724 SOLUTIONS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 2002.

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

Commission File Number: 000-31146

724 SOLUTIONS INC.
(Exact Name of Registrant as Specified in its Charter)

ONTARIO INAPPLICABLE
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

10 YORK MILLS ROAD, THIRD FLOOR M2P 2G4
TORONTO, ONTARIO (Zip Code)
(Address of Principal Executive Office)

(416) 226-2900
(Registrant's Telephone Number, Including Area Code)

NOT APPLICABLE
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)

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
--- ---

Common Shares, no par value - 59,646,642 shares outstanding as of August
9, 2002.

724 SOLUTIONS INC.

TABLE OF CONTENTS

Part I. Financial Information

Item 1. Financial Statements

a) Consolidated Balance Sheets ..................................................1

b) Consolidated Statement of Operations .........................................2

c) Consolidated Statement of Cash Flows .........................................3

d) Consolidated Statements of Shareholders' Equity ..............................4

e) Notes to Consolidated Financial Statements ...................................5

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................................14

Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................27

Part II. Other Information

Item 1. Legal Proceedings ...............................................................28

Item 2. Changes in Securities ...........................................................28

Item 3. Defaults Upon Senior Securities .................................................28

Item 4. Submission of Matters to a Vote of Security Holders .............................28

Item 5. Other Information ...............................................................29

Item 6. Exhibits and Report on Form 8-K .................................................29

Signatures ........................................................................................30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
(a) CONSOLIDATED BALANCE SHEETS

724 SOLUTIONS INC.
Consolidated Balance Sheets
(In thousands of U.S. dollars)

See accompanying notes to consolidated financial statements.

1

(b) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

724 SOLUTIONS INC.
Consolidated Statements of Operations
(In thousands of U.S. dollars, except per share amounts)

See accompanying notes to consolidated financial statements.

2

(c) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

724 SOLUTIONS INC.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

See accompanying notes to consolidated financial statements.

3

(d) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

724 SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(In thousands of U.S. dollars, except per shares amounts)

Six months ended June 30, 2002 and 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

4

(e) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

724 SOLUTIONS INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts)

Three months ended June 30, 2002 and six months ended June 30, 2002
(Unaudited)

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1. BASIS OF PRESENTATION:

The accompanying consolidated financial statements include the accounts
of 724 Solutions Inc. and its wholly owned subsidiaries (collectively
referred to as the "Company"). Intercompany transactions and balances are
eliminated on consolidation.

The 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 conform, in all material
respects, with U.S. generally accepted accounting principles. Unless
otherwise noted, the interim financial statements follow the same
accounting polices and methods of application as the most recent annual
financial statements. For further information, reference should be made
to the audited annual consolidated financial statements for the year
ended December 31, 2001 that are included in the Company's Annual Report
filed with the Canadian Securities Administrators on March 25, 2002 and
with the Securities and Exchange Commission on Form 10-K on March 29,
2002. Certain comparative figures have been reclassified to conform to
the current period's presentation.

The information furnished for the three and six months ended June 30,
2002 and June 30, 2001 reflect, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results of the interim periods presented.
Interim results are not necessarily indicative of results for a full
year.

5

2. SIGNIFICANT ACCOUNTING POLICIES:

The unaudited interim consolidated financial statements are based upon
accounting principles consistent with those used and described in
Company's audited financial statements for the year ended December 31,
2001, except the following:

(a) Business combinations, goodwill and other intangible assets:

In September 2001, The Canadian Institute of Chartered Accountants
("CICA") issued Handbook Sections 1581, "Business Combinations", and
3062, "Goodwill and Other Intangible Assets." The new standards
require that the purchase method of accounting must be used for
business combinations and require that goodwill no longer be
amortized but instead be tested for impairment at least annually. The
standards also specify criteria that intangible assets must meet to
be recognized and reported apart from goodwill. The standards require
that the value of the shares issued in a business combination be
measured using the average share price for a reasonable period before
and after the date the terms of the acquisition are agreed to and
announced. The new standards are substantially consistent with U.S.
GAAP.

The Company has adopted these new standards as of January 1, 2002 and
the Company has discontinued amortization of all existing goodwill.
The Company has also evaluated existing intangible assets, including
estimates of remaining useful lives, and have made the necessary
reclassifications in order to conform with the new criteria.

In connection with Section 3062's transitional goodwill impairment
evaluation, the Company is required to assess whether goodwill is
impaired as of January 1, 2002. Impairment is identified by the
Company comparing the carrying amount of the Company's reporting
units with their fair values. To the extent a reporting unit's
carrying amount exceeds its fair value, the Company must perform a
second step to measure the amount of impairment in a manner similar
to a purchase price allocation. Under Canadian GAAP, any transitional
impairment will be recognized as an effect of a change in accounting
principle and will be charged to opening retained earnings as of
January 1, 2002. Under U.S. GAAP, any transitional impairment will be
charged to operations in the current period. The Company has
completed the transitional goodwill impairment during the second
quarter of 2002 and has determined that no impairment existed at the
date of adoption.

6

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Effective January 1, 2002, the Company had unamortized goodwill of
$9,097 which is no longer being amortized. This change in accounting
policy is not applied retroactively and the amounts presented for
prior periods have not been restated for this change. The impact of
this change is as follows:

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Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------

Loss for the period $ (13,082) $ (62,805) $ (56,750) $ (121,202)
Add back goodwill amortization - 24,445 - 46,342
--------------------------------------------------------------------------------------------------------
Loss before goodwill
amortization $ (13,082) $ (38,360) $ (56,750) $ (74,860)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Loss per share $ (0.22) $ (1.08) $ (0.96) $ (2.09)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Loss per share before
goodwill amortization $ (0.22) $ (0.66) $ (0.96) $ (1.29)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

(b) Stock-based compensation and other stock-based payments:

Effective January 1, 2002, the Company adopted the new CICA Handbook
Section 3870, "Stock based compensation and other stock-based
payments", which requires that a fair value based method of
accounting be applied to all stock-based payments to non-employees
and to direct awards of stock to employees. The requirements of the
new standard are consistent with the Company's accounting policies
for these types of transaction and are disclosed in the Company's
annual consolidated financial statements. Section 3870, however, does
require additional disclosures including pro forma earnings and pro
forma earnings per share, which are provided in note 7.

7

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

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:

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
------------------------------------------------------------------------------------------------------------

Cash and cash equivalents:
Cash $ 10,228 $ 6,922
Cash equivalents:
Bearers' deposit note 1,994 -
Corporate debt - 49,000
Government treasury bills 7,852 4,357
Corporate bonds 9,500 -
Corporate commercial paper 14,961 -
Term deposit 692 -
------------------------------------------------------------------------------------------------------------
$ 45,227 $ 60,279
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Short-term investments:
Held-to-maturity:
Corporate commercial paper $ - $ 364
Term deposit - 2,285
Government bond 5,514 5,989
Government treasury bills 3,142 19,119
Corporate bonds 5,100 1,100
------------------------------------------------------------------------------------------------------------
$ 13,756 $ 28,857
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

The Company has entered into letters of credit in the aggregate amount of
$2,946 (December 31, 2001 - $2,285) to guarantee payments under future
contractual lease commitments. The letters of credit are secured by
segregated instruments included in restricted cash on the consolidated
balance sheet.

8

4. GOODWILL AND OTHER INTANGIBLE ASSETS:

The following table represents details for the Company's total purchased
intangible assets which are subject to amortization:

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Impairment
Accumulated charge taken Net book
June 30, 2002 Gross amortization in 2001 value
------------------------------------------------------------------------------------------------------------

Technology $ 29,120 $ 10,088 $ 11,979 $ 7,053
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Impairment
Accumulated charge taken Net book
December 31, 2001 Gross amortization in 2001 value
------------------------------------------------------------------------------------------------------------

Technology $ 28,663 $ 7,924 $ 11,979 $ 8,760
Customer relationships 7,120 2,301 4,819 -
------------------------------------------------------------------------------------------------------------
$ 35,783 $ 10,225 $ 16,798 $ 8,760
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

5. SEGMENTED INFORMATION:

The Company operates in a single reportable operating segment, that is,
the design and delivery of an Internet infrastructure platform and
related applications that enable 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:

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------

Net revenue by geographic location:
North America $ 4,641 $ 8,485 $ 7,924 $ 18,235
Europe 157 3,488 927 5,672
Asia Pacific 210 2,105 670 4,020
------------------------------------------------------------------------------------------------------------
$ 5,008 $ 14,078 $ 9,521 $ 27,927
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

9

5. SEGMENTED INFORMATION (CONTINUED):

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
------------------------------------------------------------------------------------------------------------
Goodwill Goodwill
and other and other
Fixed intangible Fixed intangible
assets assets assets assets
------------------------------------------------------------------------------------------------------------

North America $ 4,272 $ 16,150 $ 11,130 $ 17,857
Europe 1,090 - 1,272 -
Asia Pacific 134 - 123 -
------------------------------------------------------------------------------------------------------------
$ 5,496 $ 16,150 $ 12,525 $ 17,857
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

For the six months ended June 30, 2002, two customers accounted for 21%
and 24% of revenue. For the six months ended June 30, 2001, two customers
accounted for 14% and 21% of revenue, respectively.

6. SHARE CAPITAL:

(a) Stock options:

At June 30, 2002 and December 31, 2001, there were options
outstanding to acquire 3,768,443 and 7,144,314 common shares of the
Company, respectively.

The Company has excluded, from the calculation of diluted earning per
share, all common shares potentially issuable upon the exercise of
stock options and other potentially convertible instruments that
could dilute basic per share in the future because to do so would
have been anti-dilutive.

10

6. SHARE CAPITAL (CONTINUED):

(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 1,403,628 options being tendered,
accepted and cancelled (1,031,416, 57,212 and 315,000 were granted
under the 2000 stock options plan, the Canadian stock options 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% immediately upon grant and 25% 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 terms of the options are identical to
the above-mentioned options to be granted to eligible employees.
25% of the options will vest at the time of grant with an additional
25% vesting on each anniversary date of grant until all options are
exercisable. The options are expected to be granted on or after
August 29, 2002.

11

7. PRO FORMA DISCLOSURE FOR STOCK-BASED COMPENSATION AND OTHER STOCK-BASED
PAYMENTS:

In addition to the disclosures presented in note 9(b) of the audited
annual financial statements, the new Canadian stock-based compensation
standard requires the disclosure of pro forma net earnings and earnings
per share information as if the Company had accounted for employee stock
options under the fair value method. The Company has elected to disclose
pro forma net loss and pro forma net loss per share 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 pro forma disclosure of the
impact of the consolidated statement of operations is presented in the
table below.

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------

Loss for the period - U.S. GAAP $ (13,082) $ (62,805) $ (56,750) $ (114,952)
Compensation expense related
to the fair value of stock options (4,755) (5,673) (7,594) (7,804)
------------------------------------------------------------------------------------------------------------
Pro forma loss for the period $ (17,837) $ (68,478) $ (64,344) $ (122,756)
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Pro forma loss per share:
Basic and diluted $ (0.30) $ (1.18) $ (1.09) $ (2.12)
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

The fair value of each option granted in the period ended June 30, 2002
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%, risk-free rate of return of 4.64%, and
an expected life of the option of five years. The fair value of each
option granted prior to January 1, 2002 has been estimated at the date of
grant using the Black-Scholes option pricing model with the assumptions
disclosed in note 15(b) of the annual consolidated financial statements.

The Company has assumed no forfeiture rate, as adjustments for actual
forfeitures are made in the period they occur. The weighted average grant
date fair value of options issued in the three months ended June 30, 2002
was $0.87 (2001 - $9.42).

12

8. RESTRUCTURING AND WRITE-DOWN OF FIXED ASSETS:

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 and inventory.

In January 2002, the Company formalized an arrangement with Computer
Sciences Corporation ("CSC"), located in Austin Texas, in which 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. The initial term of the 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.

As a result of the following transactions, the Company incurred the
following charges:

------------------------------------------------------------------------------------------------------------
Cumulative draw down in 2002
------------------------------------------------------------------------------------------------------------
Provision at Cumulative Provision
December 31, provision in Cash Non-cash June 30,
2001 2002 Total payments charges 2002
------------------------------------------------------------------------------------------------------------

Restructuring costs:
Severance $ 2,331 $ 3,691 $ 6,022 $ (5,417) $ - $ 605
Lease exit costs 6,593 4,801 11,394 (3,053) (1,781) 6,560
Hosting - 5,747 5,747 (1,892) 1,691 5,546
Write-down
of inventory - 2,748 2,748 - (2,748) -
------------------------------------------------------------------------------------------------------------
8,924 16,987 25,911 (10,362) (2,838) 12,711
Write-down of
fixed assets - 4,134 4,134 - (4,134) -
------------------------------------------------------------------------------------------------------------
$ 8,924 $ 21,121 $ 30,045 $ (10,362) $ (6,972) $ 12,711
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

13

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

The following discussion and analysis should be read together with our
audited annual consolidated financial statements for the year ended December 31,
2001 and the accompanying notes included in our annual report filed with the
Canadian Securities Administrators on March 25, 2002 and our annual report on
Form 10-K, which was filed with the Securities and Exchange Commission on March
29, 2002, and the consolidated financial statements and accompanying notes
appearing elsewhere in this report. All financial information is presented in
U.S. dollars.

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. Please see "Information
Regarding Forward-Looking Statements."

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. In addition, our customers are able to rapidly introduce services with
ended-to-end customer support through Computer Sciences Corporation, our
preferred hosting partner.

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 mobile network operators. 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 2002

RESTRUCTURING AND OTHER CHARGES

In January 2002 we continued our cost reduction initiative which began
in 2001. The additional cost realignment is critical to our plan to achieve
operational profitability. This restructuring included a reduction of our
worldwide work force by approximately 98 people, the

14

additional closures of redundant facilities, write-down of inventory assets that
are no longer part of our future strategy and write-down of additional unused
fixed assets. In addition, as part of our reorganization, in January 2002, we
formalized our plan to discontinue hosting services though forming 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 these transactions, we recorded $17.0 million in
restructuring charges and $4.1 million relating to the write-down of redundant
fixed assets.

STOCK OPTION EXCHANGE PROGRAM

In January 2002, in recognition that a large percentage of our
outstanding options had 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 initiated a voluntary 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 were tendered, accepted and cancelled under this program. Exchanged
options are expected to be granted under this program in or about 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. We
recorded approximately $1.4 million in stock compensation expense during the
first quarter of 2002 related to the immediate recognition of deferred
stock-based compensation for those employees who chose to tender their options.
The stock option exchange program is not expected to result in additional
compensation charges or variable award accounting.

CRITICAL ACCOUNTING POLICIES

We periodically review our financial reporting and disclosure practices
and accounting policies to ensure that our financial reporting and disclosure
system provide accurate and transparent information relative to the 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 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 interim quarterly financial statements for the three and six months
ended June 30, 2002, which is set forth in this report, and Note 2 to our
audited annual consolidated financial statements, which is set forth in our
annual report on form 10-K, which we encourage you to read.

REVENUE RECOGNITION

SOURCES OF REVENUE

We derive revenue 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;

15

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

Product revenue consists of the following:

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 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 believe that these
fees will grow if 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.

16

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.

During the first six months of 2002, our revenues began to include
solution sales in addition to our current software and services models. The key
distinguishing factors between what we consider to be a solutions sale versus a
software and services sale are the increased 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 services. 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 contracts
will primarily be based on the percentage of work completed method based either
on inputs or on outputs, depending upon the terms of 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 contracts. 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 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. In
2002, services revenue also included fees earned from consulting projects, which
required us to build customized code and more complex interfaces as opposed to
installation services. Customers are charged a fee based on time and expenses.
Revenue from implementation and customer service fees is recognized as the
services are performed or deferred until we achieve contractually defined
milestones or until customer acceptance has occurred, as the case may be for
such contracts.

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

17

associated with the variable fee license model, any maintenance payments will be
recognized on a monthly basis as earned.

HOSTING FEES

We no longer intend to provide hosting services directly, but instead
have arranged an alliance with CSC, whereby CSC is our preferred hosting partner
for future customer deployments where hosting may be required. For our existing
hosting customers, we typically charge customers a monthly flat fee or a monthly
fee based on the number of users. 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 annual audited consolidated financial statements for the
year ended December 31, 2001.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2001

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.

REVENUE

PRODUCT REVENUE

In the three months ended June 30, 2002, product revenue decreased to
$1.6 million from $9.0 million for the same period in 2001. In the six months
ended June 30, 2002, product revenue decreased to $4.1 million from $18.1
million for the corresponding period in 2001. Due to poor economic conditions,
we experienced reluctance in our customers' willingness to make large upfront
commitments on license fees. We expect product revenue to be lower than in prior
periods until the economy recovers and our customers begin to increase their
level of capital expenditures.

SERVICE REVENUE

Service revenue decreased to $3.4 million for the three months ended
June 30, 2002 compared to $5.1 million in 2001. Service revenue decreased to
$5.4 million for the six months ended June 30, 2002 from $9.8 million in 2001.
The decrease in service revenue is due to the reduced number of projects our
customers were implementing and continuing of general weakness in the economy.

18

OPERATING EXPENSES

COST OF REVENUE

Cost of revenue (COR) 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 $2.7 million and $4.4 million for the three months
and six months ended June 30, 2002, respectively, compared to $5.6 million and
$10.7 million for the comparative periods in 2001. The main reason for the
decrease is because in 2002, as a result of our restructuring efforts and
realigning of our business, we employed fewer professional services personnel
than we did in 2001. Cost of revenue as percentage of revenues was 53% and 46%
for the three months and six months ended June 30, 2002, respectively compared
to 40% and 38% for the comparative periods in 2001. The increase in these
percentages is primarily a result of our reduced revenue in the first and second
quarters of 2002 compared to 2001.

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) decreased to $4.1 million and $9.9
million for the three months and six months ended June 30, 2002 respectively,
compared to $11.7 million and $22.9 million for the comparative periods in 2001.
The decrease in this expense is a result of our 2001 restructuring initiative in
which we reduced our R&D headcount and developed a more streamlined, integrated
and focused product road map and reduced duplication in the R&D process. We will
also continue to evaluate our R&D expenditure needs based on our new product
architecture and services and the current market environment. R&D expense, as a
percentage of revenue, was 82% and 104% for the three months and the six months
ended June 20, 2002, respectively, compared to 83% and 82% for the same periods
in 2001. The increase in these percentages, in the six months ended June 30,
2002, is primarily a result of our reduced revenue in the first and second
quarters of 2002 compared to 2001.

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 $4.3 and $10.7 million for the
three and six months ended June 30, 2002 respectively, compared to $10.6 million
and $19.6 million for the comparative periods in 2001. The decrease is a result
of the reduced number of our worldwide sales and marketing personnel and reduced
spending on 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

19

prevailing market conditions. S&M expenses, as a percentage of revenues,
increased to 87% and 113% in the three and six months ended June 30, 2002
respectively from 75% and 70% in the comparative periods in 2001. The increase
in these percentages is primarily a result of our reduced revenue in the first
and second quarters of 2002 compared to 2001.

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 decreased to $1.5 million and $3.9 million for the
three months and six months ended June 30, 2002 respectively compared to $4.0
million and $10.6 million for the comparative periods in 2001. The decrease in
G&A expenses reflected our efforts in our restructuring initiatives to reduce
complexity in our business and to make our infrastructure efficient in order to
support our business in the current market environment. G&A expenses as a
percentage of revenues increased slightly to 31% and 41% for the three months
and six months ended June 30, 2002 from 28% and 38% for the comparative periods
in 2001. The increase in these percentages is a result of our reduced revenue in
the first and second quarters of 2002 compared to 2001.

DEPRECIATION AND AMORTIZATION

Depreciation expense was $1.5 million and $3.2 million in the three
months and six months ended June 30, 2002 compared to $2.2 million and $3.9
million in the comparative periods in 2001. The decrease is a result of the
decommissioning of our redundant fixed assets and reductions in our capital
expenditure budgets as part of our restructuring initiatives.

Amortization expense decreased to $1.0 million and $2.2 million for the
three and six months ended June 30, 2002, respectively compared to $27.4 million
and $51.2 million in the comparative periods in 2001. The decrease is
attributable to lower amortization as a result of the write-down of intangible
and other assets in fiscal 2001 and our adoption SFAS No.142 and CICA Handbook
section 3062, which require goodwill to be assessed for impairment only, rather
than being amortized, on a prospective basis starting January 1, 2002. The
amortization in 2002 represents the amortization of acquired technology, which
will be amortized over a period of two to five years. See "Recent Accounting
Principles."

STOCK-BASED COMPENSATION

Stock-based compensation represents amortization of deferred
stock-based compensation that we recorded as a result of assuming, through the
acquisition of TANTAU, stock option plans that included unvested options and
common shares. This stock based compensation is being amortized on a
straight-line basis over the remaining vesting period of these options, which
will be January 2003. In addition, included in stock-based compensation is the
immediate recognition of stock compensation expense for those terminated
employees who have options that vest immediately upon their termination, and
immediate recognition of the unamortized portion of the deferred stock
compensation for those employees who tendered their options as part of our stock
option exchange initiative in January 2002.

20

Stock-based compensation decreased to $3.1 million and $11.5 million
for the three and six months ended June 30, 2002, respectively compared to $13.1
million and $23.8 million in the comparative periods in 2001. Stock-based
compensation expense decreased in the current year mainly as a result of the
immediate recognition of deferred stock-based compensation related to terminated
employees who were a part of our restructuring plan.

RESTRUCTURING COSTS

With the downturn in general economic conditions, in the second quarter
of 2001 we began to work to identify areas to reduce costs by eliminating
duplicate resources and positions, narrowing our product offerings and
streamlining our operating processes. As a result, in the six months ended June
30, 2001 we recorded $3.4 million in restructuring costs. We continued with this
restructuring in the second half of 2001 continuing to January 2002. As a
result, for the six months ended June 30, 2002, we recorded a restructuring
charge of $17.0 million relating to fees to be paid to CSC to assume the
obligation to provide services under our contracts, employee severance, lease
costs for the closing of several of our offices and the write-down of inventory
assets that are no longer a part of our current business strategy. In addition,
we recorded $4.1 million relating to the decommissioning of our redundant fixed
assets and $3.2 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 $12.7 million in restructuring reserve relating to unpaid
severance costs, lease exit costs and expected fees to be paid to CSC. See note
8 to our interim consolidated financial statements.

WRITE-DOWN OF FIXED ASSETS

For the six months ended June 30, 2002, we recorded a charge of $4.1
million related to the write-down of fixed assets that are redundant as a result
of our restructuring.

INTEREST INCOME

Interest income decreased to $139,000 and $525,000 for the three and
six months ended June 30, 2002, respectively, compared to $1.6 million and $4.1
million in the comparative periods in 2001. 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. Interest
income is net of interest expense relating to our loan from Comdisco. Interest
income mainly, decreased in 2002 compared to 2001 because we have reduced
holdings of cash and cash equivalent balances and short-term investments. We
anticipate that we will receive reduced rates of interest, versus a year ago, on
these assets during the current year compared to the year ended December 31,
2001.

EQUITY IN LOSS OF AFFILIATE

We own 24.9% of the equity of Maptuit, as at June 30, 2002. We account
for our investment in Maptuit using the equity method, which requires us to
adjust our original cost of investment for our share of post-acquisition income
and losses, less dividends only to the extent that the carrying value of the
investment is no less than zero. As at December 31, 2001, the carrying value of
Maptuit was zero, therefore we did not record additional losses of Maptuit for
the three and six months ended June 30, 2002, compared to a loss of $480,000 and
$758,000 for the three and six months ended June 30, 2001.

21

NET LOSS

Our net loss decreased to $13.1 million and $56.8 million for the three
and six months ended June 30, 2002 respectively, compared to $62.8 million and
$121.2 million in the comparative periods in 2001. Our net loss decreased mainly
because we have substantially reduced our operating expenses as a result of our
restructuring initiatives and have reduced amortization expenses, due to the
fact that we no longer amortize goodwill under SFAS No. 142 and CICA Handbook
section 3062. If SFAS No. 142 and CICA Handbook section 3062 had been adopted
for the period three months and six months ended June 30, 2001, the loss would
have been $38.4 million and $74.9 million respectively. We expect that the
future cost savings due to our restructuring in January 2002 will result in
further reductions in salary, benefits and infrastructure costs.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities decreased to $8.4 million and
$25.0 million for the three and six months ended June 30, 2002 compared to $28.4
million and $44.6 million for the comparative periods in 2001. The main reason
for the decrease is because we have less operating expenses as a result of our
restructuring efforts. Net cash used in operating activities for the second
quarter of 2002 consisted mainly of our net loss of $13.1 million, offset by
depreciation and amortization of $2.5 million, stock-based compensation expense
of $3.1 million and a cash outflow from working capital of $850,000.

As at June 30, 2002, we had commitments to make $8.0 million in minimum
lease payments, until the year 2005, relating to our facilities and equipment
rentals. As a result of our restructuring initiative, we have vacated some of
our premises. We have been successful in reducing our total future lease
commitments with our landlords, for some of our locations, and we have plans in
place to renegotiate the remaining leases and/or sublease these premises to
reduce our future commitments. However, we cannot provide any assurances that
such plans will be successful.

Cash used in financing activities was $784,000 and $1.2 million for the
three and six month periods ending June 30, 2002, respectively compared to a
cash inflow from financing activities of $165,000 and $783,000 in the
comparative periods in 2001. The decrease in 2002 compared to 2001 is because in
2002, we were obligated to make principal payments on our loan and we received
reduced proceeds from the exercise of stock options. As at June 30, 2002 we are
obligated to pay approximately $2.4 million in principal and interest related to
this loan, with the final payment on February 1, 2003.

Cash used in investing activities, before the sale of short-term
investments and business acquisitions, was $3.5 million for the three months
ended June 30, 2002 compared to $2.3 million for the three months ended June 30,
2001. For the six months ended June 30, 2002 it was $3.7 million compared to
$13.7 million in the six months ended June 30, 2001. The main reason for the
decrease for the six months ended June 30, 2002 compared to 2001 is due to the
fact that we have significantly reduced our capital assets budget and because we
have limited the extent to which we invest in other companies. Included in the
cash outflow from investing activities for the three and six months June 30,
2002 is a restricted cash of $2.9 million related to letters of

22

credit we entered into to guarantee payments under future contractual lease
commitments as part of our agreements with our landlords to reduce the total
payments under the original leases.

In total, cash used for the three months ended June 30, 2002 was $13.0
million and $30.1 million for the six months ended June 30, 2002. 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 PRINCIPLES

US GAAP

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.

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 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.

Information Regarding Forward-Looking Statements

This report contains statements of a forward-looking nature. These
statements are made under the U.S. Private Securities Litigation Reform Act of
1995. These statements include the statements herein regarding our estimated
cost reductions; our future ability to fund our operations and become
profitable; our development of new products and relationships; our plans to
operate in the mobile operator market; the rate at which consumers will adopt
wireless applications; our ability to increase our customer base; the services
that we or our customers will

23

introduce and the benefits that end users will receive from these services; the
impact of entering new markets; our plans to use or not to use certain types of
technologies in the future; our future cost of revenue, gross margins and net
losses; our future restructuring, research and development, sales and marketing,
general and administrative, stock-based compensation, depreciation and
amortization expenses; our future interest income; the value of our goodwill and
other intangible assets; our future capital expenditures and capital
requirements; our expected date of stock option issuance in connection with our
stock option initiatives; and the anticipated impact of changes in applicable
accounting rules.

The accuracy of these statements may be impacted by a number of
business risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated. These risks include the risks
described in our SEC filings, including our annual report on Form 10-K. These
risks are also described in our filings with the Canadian Securities
Administrators, including our prospectuses, material change reports, Annual
Information Form and Management Information Circular. We encourage you to
carefully review these risks in order to evaluate an investment in our
securities. Some of the key risks that could cause actual results to differ
materially from those projected or anticipated also include the risks discussed
below. We do not undertake any obligation to update this forward-looking
information, except as required under applicable law.

GENERAL INDUSTRY, ECONOMIC AND MARKET 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 customers deferred
their spending on our products and our sales cycle began to lengthen
significantly as potential customers began to reduce their spending commitments,
including their willingness to make investments in new wireless services.
Moreover, adoption of wireless services has not proceeded as rapidly as
previously anticipated. For example, in July 2002, Bank of Montreal, one of our
initial customers, ceased offering its Veev banking and brokerage service. 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 enter into 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.

ENTERING NEW MARKETS. We have recently made mobile network operators an
important focus of our activities. We have limited experience in marketing our
services to, and working with, these customers. In order 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.

INTERNATIONAL MARKETS. Since December 31, 2000, we have begun to
recognize revenues from our sales in international markets. 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

24

economic activity, and our sales to these regions declined beginning 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.

LIQUIDITY. In order 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.

INVESTMENTS IN OTHER COMPANIES. For 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.

INVESTMENTS IN NEW TECHNOLOGIES. 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 six months ended June 30, 2002,
we recorded a charge of $2.7 million relating to our decision not to use certain
inventory that we purchased to resell to our customers. 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.

RECEIVABLES. As our sales to international customers increase, a
greater portion of our receivables are derived from companies in foreign
countries. Due to varying economic conditions and business practices in these
countries, our collections cycle from these customers may be longer than our
past experience. As adverse economic conditions persist, there is a

25

greater risk that our customers will have difficulties in paying us in
accordance with the terms of their contracts, and our risk of bad debt may
increase substantially in future fiscal periods.

HOSTING SERVICES. In January 2002, we formalized our plan to transfer
the management of our application hosting services 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 and/or CSC becomes unable to deliver these services, or
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.

EMPLOYEES. 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 ability
to attract potential new employees in the future may suffer if our reputation
suffers as a result of these staffing reductions.

GROSS MARGINS. We believe that certain factors in the current market
may contribute to the risk that our gross margins will decrease in future fiscal
quarters. We may have to lower our prices, in order to accommodate our
customers. 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 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.

LITIGATION. 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.

NASDAQ LISTING. 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. We have been notified by Nasdaq
that we are not currently in compliance with this standard. If we do not meet
this requirement on or prior to September 10, 2002, the date by which Nasdaq has
required that we regain compliance, we intend to apply for listing on the Nasdaq
SmallCap Market. We continue to meet all requirements for trading on the Toronto
Stock Exchange, and if

26

our listing on the Nasdaq SmallCap Market also does not succeed, we expect to
qualify for trading on 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, and
to retain our personnel.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

IMPACT OF INTEREST RATE EXPOSURE

As of June 30, 2002 we had approximately $61.9 million in cash, cash
equivalents, short-term investments and restricted cash of which $13.8 million
consisted of 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 three month period ended June 30, 2002, we incurred
unrealized foreign currency gains relating to the translation of our non-US
denominated monetary assets and liabilities of approximately $127,000. 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.

27

PART II. OTHER INFORMATION

ITEM 1. 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
actions against Company, similar actions have been filed against over 300 other
issuers that have had initial public offerings since 1998. On or about April 19,
2002, the plaintiffs filed an amended complaint as against the Company.

The amended complaint in the IPO Allocation Litigation names as
defendants, in addition to the Company, some or all of the current or former
directors and officers of the Company (the "Individual Defendants") and certain
underwriters of the Company's initial public offering of securities (the
"Underwriter Defendants"). In general, the amended complaint alleges 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 amended complaint also
alleges that the Company and the Individual Defendants failed to disclose these
facts and that the Company and the Individual Defendants were aware of, or
disregarded, the Underwriter Defendants' conduct.

The Company intends to vigorously defend itself and the Individual
Defendants against these claims. 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 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

Our Annual and Special Meeting of Shareholders (the "Meeting") was
held on April 25, 2002. The following matters were submitted to our shareholders
for their vote, and the results of the vote taken at the Meeting were as
follows:

1. Each of our current directors standing for reelection was reelected for a
one year term.

28

(a) Gregory Wolfond: 31,075,763 votes for; 1,251,536 votes withheld; 0 broker held non-voted shares;
(b) John Sims: 31,070,866 votes for; 1,256,433 votes withheld; 0 broker held non-voted shares;
(c) Christopher E. Erickson: 31,079,473 votes for; 1,247,826 votes withheld; 0 broker held non-voted shares;
(d) Lloyd F. Darlington: 31,078,623 votes for; 1,248,676 votes withheld; 0 broker held non-voted shares;
(e) James D. Dixon: 32,290,406 votes for; 36,893 votes withheld; 0 broker held non-voted shares;
(f) Holger Kluge: 32,290,044 votes for; 37,255 votes withheld; 0 broker held non-voted shares;
(g) Barry Reiter: 31,079,898 votes for; 1,247,401 votes withheld; 0 broker held non-voted shares;
(h) Joseph Aragona: 32,286,109 votes for; 41,190 votes withheld; 0 broker held non-voted shares; and
(i) Charles Goldman: 32,290,069 votes for; 37,230 votes withheld; 0 broker held non-voted shares;

2. The appointment of KPMG LLP, Chartered Accountants, as our independent
auditors for fiscal 2002 and the authorization of our Board of Directors to fix
the remuneration of the auditors.

32,250,284 votes for; 22,517 votes against; 9,629 abstentions; and
0 broker held non-voted shares.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORT ON FORM 8-K

(a) EXHIBITS:

None.

(b) REPORT ON FORM 8-K:

None.

29

SIGNATURES

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.

SIGNATURES TITLES DATE
---------- ------ ----

/s/ John J. Sims Chief Executive Officer (principal August 14, 2002
- --------------------- executive officer)
John J. Sims

/s/ Karen Basian Chief Financial Officer (principal August 14, 2002
- --------------------- financial and accounting officer)
Karen Basian

30