform, in all material respects, with generally accepted accounting principles
in the United States.

(a) CONSOLIDATION:
These consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. The results of
operations for acquisitions are included in these consolidated financial
statements from the date of acquisition. Intercompany transactions and
balances are eliminated on consolidation.

(b) FINANCIAL INSTRUMENTS:


F-6


Financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, accrued liabilities,
deferred consideration and note payable. The Company determines the fair
values of its financial instruments based on quoted market values or
discounted cash flow analyses. Unless otherwise indicated, the fair values of
financial assets and financial liabilities approximate their recorded
amounts.

Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents consist
primarily of deposits with major commercial banks, corporate debt and
government treasury bills, the maturities of which are three months or less
from the date of purchase. Short-term investments consist of high-grade
liquid fixed income securities with maturities of more than three months but
less than one year. The Company performs periodic credit evaluations of the
financial condition of its customers. If necessary, allowances are maintained
for potential credit losses consistent with the credit risk of specific
customers.

(c) REVENUE RECOGNITION:
The Company recognizes product revenue in accordance with Section 3400 of The
Canadian Institute of Chartered Accountants' ("CICA") Handbook and has
applied relevant U.S. accounting standards, including the American Institute
of Certified Public Accountants' ("AICPA") Statement of Position ("SOP")
97-2, "Software Revenue Recognition," SOP 98-9, "Modification of SOP 97-2,
Software Recognition, With Respect to Certain Transactions," and the SEC
Staff Accountant Bulletin No.101, "Revenue Recognition in Financial
Statements."

The Company recognizes product revenue when the Company has an executed
license agreement with the customer, the software product has been delivered,
the amount of the fees to be paid by the customer is fixed and determinable,
and collection of these fees is deemed probable. The Company considers fees
related to arrangements with significant payments due beyond the company's
normal trading terms not to be fixed or determinable. If the fee is not fixed
or determinable, revenue is recognized as the payments become due from the
customer. If collectibility is not considered probable, revenue is recognized
when the fee is collected.

The Company enters into software license agreements that provide for future
royalty/license payments to be made based on a per user fee. These
arrangements often specify a quarterly minimum payment. Revenue from the
minimum payments is recognized on a straight-line basis. Revenue associated
with user fees in excess of any minimum payments is recognized when the
amount becomes determinable, generally on a quarterly basis.

The Company enters into arrangements with customers in which they agree to
deliver specified software currently and to deliver unspecified additional
software products in the future. Under these arrangements, the Company
recognizes revenue under the subscription accounting method. Under this
method, revenue is recognized ratably over the term of the arrangement
beginning with delivery of the first product.

Typically, software license agreements are multiple element arrangements as
they also include consulting, related maintenance and implementation services
fees. Arrangements that include consulting services are evaluated to
determine whether those services are essential to the


F-7


functionality of other elements of the arrangements. When such services are
considered essential, license and service revenue under the arrangement
are recognized as services are performed as discussed below. When services
are not considered essential, the entire arrangement fee is allocated to
each element in the arrangement based on the respective vendor specific
objective evidence of the fair value of each element. The revenue
allocable to the software license is recognized when the product revenue
criteria are met. The revenue allocable to the consulting services is
recognized as the services are performed. In instances where vendor
specific objective evidence exists for undelivered elements but does not
exist for delivered elements of a software arrangement, the Company uses
the residual method of allocation of the arrangement fees for revenue
recognition purposes.

Services revenue from consulting, implementation and other services are
recognized when the services are performed. Losses on professional services
contracts, if any, are recognized at the time such losses are identified.
Maintenance and support revenues paid in advance are non-refundable and are
recognized ratably over the term of the agreement, which is typically 12
months.

Hosting service arrangements typically include a software license, a one-time
setup fee and a monthly flat fee or a monthly fee based on the number of
users. The Company recognizes license revenue when the criteria for product
revenue are met, which include when the customer has the contractual right to
take possession of and operate the software at any time without significant
penalty and it is feasible for the customer to either run the software on its
own hardware or to contract with another party unrelated to the Company to
host the software. When these conditions do not exist, the software license
fee is recognized ratably over the term of the contract. The one-time setup
fee is recognized over the term of the hosting arrangement, and the
application hosting services revenue is recognized monthly as earned on a
fixed fee or variable rate basis.

The Company enters into arrangements with original equipment manufacturers
("OEM") and resellers. Under these arrangements, the Company grants the OEM
or reseller rights to sell products, which incorporate the Company's products
for a specific period of time. The Company's primary obligation to the OEM
and reseller is to deliver a product master and any bug fixes under warranty
provisions in order to maintain the product master in accordance with
published specifications. In some arrangements, the Company receives prepaid,
non-refundable minimum license fees from OEM or reseller. As the Company's
primary obligation to an OEM or reseller is fulfilled upon delivery of the
product master, the Company recognizes the prepaid, non-refundable minimum
license fees as revenue upon delivery of the product master and upon meeting
all other product revenue recognition criteria.

The Company enters into sales agreements with certain customers from whom the
Company concurrently acquires goods and services. In these instances, the
Company recognizes revenue on products sold in accordance with The Canadian
Institute of Chartered Accountants' Handbook Section 3830, "Non-Monetary
Transactions" and the United States Accounting Principles Board ("APB") No.
29, "Accounting for Nonmonetary Transactions," and Emerging Issues Task Force
("EITF") Issue No. 86-29, "Nonmonetary Transactions: Magnitude of Boot and
Exceptions to the Use of Fair Value, Interpretation of Accounting Principles
Board No. 29, Accounting for Nonmonetary Transactions." Transactions
involving the exchange of significant


F-8


consideration, are considered to be monetary transactions. Monetary
transactions and nonmonetary transactions that represent the culmination
of an earnings process are recorded at the fair value of the products
delivered or products and services received, whichever is more readily
determinable, providing these fair values are determinable within
reasonable limits. In determining the fair values of software
arrangements, the Company considered whether vendor-specific objective
evidence of fair value as defined in SOP 97-2, of the product delivered
and the fair value of the asset received exists. For nonmonetary
arrangements that do not represent the culmination of the earnings
process, the exchange is recorded based on the carrying value of the
products delivered, generally zero.

During the year ended December 31, 2001, the Company recognized license
revenue in the amount of $4,922,000 from nonmonetary transactions. The
Company did not have any non-monetary transactions in 2000 and 1999.

Product and services revenues that have been prepaid but do not yet qualify
for recognition as revenue under the Company's revenue recognition policy are
reflected as deferred revenue on the Company's consolidated balance sheet.

(d) RESEARCH AND DEVELOPMENT EXPENSES:
Costs related to research, design and development of software products are
charged to research and development expense as incurred. Software development
costs are capitalized beginning when a product's technological feasibility
has been established, which generally occurs upon completion of a working
model, and ending when a product is available for general release to
customers. All subsequent costs are expensed as incurred. To date, completing
a working model of the Company's products and the general release of the
products have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.

(e) INVESTMENT TAX CREDITS:
The Company is entitled to Canadian federal and provincial investment tax
credits, which are earned as a percentage of eligible research and
development expenditures incurred in each taxation year.

Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related
asset cost for items of a long-term nature, provided that the Company has
reasonable assurance that the tax credits will be realized.

(f) STOCK-BASED COMPENSATION:
The Company uses the intrinsic value method to account for employee
stock-based compensation. As such, deferred stock-based compensation is
recorded if, on the date of grant of the stock option to an employee, the
current market value of the underlying common share exceeds the exercise
price per share. Deferred stock-based compensation is recognized as an
expense over the vesting period of the option. Stock options granted to
consultants and other non-employees are accounted for using the fair value
method. Under this method, options granted are recognized at their fair value
as services are performed and options are earned.

(g) FIXED ASSETS:


F-9


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



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


The Company regularly reviews the carrying values of its fixed assets by
comparing the carrying amount of the asset to the expected future
undiscounted cash flows to be generated by the asset. If the carrying value
exceeds the amount recoverable, a write-down equal to the excess is charged
to the consolidated statements of operations. For the year ended December 31,
2001, in connection with the restructuring of its business, the Company
recorded a write-down of $3,156,000 related to redundant fixed assets (note
17).

(h) INVESTMENTS:
Investments in affiliates are recorded by the equity method when the
Company's ownership interest in the affiliate is greater than 20% but not
more than 50% and where the Company can exercise significant influence over
the affiliate.

Investments in affiliates in which the Company's ownership interest is less
than 20% and where the Company cannot exercise significant influence over the
affiliate are accounted for by the cost method. Under this method of
accounting, the investment is recorded at cost and only written down in value
if a decline in value is other than temporary.

(i) INTANGIBLE AND OTHER ASSETS:
Intangible and other assets are recorded at cost, and are amortized on a
straight-line basis at the following rates:



---------------------------------------------
Workforce 2 - 5 years
Acquired technology 1 - 5 years
Goodwill 2 - 5 years
--------------------------------------------


Goodwill represents the excess of the purchase price over the fair value of
net identifiable assets acquired in a business combination, and is being
amortized on a straight-line basis over a period of up to five years. On an
ongoing basis, management reviews the valuation and amortization of goodwill,
taking into consideration any events and circumstances which might impair the
fair value of the related asset. Intangible and other assets are written down
to fair value when decreases in value are considered to be other than
temporary, based upon expected cash flows of the acquired business (note 17).

(j) DEFERRED ACQUISITION COSTS:


F-10


The Company commences the deferral of business acquisition costs when the
proposed transaction has been specifically identified and the completion of
the transaction is considered to be more likely than not. The Company defers
only those costs that are direct and incremental costs incurred in connection
with the proposed transaction. The Company records deferred acquisition costs
as non-current assets and includes them in the cost of acquisition when a
transaction is completed. The Company expenses costs related to abandoned
proposed acquisitions in the year in which the Company determines that the
transaction is not likely to be completed.

(k) FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company is the U.S. dollar. Transactions of
the Canadian parent company and fully integrated foreign subsidiaries which
are denominated in currencies other than the U.S. dollar are translated using
the temporal method. Exchange gains and losses arising from these
transactions are included in the results of operations for the year.
Transactions of foreign subsidiaries which are considered self-sustaining are
translated using the current rate method and resulting exchange gains and
losses are recorded as a Cumulative Translation Adjustment in Shareholders'
Equity.

The aggregate foreign currency gain (loss) included in determining loss for
the three years ended December 31, 2001 are as follows: 2001 - $113,000; 2000
- $(938,000); 1999 - $105,000.

(l) INCOME TAXES:
The Company provides for income taxes under the liability method. Under the
liability method, future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying value of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carryforwards. Future
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the year that
includes the enactment date. To the extent that the recoverability of future
tax assets is not considered to be more likely than not, a valuation
allowance is provided.

(m) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingencies at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting year.
Actual results could differ from those estimates.

3. ACQUISITIONS:

(a) 2001:

TANTAU Software, Inc.:
On January 16, 2001, the Company acquired all of the issued and outstanding
shares and assumed all of the common share purchase options of TANTAU
Software, Inc. ("TANTAU")


F-11


in exchange for the issuance of 17,119,869 common shares and 2,011,055
replacement common share purchase options.

Of the 17,119,869 common shares issued, 14,276,536 common shares were fully
vested shares, with the balance of 2,843,333 subject to future vesting under
the terms of the assumed TANTAU stock option plan. The fair value of the
fully vested shares issued has been recorded as a component of the purchase
consideration. The values of the unvested shares and the common share
purchase options have been allocated between purchase consideration and
deferred stock-based compensation. The Company has determined the amount
attributable to deferred stock-based compensation as the proportionate share
of the intrinsic value of the unvested shares and options pertaining to the
service period subsequent to the date of acquisition. The amount attributable
to purchase consideration represents the fair value of the unvested shares
and options as of the purchase date less the amount recorded as deferred
stock-based compensation related to these unvested shares and options.

The purchase price has been determined to be $407,734,000 including
acquisition costs of $9,385,000. The deferred stock-based compensation
related to the unvested shares and replacement stock options has been
determined to be $53,280,000.

The acquisition has been accounted for by the purchase method with the fair
value of the consideration paid being allocated to the fair value of the
identifiable assets acquired and liabilities assumed on the closing date as
set out below.




FAIR VALUE

- ------------------------------------------------------------------------
Net tangible assets acquired:
Cash and cash equivalents $ 30,248
Accounts receivable 5,213
Other assets 1,605
Fixed assets 1,884
Accounts payable and accrued liabilities (7,782)
Deferred revenue (2,143)
Note payable (5,000)
----------------------------------------------------------------------
24,025
Allocation of the net purchase price:
Goodwill 302,859
Intangible assets 27,570
Deferred stock-based compensation 53,280
----------------------------------------------------------------------
383,709

- ------------------------------------------------------------------------
$ 407,734
- ------------------------------------------------------------------------

Consideration paid:
Share and stock option consideration $ 398,349
Costs of acquisition 9,385

- ------------------------------------------------------------------------
$ 407,734
- ------------------------------------------------------------------------



Amortization expense of the goodwill and acquired intangible assets of
$49,375,000 has been recorded in the year ended December 31, 2001 (2000 nil).


F-12


In September 2001, the Company reviewed the carrying values of goodwill and
intangible and other assets related to the TANTAU acquisition and,
accordingly, recorded a significant write-down (note 17(b)).

The table below reflects the unaudited pro forma consolidated results of
the Company and TANTAU for the year ended December 31, 2000 as if the
acquisition had taken place on January 1, 2000:




------------------------------------------
(Unaudited)
Revenue $31,477
Pro forma loss for the year (223,390)
Pro forma loss per common share (4.43)
------------------------------------------


(b) 2000:

(i) YRLess Internet Corporation:
On March 17, 2000, the Company acquired all the outstanding common shares
of YRLess Internet Corporation ("YRLess"), an internet message gateway
developer, for total cash consideration of approximately $1,272,000,
including acquisition costs of approximately $34,000. The transaction has
been accounted for by the purchase method, with the results of operations
included in these financial statements from the date of acquisition. The
cash consideration paid has been allocated to the net identifiable assets
acquired based on their fair values, and the excess of the purchase price
over the fair value of the net assets acquired has been recorded as
goodwill and is being amortized over 36 months.

In addition, the Company committed to pay approximately $4,401,000 in
common shares, or cash if the Company agrees to a cash payment, over the
next three years. The Company intends to settle this liability in shares.
As the purchase agreement contains certain terms that may require the
Company to settle the payments in cash, and these terms are out of the
control of the Company, the commitment is being recorded as a liability
under the heading deferred consideration. Of the additional $4,401,000 in
consideration, $2,640,000 was contingent on certain former shareholders of
YRLess remaining employees of the Company. As at December 31, 2001, the
contingent terms of the payments were no longer in effect, resulting in
the Company recording the remaining contingent compensation as an expense
in 2001. Total compensation expense related to this commitment amounted to
$3,293,000 in 2001 (2000 - $1,108,000). The Company has recorded the
unpaid portion of the $4,401,000 commitment as a liability. The unpaid
amount is due $1,414,000 in 2002, and $1,415,000 in 2003.

(ii) Ezlogin.com, Inc.:
On June 16, 2000, the Company acquired all of the outstanding shares of
Ezlogin.com, Inc. ("Ezlogin"), a privately held company incorporated in
California in the business of providing internet infrastructure tools for
user-driven personalization. The transaction was accounted for by the
purchase method, with the results of operations included in these
financial statements from the date of acquisition. The purchase price of
approximately $55,800,000, before acquisition costs, was satisfied by the
issuance of 1,003,594 common


F-13


shares of the Company and the assumption of the existing Ezlogin
option plan which, if all options outstanding under the plan are
exercised, would result in the issuance of an additional 91,796 common
shares of the Company. In addition, the Company incurred $3,000,000 in
costs related to the acquisition. The excess of the purchase price over
the fair value of the net identifiable assets of Ezlogin at the date of
acquisition of $56,900,000 was allocated to goodwill and other
intangible assets and was being amortized over 24 months. Amortization
expense of the resulting goodwill and acquired intangible assets of
$21,534,000 has been recorded in the year ended December 31, 2001.

In September 2001, the Company reviewed the carrying value of goodwill
related to the Ezlogin acquisition and, accordingly, recorded a write-down
of the remaining carrying value (note 17(b)).


(iii) Spyonit.com, Inc.:
On September 12, 2000, the Company acquired all of the outstanding shares
of Spyonit.com, Inc. ("Spyonit"), a privately held company incorporated in
Delaware, which develops software to monitor the internet and other
content sources for items of interest to end-users. The transaction has
been accounted for by the purchase method, with the results of operations
included in these financial statements from the date of acquisition. The
purchase price of approximately $40,000,000 was satisfied by the issuance
of 1,041,616 common shares of the Company and $2,000,000 in cash. As part
of the terms of purchase, up to 137,062 common shares of the total common
shares issued are subject to repurchase at a minimum value if the vendors
do not remain employees of the Company through September 2003. The Company
has recorded deferred stock-based compensation in the amount of $6,000,000
related to the 137,062 common shares and is amortizing this amount as
compensation expense on a straight-line basis over three years. In
addition, the Company incurred $200,000 in costs related to the
acquisition. The excess of the purchase price over the fair value of the
net tangible assets of Spyonit at the date of acquisition of $39,900,000
has been allocated to goodwill and acquired intangible assets and is being
amortized over 60 months starting September 30, 2000. Amortization expense
of the resulting goodwill and acquired intangible assets of $6,518,000 has
been recorded in the year ended December 31, 2001.

In September 2001, the Company reviewed the carrying value of goodwill and
intangible and other assets related to the Spyonit acquisition and,
accordingly, recorded a significant write-down (note 17(b)).

The transactions are summarized as follows:




YRLESS EZLOGIN SPYONIT

----------------------------------------------------------------------------------------
Net identifiable assets acquired at fair values:
Cash $ - $ 1,517 $ 66
Fixed assets 17 529 87
Other assets 43 272 38
Current liabilities (177) (486) (109)
Acquired technology - 2,290 7,290
Workforce and non competition agreements - 560 540
----------------------------------------------------------------------------------------




F-14





Fair value of identifiable assets (117) 4,682 7,912

Goodwill 1,389 54,103 32,063

----------------------------------------------------------------------------------------
$ 1,272 $ 58,785 $ 39,975
----------------------------------------------------------------------------------------

Purchase price:
Cash $ 1,238 $ - $ 2,000
Common shares - 51,186 37,775
Fair value of options - 4,599 -
Acquisition expenses 34 3,000 200

----------------------------------------------------------------------------------------
$ 1,272 $ 58,785 $ 39,975
----------------------------------------------------------------------------------------



4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:

Cash consists of deposits with major financial institutions. Cash
equivalents consist of short-term deposits and high-grade commercial paper with
an original term to maturity of three months or less at the date of purchase.

All short-term investments are classified as held-to-maturity because the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion discounts to maturity. The Company owns
no short-term investments that are considered to be trading securities or
available-for-sale securities.

The components of cash and cash equivalents and short-term investments are
summarized as follows:




2001 2000

- ---------------------------------------------------------------------
Cash and cash equivalents:
Cash $ 6,922 $ 1,297
Cash equivalents:
Corporate debt 49,000 -
Government T-bills 4,357 32,086
Corporate bonds - 33,374
Corporate commercial paper - 7,141

- ---------------------------------------------------------------------
$ 60,279 $ 73,898
- ---------------------------------------------------------------------
Short-term investments:
Held-to-maturity:
Corporate commercial paper $ 364 $ 90,546
Government term deposits - 2,180
Term deposit 2,285 -
Government bond 5,989 -
Government T-Bills 19,119 -
Corporate bond 1,100 -

- ---------------------------------------------------------------------
$ 28,857 $ 92,726
- ---------------------------------------------------------------------




F-15


The Company has entered into letters of credit in the aggregate amount
of $2,285,000 to guarantee payments under future contractual lease
commitments. The letters of credit are secured by segregated instruments
included in short-term investments on the consolidated balance sheet.

5. FIXED ASSETS:



2001 2000
------------------------------------------------------------------

Computer equipment $ 11,845 $ 7,770
Computer software 6,606 2,602
Office furniture and equipment 2,408 2,142
Leasehold improvements 3,463 3,150
------------------------------------------------------------------
24,322 15,664

Less accumulated depreciation and 11,797 4,367
amortization
------------------------------------------------------------------
$ 12,525 $ 11,297
------------------------------------------------------------------


6. INVESTMENTS:



2001 2000
- ---------------------------------------------------------------------

Investments, at cost:
Corillian Corporation $ - $ 7,000
Neomar Inc. 3,500 3,500
Webhelp Inc. 9,558 -
CashEdge Inc. 2,000 -
Other 264 -
- ---------------------------------------------------------------------
15,322 10,500
Less provision for impairment in value 9,975 -
- ---------------------------------------------------------------------
5,347 10,500

Investments, at equity:
Maptuit.com Inc. - 1,696
- ---------------------------------------------------------------------
$ 5,347 $ 12,196
- ---------------------------------------------------------------------


(a) 2001:

(i) Investment in CashEdge Inc.:

On May 31, 2001, the Company acquired an 11.0% interest in CashEdge
Inc. ("CashEdge") for $2,000,000 in cash. CashEdge is a privately
held company in the business of developing software that provides
end-users with the ability to aggregate account information
electronically via the internet. The investment is accounted for
using the cost method of accounting. In addition, the Company also
entered into a reseller arrangement with CashEdge, whereby CashEdge
was appointed a non-exclusive distributor of the Company's Alerts
and Wireless Aggregation product and the Company was appointed as a
non-exclusive distributor of CashEdge's Aggregation Service. As at
December 31, 2001, no sales between the parties have taken place.

(ii) Investment in Webhelp Inc.:

F-16



On March 26, 2001, the Company entered into a series of
transactions with Webhelp Inc. ("Webhelp"), a private company
incorporated in Delaware.

The Company acquired 4,087,193 Series C convertible preferred
shares of Webhelp for cash of $7,621,000 and share consideration of
196,836 common shares of the Company valued at $1,937,000. At March
26, 2001, this investment represented a shareholder interest of
approximately 11% in Webhelp (December 31, 2001 - 9.4%). The
investment is being accounted for on a cost basis.

On March 26, 2001, the Company purchased the right, title and
interest in Webhelp's "Web Application Event Framework" technology
("WAEF"). This technology is designed to allow mobile applications
to be executed with real-time interaction. As part of the
arrangement, Webhelp retained a worldwide right to use the WAEF in
its current businesses. The aggregate purchase price consisted of
820,150 common shares of the Company and additional consideration
based on a fixed percentage of future sales of WAEF and products
incorporating WAEF for a period of three years. The value ascribed
to the shares issued on acquisition amounted to approximately
$8,070,000 and has been recorded as acquired technology. The
Company intends to expense, as a selling cost, any amounts paid
under the conditional consideration obligations. No amounts have
been paid or are payable to December 31, 2001 under the contingent
consideration arrangement. On March 26, 2001, Webhelp purchased
from the Company a perpetual license for a fixed number of users of
the Company's Wireless Internet Platform ("WIP") for a
non-refundable fee based on commercial rates that are comparable to
rates charged to other customers.

In September 2001, in light of the restructuring of the Company's
business, the Company reviewed the carrying value of the WAEF
technology and, accordingly, recorded a significant write-down
(note 17(b)).

(iii) Write-down of investments:

During the year ended December 31, 2001, the Company realized
losses on the sale of investments of $4,591,000 and recorded a
provision of $9,975,000 against investments as its investments have
experienced significant other than temporary declines in their
values (note 17).

(b) 2000:

(i) On March 8, 2000, the Company purchased a one-third interest in
Maptuit.com Inc. ("Maptuit") for cash consideration of $750,000.
Maptuit is a privately held Canadian company in the business of
developing directional mapping software and providing online
directional services, mapping services and spatial relational
search services to its customers.

The investment in Maptuit has been accounted for using the equity
method. Under the equity method, the original cost of the
investment is adjusted for the Company's share of post-acquisition
income or losses, less dividends only to the extent that the
carrying value of the investment is no less than zero. The excess
of the cost of the shares of Maptuit over the Company's
proportionate interest in the net book value of Maptuit's net
assets on the

F-17



date of acquisition amounted to approximately $677,000. This excess
is being amortized on a straight-line basis over three years.

On September 27, 2000 and December 6, 2000, Maptuit completed two
separate private placements through the issuance of convertible
preferred shares for aggregate proceeds of $8,000,000. In 2000, the
Company recorded a dilution gain of $1,890,000, which reduced its
investment from a 33.3% interest to a 24.88% interest.

(ii) In April 2000, the Company acquired 875,000 common shares (then
representing approximately a 2.9% interest) for $7,000,000 in cash
in Corillian Corporation ("Corillian"), a provider of eFinance
solutions for the internet. Corillian is a U.S. publicly traded
company on the NASDAQ exchange trading under the symbol CORI. In
2000, the investment was accounted for using the cost method of
accounting. During 2001, the Company sold its shares in Corillian
for a loss of approximately $4,133,000.

(iii) In June 2000, the Company acquired a 9.5% interest (December 31,
2001 -5.984%; 2000 - 5.98%) in Neomar Inc. ("Neomar") for
$3,500,000 in cash. Neomar is a privately held company in the
business of providing Wireless Application Protocol ("WAP")-based
services for personal digital assistants. In addition, the Company
has entered into a license agreement with Neomar to license the WAP
solution and incorporate it into the Company's Financial Services
Platform. The investment is accounted for using the cost method of
accounting.

7. INTANGIBLE AND OTHER ASSETS:



2001 2000
- ------------------------------------------------------------------------

Goodwill $ 401,698 $ 87,387
Deferred acquisition costs - 9,385
Acquired technology and other assets 41,164 12,634
----------------------------------------------------------------------
442,862 109,406

Less accumulated amortization 103,544 18,843
Less impairment charge (note 17(b)) 321,461 -
- ------------------------------------------------------------------------
$ 17,857 $ 90,563
- ------------------------------------------------------------------------


Goodwill represents the excess of the purchase price over the fair value
of net assets acquired and is being amortized on a straight-line basis over
varying periods of up to five years. On an ongoing basis, management reviews the
valuation and amortization of intangible and other assets, taking into
consideration any events and circumstances which might impair the fair value of
the related assets. Intangible and other assets are written down to fair value
when decreases in value are considered to be other than temporary, based upon
expected cash flows related to the acquired assets. During the fiscal year, the
Company recorded an impairment charge of $321,461,000 related to intangible and
other assets (note 17).

8. NOTE PAYABLE:

The note payable bears interest at 10% per annum and is repayable in
monthly blended payments of $300,000 with the balance due February 1, 2003. The
note payable is secured by the

F-18



accounts receivable, furniture and equipment and intangible assets of TANTAU
and an assignment of specific patents related to technology acquired in the
TANTAU acquisition.

9. SHAREHOLDERS' EQUITY:

(a) COMMON SHARE ISSUANCES:

2001:
During 2001, in connection with the acquisition of TANTAU, the Company
issued 17,119,869 common shares and 2,011,055 replacement common share purchase
options with an aggregate value of approximately $398,349,000 of which
$53,280,000 was recorded as deferred stock-based compensation (note 3). In
addition, the Company also issued 1,016,986 common shares related to the
Company's investment in Webhelp and the acquisition of WAEF (note 6(a)(ii)) and
127,163 common shares related to the acquisition of YRLess (note 3(b)(i)).

2000:
In February 2000, the Company issued 6,900,000 common shares through an
initial public offering at $26.00 per common share on the NASDAQ National Market
and The Toronto Stock Exchange for net proceeds of approximately $164,200,000.

During 2000, in connection with the acquisitions of Ezlogin and Spyonit,
the Company issued an aggregate of 2,045,210 common shares with an ascribed
aggregate value of $89,000,000 (note 3).

1999:
In 1999, the Company issued 3,200,000 common shares to Bank of America
("BA") for gross proceeds of $12,243,446.

In 1999, the Company issued to Citicorp Strategic Technology Corporation
6,400,000 common shares for gross proceeds of $24,480,000.

In August 1999, the Company issued 6,400,000 common shares to Sonera
Corporation for gross proceeds of $24,480,000.

In October 1999, the Company completed three private placements for a
total issuance of 1,973,856 common shares at prices of $3.83 and $7.50 per share
and a warrant in respect of 666,668 common shares exercisable at a price of
$7.50 per share for total proceeds of $10,000,000. This warrant expired
unexercised on January 14, 2000.

On December 30, 1999, all of the outstanding and reserved common shares
were split on a basis of two-for-one. The Company's share capital and loss per
share have been restated on a retroactive basis to give effect to this share
split.

(b) STOCK OPTION PLANS:

The Company currently has a Canadian stock option plan, a U.S. stock
option plan and a 2000 stock option plan (the "Plans"), each of which
is intended to attract, retain and motivate employees, officers,
directors and consultants. The Company also has two option plans that

F-19




were adopted upon the acquisitions of Ezlogin and TANTAU (the "adopted
plans"). The stock option committee, in conjunction with the
compensation committee, determines, among other things, the eligibility
of individuals to participate in the Plans and the term, vesting
periods and the exercise price of options granted under the Plans. The
Company no longer issues stock options under the Canadian, U.S.,
Ezlogin and TANTAU plans and has reserved an aggregate of 10,500,000
common shares for issuance under the 2000 stock option Plan.

The Canadian stock option plan was adopted in September 1997. All
options granted under the plan have a maximum term of 10 years and have
an exercise price per share of no less than the fair market value of
the underlying common shares on the date of the option grant as
determined by the Board of Directors or duly authorized committee as at
the time of the grant. If an optionee's employment is terminated
without cause, the vested portion of any grant will remain exercisable
until its expiration date subject to compliance with certain
non-competition and non-solicitation obligations. In the event of
termination for cause, the vested portion of any grant will remain
exercisable for a period of 30 days after the date of termination.
Unvested options will expire on termination, except for such portion
thereof which would have vested within six months or within the
required statutory notice period following a termination without cause,
whichever is earlier, or within one year if termination is due to death
or disability. If a change of control of the Company occurs, all
options become immediately vested and exercisable.

The U.S. stock option plan was adopted in October 1999. The plan
provides for the grant of both incentive stock options and
non-qualified stock options. Incentive stock options granted under the
plan have a maximum term of 10 years, or five years in the case of
incentive stock options granted to an employee who owns common shares
having more than 10% of the voting power of the Company. The exercise
price of incentive stock options is the fair market value of common
shares on the date of the grant, or 110% of the fair market value in
the case of an incentive stock option granted to an employee who owns
common shares having more than 10% of the voting power of the Company.
Non-qualified stock options granted under the plan have a maximum term
of 10 years and an exercise price of no less than 85% of the fair
market value of the common shares on the date of the grant, or 110% of
the fair market value for those employees who own common shares
representing more than 10% of the voting power. Restricted shares
granted under the plan have a maximum term of 10 years and an exercise
price of no less than 85% of the fair market value of the common shares
on the date of the grant, or 100% of the fair market value in the case
of restricted shares granted to an employee who owns common shares
having more than 10% of the voting power.

Under the Canadian and U.S. stock option plans, the Company has
the right to repurchase options from optionees after termination of
employment on certain terms.

The 2000 stock option plan was adopted in December 1999 and
replaced, on a prospective basis, the Canadian and U.S. stock option
plans. The stock options granted under the Canadian and U.S. stock
option plans prior to the date of completion of the IPO, continued to
be effective and governed by the terms of the plans under which they
were granted. The options granted under the 2000 plan have a maximum
term of 10 years and an exercise price no less than the fair market
value of the common shares on the date of the grant as determined by
the Board of Directors or duly authorized committee at the date of the
grant. Options held by

F-20



any person under the new plan, together with any other options granted
to that person may not at any time exceed 5% of the aggregate number of
common shares outstanding. If a change of control of the Company
occurs, all options granted under this plan will become immediately
vested and exercisable.

On June 16, 2000, the Company assumed the Ezlogin stock option
plan in connection with its acquisition of Ezlogin. In aggregate, the
Company assumed options to issue common shares of the Company totalling
91,796 to the Ezlogin option holders. The Company does not plan to
issue any additional options under the Ezlogin stock option plan in the
future. Instead, any of the former directors, officers, employees and
consultants of Ezlogin will be issued options under the Company's 2000
stock option plan.

On January 17, 2001, the Company assumed the TANTAU stock option
plan in connection with its acquisition of TANTAU. In aggregate, the
Company assumed options to issue common shares of the Company totaling
1,879,992. The Company does not plan to issue any additional options
under the TANTAU stock option plan in the future. Instead, any of the
former directors, officers, employees and consultants of TANTAU will be
issued options under the Company's 2000 stock option plan.

The TANTAU plan provided for the grant of both incentive stock
options and non-qualified stock options. Incentive stock options
granted under the plan have a maximum term of 10 years, or five years
in the case of incentive stock options granted to an employee who owned
common shares having more than 10% of the voting power of TANTAU. For
options granted prior to 2001, optionees can exercise such options
prior to full vesting. The shares issued upon such "early exercise" are
subject to a repurchase agreement that lapses at the same rate as the
options would have continued to vest. Under such agreement, the Company
may repurchase the "unvested" shares at the price originally paid by
the optionee on exercise. In the event of termination and to the extent
unexercised and exercisable, options issued under the TANTAU plan
generally remain exercisable for a period of 90 days after the date of
termination. If termination is due to death or disability, the right to
exercise the option will generally expire in one year.

F-21



A summary of the status of the Company's options under the as of December 31,
2001 is as follows:



Weighted
average
Weighted remaining Number Weighted
Number average contractual of average
of exercise life options exercise
Exercise price range options price (years) exercisable price
- ---------------------------------------------------------------------------------

$ 0 - $ 1.95 1,807,061 $ 0.95 5.85 1,197,658 $ 0.65
$ 2.11 - $4.87 532,863 3.03 5.60 358,350 3.09
$ 5.19 - $10.00 1,754,271 7.33 8.20 335,530 9.95
$10.08 - $15.00 107,000 12.64 6.76 - -
$15.01 - $20.00 787,409 16.69 8.50 19,258 17.37
$20.31 - $24.94 1,389,975 20.55 7.85 10,222 22.77
$25.35 - $49.08 590,941 39.37 7.14 227,999 38.64
$51.22 - $197.29 174,794 79.17 7.46 60,697 80.32

- ---------------------------------------------------------------------------------
7,144,314 13.49 7.27 2,209,714 8.92
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------


The following table summarizes the continuity of options issued under the Plans:



- ---------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------
Weighted Number Weighted Number Weighted
Number average of average of average
of exercise options exercise options exercise
options price price price
- ---------------------------------------------------------------------------------

Outstanding,
beginning of 3,973,522 $26.65 2,876,930 $ 2.81 1,865,000 $ 0.49
year
Granted 6,932,282 13.98 2,238,836 50.84 1,071,196 8.44
Exercised (998,748) 1.04 (765,339) 0.81 - -
Cancelled (2,762,742) 29.32 (376,905) 40.76 (59,266) 3.42

- ---------------------------------------------------------------------------------
Outstanding, 7,144,314 13.49 3,973,522 26.65 2,876,930 2.81
end of year
- ---------------------------------------------------------------------------------

Options
exercisable,
end of year 2,209,714 $ 8.92 1,264,491 $ 3.15 1,237,926 $ 0.72
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------


Subsequent to year end, the Company announced a voluntary stock option exchange
program. For Details see note 19(b).

F-22




(c) DEFERRED STOCK-BASED COMPENSATION:

Deferred stock-based compensation related to employee options
represents amounts that the Company recorded as a result of granting
stock options to its employees at less than the fair market value, for
financial reporting purposes, of the Company's shares on the date of
the grant. Deferred stock-based compensation relating to options issued
to employees is recognized as an expense over the vesting period of the
stock option. Deferred stock-based compensation related to options and
unvested shares issued in connection with business acquisitions and
options issued under the Company's Plans amounted to $53,280,000 for
the year ended December 31, 2001 (2000 - $14,364,000; 1999 -
$5,841,000). Amortization of deferred stock-based compensation amounted
to $45,670,000 for the year ended December 31, 2001 (2000 - $5,327,196;
1999 - $165,000). Substantially, all of the deferred stock-based
compensation recorded in 2001 relates to the Company's acquisition of
TANTAU (note 3). This amount is recognized as an expense over a maximum
period of two years, which is the maximum vesting period of the stock
options and unvested shares.

10. INCOME TAXES:

The provision for income taxes differs from the amount computed by applying the
statutory income tax rate to loss before income taxes. The sources and tax
effects of the differences are as follows:



- ---------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------


Basic rate applied to loss
before provision for
income taxes $(227,207) $ (27,156) $ (6,168)
Adjustments resulting from:
Change in enacted rates 14,560 - -
Foreign losses affected at
lower rates 17,780 6,935 991
Stock-based compensation
not deductible for tax 14,165 2,815 789
Amortization and write-down
of intangibles 159,104 7,962 -
Other (6,392) (4,742) 100
- ---------------------------------------------------------------------------------
(27,990) (14,186) (4,288)

Change in valuation
allowance 27,990 14,186 4,288

- ---------------------------------------------------------------------------------
Income taxes $ - $ - $ -
- ---------------------------------------------------------------------------------


Significant components of the Company's future tax assets are as follows:



- ---------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------

Research and development expenses
deferred for income tax purposes $ 5,446 $ 4,387
Net operating losses carried forward 28,909 11,427

F-23






Reserves 3,295 -
Share issue cost 2,836 5,383
Fixed assets 3,601 1,326
Capital losses carried-forward 6,146 -
- ---------------------------------------------------------------------------------

Future tax asset 50,233 22,523

Less:
Future tax liability related
to acquired technology 3,500 3,781
Valuation allowance 46,733 18,742
- ---------------------------------------------------------------------------------
50,233 22,523
- ---------------------------------------------------------------------------------
$ - $ -
- ---------------------------------------------------------------------------------


The net operating losses carried forward are subject to expiry if
the Company does not utilize the losses prior to the taxation imposed
date at which the losses expire. The year in which the losses expire
depends upon the year in which the losses arose and the jurisdiction in
which the losses where incurred. Of the $28,900,000 in future tax asset
related to operating losses carried forward, the majority of the asset
of approximately $20,800,000 does not begin to expire until 2019 and
approximately $2,500,000 is not subject to expiry. The remaining
balance of $5,600,000 expires as to approximately $2,100,000 in 2004,
$900,000 in 2005, $1,300,000 in 2006, $400,000 in 2009 and $900,000 in
2010.

In assessing the realizability of future tax assets, management
considers whether it is more likely than not that some portion or all
of the future tax assets will not be realized. The ultimate realization
of future tax assets is dependent upon the generation of future taxable
income during the years in which those temporary differences become
deductible. Management considers projected future taxable income,
uncertainties related to the industry in which the Company operates,
and tax planning strategies in making this assessment. In order to
fully realize the future tax assets, the Company will need to generate
future taxable income of approximately $190,000,000 prior to the
expiration of the net operating losses carried forward in the years
2003 to 2019. Due to the uncertainties related to the industry in which
the Company operates, the tax benefit of the above carried forward
amounts have been completely offset by a valuation allowance.

11. LEASE COMMITMENTS:

Future minimum lease payments under non-cancellable operating leases for
premises and equipment at December 31, 2001 are as follows:


-----------------------------------------------------

2002 $ 2,045
2003 2,049
2004 1,665
2005 1,121
2006 and thereafter 2,230
-----------------------------------------------------

F-24





$ 9,110
-----------------------------------------------------


Rent expense for the year ended December 31, 2001 was $6,556,000 (2000 -
$3,733,000; 1999 - $590,000). The Company is also responsible for certain common
area costs at its various leased premises.

As part of the restructuring charge, the Company has recorded a liability
of $6,594,000 for future lease commitments for premises which the Company has
vacated. The commitments for these leases have been excluded from the amounts in
the table above. The liability has been estimated as the future amount in which
the Company is contractually obligated to pay, related to vacated leased
premises, less an estimated amount for future potential sublease arrangements.

12. SEGMENTED INFORMATION:

The Company operates in a single reportable operating segment, that is,
the design and delivery of an internet infrastructure platform that enables
financial institutions and other customers to deliver financial information and
services to a range of internet-enabled devices. The single reportable operating
segment derives its revenue from the sale of software and related services.
Information about the Company's geographical net revenue and assets is set forth
below:



- ------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------

Net revenue by geographic locations:
North America $ 31,962 $ 20,909 $ 1,222
Europe 6,617 - -
Asia Pacific 5,238 337 -
- ------------------------------------------------------------------------
$ 43,817 $ 21,246 $ 1,222
- ------------------------------------------------------------------------




- ----------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------
INTANGIBLE INTANGIBLE
FIXED AND OTHER FIXED AND OTHER
ASSETS ASSETS ASSETS ASSETS

North America $ 11,130 $ 17,857 $ 10,920 $ 90,563
Europe 1,272 - 150 -
Asia Pacific 123 - 227 -
- ----------------------------------------------------------------------------
$ 12,525 $ 17,857 $ 11,297 $ 90,563
- ----------------------------------------------------------------------------


For the year ended December 31, 2001, two customers accounted for 10%
and 11% of revenue, respectively.

For the year ended December 31, 2000, four customers accounted for 43%,
18%, 15% and 14% of revenue, respectively. For the year ended December 31, 1999,
three customers accounted for 100% of revenue.

F-25



At December 31, 2001, three customers accounted for 20%, 14% and 10% of
the accounts receivable balance. At December 31, 2000, three customers
accounted for 41%, 25% and 16% of the accounts receivable balance.

13. RELATED PARTY TRANSACTIONS:

In 2000 and 1999, the Company transacted with certain shareholders who
owned in excess of 10% of the outstanding common shares of the Company at any
point during that year. In 2001, these shareholders ceased to own in excess
of 10% of the outstanding common shares of the Company, at any point during
the year, and are therefore no longer considered to be related parties for
the purposes of these financial statements. The following table and narrative
sets out the balances and transactions with these shareholders in the years
when they were related parties. These amounts have been recorded at the
exchange amount:



- -----------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------

Related party balances:
Accounts receivable, net of allowance for doubtful accounts $- $2,904 $2,051
Deferred revenue, net of deferred stock-based compensation
(2000 - NIL; 1999 - $248) - 1,400 4,125
- -----------------------------------------------------------------------------------------------





- -----------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------

Related party transactions:
Net revenue:
Product, net $- $11,115 $ 53
Services - 4,733 963
- -----------------------------------------------------------------------------------------------


(a) On April 30, 1998, the Company entered into a share subscription
agreement and a technology license agreement with Bank of Montreal
("BMO"). Pursuant to the share subscription agreement, on April 30,
1998, BMO subscribed for 1,000,000 of the Company's common shares for
Cdn. $1,000,000 and received an option to subscribe for 2,428,570
additional common shares for Cdn. $1,000,000, exercisable in the event
that BMO extended its technology license agreement for a second year and
paid the second year's technology licensing fee. In October 1998, upon
exercising its right to extend the technology license agreement, BMO
exercised the option and subscribed for 2,428,570 shares for Cdn.
$1,000,000. On the date of exercise, the fair value of the 2,428,570
common shares was determined to be Cdn. $6,071,425, resulting in a
stock-based compensation charge related to software development revenue
of Cdn. $5,071,425 (U.S. $3,286,943). The stock-based compensation was
attributed to the software development revenue over the term of the
technology license agreement in proportion to the revenue recognized in
the first and second years under the agreement. As of December 31, 2000,
the deferred stock-based compensation has been fully expensed. As at
December 31, 2001 and 2000, BMO owned less than 10% of the Company's
common shares. In 1999, BMO owned approximately 11.7%, of the Company's
outstanding common shares.

The BMO technology license agreement had an initial term of 10 months
commencing on April 30, 1998 and is renewable in exchange for a
worldwide perpetual license for all technology existing at the
commencement of the license period and all technology developed

F-26


during each term of the agreement. BMO has a right to a payment, if any,
equal to a percentage of license fees paid by other Canadian financial
institutions to the Company to license the Company's technology up to a
specified maximum amount. At December 31, 2001, no amounts have been
subject to payment under this provision. The Company has recognized the
annual license fees of the technology license on a straight-line basis
over the term of the license.

On December 29, 2000, the Company entered into an agreement with BMO
that amended certain terms of the April 30, 1998 technology license
agreement. The amended agreement grants BMO the right to act as a
service bureau, including sublicensing and hosting, in relation to the
Company's financial service platform, comprising the banking and
brokerage modules, as well as the LiveClips aggregation and Spyonit
alerts products. BMO is restricted to providing these services to
financial institutions carrying on business anywhere in North America
and having a total asset value of less than $20 billion. In return, BMO
has agreed to pay a monthly royalty fee based on the number of
end-users. No royalty revenues were recognized in the year ended
December 31, 2001. In addition, BMO shall pay the Company for
maintenance fees based on a fixed percentage of royalties related to
activated end-users.

(b) On June 1, 1999, the Company entered into a subscription agreement (note
9(a)) with BA and a technology licensing agreement with an affiliate of
BA. The technology license agreement provided for a fixed license fee to
be paid to the Company over a 20-month period commencing on June 1,
1999, in exchange for the delivery of specific products over the term of
the agreement and for a license of all technology developed during the
license period. The license fee has been recognized over the term of the
contract commencing upon the delivery of the first product. As at
December 31, 2000, the Company had delivered all the software products
specified in the agreement. BA has an option to extend this agreement
for consecutive one-year terms commencing on February 1, 2001. The
Company has also contracted with BA to provide consulting fees at
commercial rates. As at December 31, 2001 and 2000 BA owned less than
10% of the Company's common shares. In 1999, BA owned approximately
10.9%, of the Company's outstanding common shares.

(c) On December 29, 1999, the Company entered into a master technology
license agreement with Citicorp Strategic Technology Corporation
("Citibank"). The initial term of the master agreement is five years.
The agreement enables Citigroup and its affiliates to license technology
by entering into separate agreements which will incorporate the terms of
the master agreement. As at December 31, 2001 and 2000, Citibank owned
less than 10% of the Company's common shares. In 1999, Citibank owned
approximately 21.8% of the Company's outstanding common shares.

Under the terms of the master agreement, and addendums thereto, Citibank
is required to pay the Company a specified minimum amount during each
year that the master agreement is in effect, whether or not Citigroup or
any Citigroup affiliates actually enter into agreements under the master
agreement to license technology or purchase service. The required
payments may increase each year of the agreement, up to specified
maximum levels, based on specified targets relating to the number of
worldwide Citigroup customers that use services based upon the Company's
solicitors, the number of Citigroup affiliates that license the
technology and the amount of revenue generated under this agreement. The
specified minimum amount

F-27


received in respect of the second year of the contract has been
recognized as revenue in the year ended December 31, 2001.

The Company agreed to purchase from Citibank a range of consulting
services that are described in the master agreement. These services will
include consulting services relating to the promotion of the technology
for adoption by Citigroup's affiliates. The Company will pay for these
services a fee that will be calculated based upon the number of
Citigroup affiliates that enter into agreements to license the
technology during the first year of the master agreement, which ended at
the end of December 31, 2000. In the year ended December 31, 2000, the
Company paid approximately $400,000 for these services.

These technology license agreements are extendible annually at the
option of the licensees. In addition, the Company has agreed to provide
related support and maintenance services to the licensees at commercial
rates.

(d) In August 1999, the Company entered into a two-year consulting agreement
with a director of the Company providing for a monthly consulting fee of
$34,000, together with options, granted under the option plan, to
purchase 48,000 common shares of the Company at an exercise price of
$3.75 per share. This consulting agreement was cancelled, with the last
payment being made in August 2000.

14. LOSS PER SHARE:

Due to the net loss for all periods presented, all potential common
shares outstanding are considered anti-dilutive and are excluded from the
calculation of diluted loss per share. Common shares issuable on the exercise
of common shares that could potentially dilute basic loss per share in the
future based on the treasury stock method for the years ended December 31,
2001, 2000 and 1999, amounted to 4,971,938, 2,999,473 and 2,117,951,
respectively.

15. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES:

The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles ("GAAP") as applied
in Canada, which conform in all material respects with generally accepted
accounting principles in the United States, except as noted below.

Statement of comprehensive income:

U.S. GAAP requires the disclosure of a statement of comprehensive
income. Comprehensive income generally encompasses all changes in
shareholders' equity except those arising from transactions with shareholders.



- ----------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------


Loss based on U.S. GAAP $(554,204) $(63,264) $(13,831)
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) arising during the year - 3,500 -
Realized gains included in income (3,500) - -



F-28




- ----------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------


Cumulative translation adjustment (52) - -

- ----------------------------------------------------------------------------------------------
Comprehensive loss based on U.S. GAAP $(557,756) $(59,764) $(13,831)
- ----------------------------------------------------------------------------------------------



As described in note 6(b)(ii), the Company had an investment in a
publicly traded entity which the Company classified as an available-for-sale
security. Under U.S. GAAP, the Company would record the investment at fair
value, and record any unrealized gain or loss as a separate component of
stockholders' equity. As at December 31, 2000 this would have resulted in
investments and stockholders' equity on the balance sheet being increased by
$3,500,000 and a separate caption in stockholders' equity entitled
"accumulated other comprehensive income" with a balance of $3,500,000. As the
Company sold the investment in 2001, the comprehensive income would have been
appropriately adjusted to reflect the disposition.

Supplemental disclosures required under U.S. GAAP include the following:

(a) RECENT ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations". SFAS No. 141
requires that all business combinations be accounted for under the
purchase method for business combinations initiated after June 30, 2001
for which the date of acquisition is July 1, 2001 or later. Use of the
pooling-of-interests method is no longer permitted. In July 2001, the
FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 142 requires that goodwill no longer be amortized to earnings, but
instead be periodically reviewed for impairment. SFAS No. 142 may be
early-adopted under certain circumstances starting with fiscal years
beginning after March 15, 2001 and must be adopted starting with fiscal
years beginning after December 15, 2001. In August 2001, the Accounting
Standards Board ("AcSB") issued Handbook Section 1581, "Business
Combinations", and Handbook Section 3062, "Goodwill and Other Intangible
Assets", which are consistent with SFAS No. 141 and SFAS No. 142,
respectively, except for certain remaining generally accepted accounting
principles differences, including the accounting for purchased
in-process research and development. The impact of the remaining
provision of adopting SFAS No. 141, No. 142 and Section 1581 and 3062
has not been determined.

In December 2001, the AcSB issued Handbook Section 3870 "Stock-Based
Compensation and Other Stock-Based Payments". Section 3870 establishes
standards for the recognition, measurement, and disclosure of
stock-based compensation and other stock-based payments made in exchange
for goods and services provided by employees and non-employees. It
applies to transactions in which shares of common stock, stock options,
or other equity instruments are granted or liabilities incurred based on
the price of common stock or other equity instruments.

The Company will adopt Section 3870 for its fiscal year beginning
January 1, 2002. The Company does not believe that the adoption of this
standard will have a material impact on the Company's financial
condition or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
significant issues relating to the implementation of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and

F-29


for Long-Lived Assets to be Disposed of", and develops a single
accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and its
provisions are to be applied prospectively. We are currently assessing
the impact of SFAS No. 144 on our financial position and results of
operations.

(b) SFAS 123 PRO FORMA INFORMATION:
The Company has elected to apply the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for the disclosure of
compensation costs related to employee stock options valued at fair
value. For companies electing not to adopt the fair value measurement
for stock-based compensation, the pronouncement requires the disclosure
of pro forma net income and net income (loss) per share information as
if the Company had accounted for its stock options issued from inception
on July 28, 1997 under the fair value method. A summary of the required
pro forma disclosure of the impact on the consolidated statements of
operations is presented in the table below:



------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------


Loss for the year - U.S. GAAP $ (554,204) $ (63,264) $ (13,831)
Compensation expense related
to the fair value of stock options (25,424) (17,064) (362)
------------------------------------------------------------------------------------
Pro forma loss for the year $ (579,628) $ (80,328) $ (14,193)
------------------------------------------------------------------------------------
Pro forma loss per share - basic and diluted $ (10.17) $ (2.17) $ (0.84)
------------------------------------------------------------------------------------


The fair value of each option granted prior to the Company becoming a
publicly traded company in February 2000, has been estimated at the date
of grant using the minimum value method and by applying the following
assumptions: weighted average risk-free interest rate of 4.9% for the
period ended December 31, 2000 and 1999, dividend yield of 0% and an
expected life of the options of five years.

The fair value of each option granted in the year ended December 31,
2001 and between the date the Company became a publicly traded company
and December 31, 2000 has been estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions used:
dividend yield of zero, expected volatility of 240% (2000 - 145%),
risk-free rate of return of 4.64% (2000 - 6.41%) and an expected life of
the option of five years.

The Company has assumed no forfeiture rate, as adjustments for actual
forfeitures are made in the year they occur. The weighted average grant
date fair value of options issued in the year ended December 31, 2001
was $13.89 (2000 - $78.28; 1999 - $3.26).

(c) OTHER DISCLOSURES:
Included in accrued liabilities at December 31, 2001 is a restructuring
provision of $8,900,000. At December 31, 2000, accrued compensation
expenses of $3,300,000, accrued acquisition

F-30


costs of $9,000,000 and consulting fees of $2,100,000 accounted for more
than 5% of current liabilities.

Included in sales and marketing expense is $925,000 (2000 - $56,000;
1999 NIL) of bad debt expenses.

16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

The following presents the supplemental disclosure of cash flow
information:



- ------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------

Supplemental disclosure of non-cash
financing and investing activities:
Net assets acquired from business
acquisitions less cash acquired $ (6,223) $ 10,894 $ -
Common shares and replacement common
share purchase options issued:
Upon acquisition of TANTAU Software, Inc. 398,349 - -
Upon acquisition of Spyonit.com, Inc. - 37,775 -
Upon acquisition of ezlogin.com, Inc. - 51,186 -
Common shares issued upon settlement of
contingent consideration 1,330 - -
Cash paid for interest 154 - -
- ------------------------------------------------------------------------------------


17. RESTRUCTURING AND OTHER CHARGES:
For the year ended December 31, 2001, the Company recorded charges for
restructuring activities and the write-down of long-term investments, goodwill
and other intangible assets. There were no such charges for the corresponding
period in 2000 and 1999.

The following table summarizes these charges:




- ------------------------------------------------------------------------------
CUMULATIVE DRAW-DOWN
- ------------------------------------------------------------------------------
PROVISION
BALANCE AT
TOTAL CASH NON-CASH DECEMBER 31,
PROVISION PAYMENTS CHARGES 2001
- ------------------------------------------------------------------------------


Restructuring charge:
Severance $ 8,888 $6,557 $ - $2,331
Lease exit costs 7,600 - 1,007 6,593
Write-down of fixed assets 3,156 - 3,156 -
19,644 6,557 4,163 8,924

Write-down of intangible
and other assets:
Goodwill 299,572 - 299,572 -
Acquired technology 5,252 - 5,252 -



F-31




- ------------------------------------------------------------------------------
CUMULATIVE DRAW-DOWN
- ------------------------------------------------------------------------------
PROVISION
BALANCE AT
TOTAL CASH NON-CASH DECEMBER 31,
PROVISION PAYMENTS CHARGES 2001
- ------------------------------------------------------------------------------



Other 9,909 - 9,909 -
- ------------------------------------------------------------------------------
314,733 - 314,733
WAEF technology 6,728 - 6,728 -
- ------------------------------------------------------------------------------
321,461 - 321,461

Write-down of long-term
investments 9,975 - 9,975 -
- ------------------------------------------------------------------------------
Total charges $351,080 $6,557 $335,599 $ 8,924
- ------------------------------------------------------------------------------


(a) RESTRUCTURING CHARGE:
With the downturn in general economic conditions, the Company has been
working to identify areas to reduce costs and leverage the
infrastructure that it has obtained through acquisitions and growth by
eliminating duplicate resources and positions, narrowing its focus to
certain product markets and streamlining operating processes. As a
result of this realignment, in the second quarter of 2001, the Company
recorded a restructuring charge of $3,400,000 related to employee
severance and lease costs for the closing of facilities.

In October 2001, the Company continued with its plan to restructure and
realign its business, which included a reduction of its worldwide work
force by approximately 350 employees, the closure of redundant
facilities and the write-down of unused fixed assets. Approximately 183
employees were terminated in October 2001 with the remaining employees
continuing their employment until January 31, 2002. The Company incurred
a charge of approximately $19,644,000, consisting of severance and
benefits costs, lease exit costs for the closing of redundant facilities
and write-downs of fixed assets. The Company also recorded stock
compensation expense in the amount of $3,625,000 related to the
immediate recognition of deferred stock compensation for those employees
whose stock options vest upon termination of employment. This amount has
been included as part of "stock-based compensation" in the statements of
operations.

(b) WRITE-DOWN OF INTANGIBLE AND OTHER ASSETS:

(i) Acquired business:
impairment were the significant changes in valuations of companies
in the technology sector, a reduction in the multiples used in
valuing technology companies, such as revenue multiples, significant
negative industry and economic trends impacting both the Company's
current operations and expected future growth rates, and decisions
made by the Company related to the abandonment of certain acquired
technology. Based on these factors, the Company concluded that a
significant other than temporary impairment existed with respect to
the Company's intangible assets, which primarily relates to the
goodwill and acquired technology associated with the acquisitions of
Ezlogin, Spyonit and TANTAU.

In quantifying the impairment charge, the Company compared the
expected future cash flows of each acquisition, including terminal
value, to the respective carrying value of the assets of the
business. Variables in the cash flows include estimated revenue
contribution to the Company's overall revenues and estimated costs.
The cash flow periods used ranged between three and five years,
consistent with the useful life of the related asset acquired. The
discount rate ranged between 15% and 20% and is based on the
risk-free rate, adjusted for risk factors of the acquired company.

F-32


As a result of the Company's review, the Company determined that the
carrying values of the acquired businesses were not fully
recoverable. Accordingly, the Company recorded, in the third quarter
of 2001, a $314,733,000 write-down of intangible and other assets
based on the amount by which the carrying amount of the intangible
and other assets exceeded the fair value calculated as described in
the preceding paragraph. The goodwill and intangible assets
write-down relates to the goodwill and intangible assets that arose
in the business acquisitions that the Company acquired primarily
through the issuance of shares and replacement options which were
valued, for accounting purposes, on the respective dates of the
acquisition at prices which were significantly higher than the
Company's share trading price at the time of determining the
existence of an impairment.

(ii) Acquired technology:

During the third quarter of 2001, the Company performed a review of
the carrying value of its Web Application Event Framework ("WAEF"),
which it acquired from Webhelp on March 26, 2001 (note 6(a)(ii)).
During the course of the review, the Company considered its future
use of WAEF in light of the restructuring of its business and the
downturn in the economy and concluded that the WAEF technology was
not expected to be part of the Company's future strategy. The
Company currently does not have any intention to incorporate this
technology into its business. As a result, the Company reduced the
carrying value of this technology to nil and recorded a charge of
$6,728,000.

(c) WRITE-DOWN OF INVESTMENTS:

For the year ended December 31, 2001, the Company performed a review of
its investments. Due to adverse changes in operating market conditions,
several of the Company's investments in other companies have experienced
a significant other than temporary decline in their values. In order to
determine the amount of the write-down, the Company assessed the fair
market value of its investments and compared it to the investments'
carrying value. The fair market value of these investments was based on
a combination of the following: (i) if public, recent trading prices and
the trend in trading prices; (ii) values indicated by recent rounds of
financing in the investee company; (iii) valuations performed by the
investee company or venture capitalists if the investee company is
seeking a round of financing; and (iv) changes in the market value of
the investment relative to industry indices. During the year ended
December 31, 2001, the Company recorded $9,975,000 as an other than
temporary decline in value.

18. CONTINGENT LIABILITIES:

The Company has been named in several class actions filed in federal
court in the Southern District of New York between approximately June 13,
2001 and June 28, 2001 (collectively the "IPO Allocation Litigation"). The
IPO Allocation Litigation was filed on behalf of purported classes of
plaintiffs who acquired the Company's common shares during certain periods.
In addition to the Company, the named defendants in actions similar to the
IPO Allocation Litigation include over 200 other issuers that have had
initial public offerings since 1998. The complaints in the IPO Allocation
Litigation name as defendants some of the current or former directors and
officers of the Company (the "Individual Defendants") and underwriters of the
Company's initial public offering of securities ("Underwriter Defendants").

F-33


In general, the complaints in the IPO Allocation Litigation allege that
the Underwriter Defendants: (i) allocated shares of the Company's offering of
equity securities to certain of their customers, in exchange for which these
customers agreed to pay the Underwriter Defendants extra commissions on
transactions in other securities; and (ii) allocated shares of the Company's
initial public offering to certain of the Underwriter Defendants' customers,
in exchange for which the customers agreed to purchase additional common
shares of the Company in the after-market at certain pre-determined prices.

The Company intends to vigorously defend itself and the Individual
Defendants against these claims made against them in the IPO Allocation
Litigation. However, due to the inherent uncertainties of litigation and
because the IPO Litigation is at a preliminary stage, the Company cannot
accurately predict the ultimate outcome of the IPO Allocation Litigation.

19. SUBSEQUENT EVENTS:

(a) RESTRUCTURING:

In January 2002, the Company continued with its plan to restructure and
realign its business, which included a reduction of its worldwide work
force by approximately 98 people, the additional closure of redundant
facilities and the write-down of unused fixed assets.

In January 2002, the Company formalized an arrangement with Computer
Sciences Corporation ("CSC"), located in Austin, Texas. CSC will be
providing application hosting services to the Company in order to
support the Company's current hosting agreements until such time as such
agreements are assigned to CSC. As a result of the transaction, the
Company expects to record a charge of $8,819,000 relating to fees to be
paid to CSC to assume the obligation to provide services under the
Company's contracts, related traditional costs and a write-down of
redundant computer equipment. The initial term of the services agreement
is three years.

In addition to the above transaction, CSC will license and resell 724
Solutions products to the financial services industry, at prices
consistent with the Company's other resellers. 724 Solutions technology
will be integrated with CSC's Hogan Systems and CAMS II (Card and
Merchant System II) software products. CSC will also provide systems
integration services, acting as the prime integrator for CSC clients.

The Company expects to incur the following charges:



- ------------------------------------------------------------------------
Cash Non-cash Total
COSTS COSTS CHARGE
- ------------------------------------------------------------------------

Restructuring costs:
Severance $ 3,000 $ - $ 3,000
Stock compensation - 3,247 3,247
Write-down of fixed assets - 2,400 2,400
Lease exit costs - 4,500 4,500
Application hosting services business 7,000 1,819 8,819
- ------------------------------------------------------------------------
$10,000 $11,966 $21,966
- ------------------------------------------------------------------------

F-34


(b) STOCK-OPTION EXCHANGE PROGRAM:

In January 2002, the Company announced a voluntary stock option exchange
program that was offered to a majority of its employees, excluding directors,
executive officers and other selected senior personnel. This new program
offered eligible employees the opportunity to exchange, on a one-for-one
basis, certain stock options, with strike prices greater than U.S. $3.00 and
Cdn. $4.75, for an equal number of new options to be granted on or after
August 29, 2002. This program resulted in 1,403,928 options being tendered,
accepted and cancelled (1,031,416, 57,512 and 315,000 were granted under the
2000 stock option plan, the Canadian stock option plan and the TANTAU plan
respectively).

The new options will be granted under the terms of the Company's 2000 Stock
Option Plan and will have an exercise price equal to the market price of the
Company's common shares on the grant date. The new options will be
exercisable for a period of 10 years from the grant date and will vest 25 per
cent immediately upon grant and 25 per cent on each subsequent anniversary of
the date of grant.

In connection with the program, the Company also announced a special grant of
options to purchase an aggregate of 2,603,000 common shares to its directors,
most of its officers and selected senior personnel, none of whom are eligible
to participate in the voluntary stock option exchange program. The options
are identical, to the above-mentioned options to be granted to eligible
employees, and are expected to be granted on or about August 29, 2002 and
will vest immediately.

The Company also announced a proposal to make a special grant of options to
purchase an aggregate of approximately 538,000 common shares to other
employees who are not eligible to participate in the voluntary stock option
exchange program generally due to unique geographic or regulatory specific
jurisdictions. These options would be issued at the same time as the new
options are issued in the exchange program.

In connection with the tender offer, the Company anticipates that it will
record a stock compensation expense of up to $1,991,000 related to the
immediate recognition of deferred stock-based compensation for those
employees who choose to tender their options.

The stock option exchange program was designed to comply with FASB
Interpretation No. 144, "Accounting for certain transactions involving stock
compensation" and is not expected to result in any additional compensation
charges or variable award accounting.

20. COMPARATIVE FIGURES:

Certain reclassifications of 2000 and 1999 amounts have been made to
facilitate comparison with the current year.

F-35



SIGNATURES

Pursuant to the requirements of Section 13 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, in the city of Toronto, Ontario
on March 28, 2002.

724 SOLUTIONS INC.



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

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




SIGNATURE TITLES DATE


/s/ John J. Sims Chief Executive Officer and Director March 28, 2002
- ------------------------------ (principal executive officer)
John J. Sims

/s/ Gregory Wolfond Chairman March 28, 2002
- ------------------------------
Gregory Wolfond

/s/ Karen Basian Chief Financial Officer, Senior Vice March 28, 2002
- ------------------------------ President Corporate Services and
Karen Basian Corporate Secretary

/s/ Lloyd F. Darlington Director March 28, 2002
- ------------------------------
Lloyd F. Darlington

/s/ James D. Dixon Director March 28, 2002
- ------------------------------
James D. Dixon

/s/ Antti Vasara Director March 28, 2002
- ------------------------------
Antti Vasara

/s/ Christopher E. Erickson Director March 28, 2002
- ------------------------------
Christopher E. Erickson

/s/ Barry J. Reiter Director March 28, 2002
- ------------------------------
Barry J. Reiter

/s/ Holger Kluge Director March 28, 2002
- ------------------------------
Holger Kluge








/s/ Joseph Aragona Director March 28, 2002
- ------------------------------
Joseph Aragona

Director March 28, 2002
- ------------------------------
Charles M.B. Goldman